(1) Each of these facilities is leased from BIG. (2) The Company has the option to renew each of these leases for an additional period.
The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto, as well as the risk factors highlighted above in "Item 1. Business - Risk Factors".
Insurance Management Solutions Group, Inc. (together with its subsidiaries, the "Company") is a holding company that was incorporated in the State of Florida in December 1996 by Bankers Insurance Group, Inc. (together with its subsidiaries, BIG), which contributed to the Company two of its wholly-owned operating subsidiaries, Insurance Management Solutions, Inc. ("IMS") and Bankers Hazard Determination Services, Inc. ("BHDS") that were previously formed in August 1991 and June 1988, respectively.
In July 1997, the Company acquired a 49% interest in Geotrac, Inc. and in July 1998 acquired the remaining 51% interest. Geotrac was subsequently merged into BHDS with the surviving company being known as Geotrac of America, Inc ("Geotrac"). In January 1999, the Company acquired Colonial Claims. On December 28, 2001, the Company sold Geotrac in exchange for $19 million in cash, 524,198 shares of the Company's Common Stock, and certain other contractual considerations (see Item 1. Business - Geotrac Sale).
The Company provides outsourcing services to the property and casualty ("P&C") insurance industry with an emphasis on providing these services to the flood insurance market. The Company's outsourcing services include policy and claims administration (policy issuance, billing and collection functions, claims adjusting and processing) as well as information technology services. BIG is the Company's principal customer, accounting for approximately 60.2%, of the Company's total revenues (including discontinued operations) and 82.6% of the Company's outsourcing revenues from continuing operations in 2000 and approximately 47.6% of the Company's total revenues and 67.0% of the Company's outsourcing revenues in 2001. Big is a diversified group of P&C insurance companies with premium writings in all 50 states. BIG's principal lines of business include flood, homeowners and automobile insurance lines. From 1996 to 2001, BIG's total annual written premiums increased from $235 million to $351 million.
Effective as of October 1, 2001, the Company entered into a new service agreement with BIC, BSIC and FCIC (the "New Service Agreement"). The New Service Agreement replaced the Service Agreements, as amended by the Letter Agreement. See "Future Trends" below and "Item 13. Certain Relationships and Related Transactions-New Service Agreement".
Effective October 1, 2001, the Company entered into the New Service Agreement with BIC, BSIC and FCIC. The New Service Agreement replaced the Service Agreements, as amended by the Letter Agreement. Pursuant to the New Service Agreement, the Company provides policy administration, claims administration and data processing services to such entities in connection with their flood, homeowners and automobile lines of business, and claims administration and data processing services for all such entities' other property and casualty lines of business.
In addition, effective February 2002, BIG sold its Florida wind-inclusive homeowners policies to an unaffiliated third party, and the Company is no longer servicing these policies. While BIG has informed the Company that it will continue to write wind-exclusive homeowners policies, revenues from the processing of homeowners business on behalf of BIG is expected to be reduced significantly for the foreseeable future. If BIG were to exit or sell off any additional lines of business, this could have a material adverse effect on the Company's business, financial condition and results of operations.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 6.8% to $6.9 million in 2001 from $7.4 million in 2000. This decrease of $500,000 was primarily attributable to a decrease in payroll costs as a result of previously-noted staff reductions and the completion of certain severance payment obligations, partially offset by the continued assumption of certain administrative services that were previously provided to the Company by BIG under a management service agreement and a $200,000 provision recorded during the fourth quarter related to billing adjustments under the New Service Agreement and already paid to the Company by BIG.
Management Services from Parent. Management services from Parent decreased 31.6% to $1.3 million in 2001 from $1.9 million in 2000. The decrease was primarily related to the assumption of certain administrative services, including human resources, which were previously provided to the Company by BIG under a management service agreement.
Provision/(Benefits) for Income Taxes. The Company's effective income tax/(benefit) rates were 32.4% and (25.1%) in 2001 and 2000, respectively. The effective tax/(benefit) rates reflect various non-deductible items, including goodwill recognized in connection with the acquisition of Colonial Claims in January 1999. For additional information on the reconciliation of the Company's effective income tax rate to the federal statutory income tax rate, see "Note 10 - - Income Taxes", in "the Notes to the Consolidated Financial Statements".
For selected financial information on discontinued operations, see "Note 3. - Discontinued Operations", in the "Notes to Consolidated Financial Statements".
The cost of flood zone determination services is exclusive of a fourth quarter of 2001 write-off of capitalized software of approximately $1.3 million. Principally during the fourth quarter of 2001, Geotrac's management, with Geotrac's Board approval, decided to abandon further development of many components of a new software system that had been in process since 1999. The decision was based on various factors including funding limitations, other available strategies, and technical difficulties.
Outsourcing Services Revenues. Outsourcing services revenues decreased 11.2% to $46.9 million in 2000 from $52.8 million in 1999. The decrease was attributable in part to the fact that revenue generated under an affiliated technical support services arrangement decreased to $0 in 2000 from $1.3 million in 1999. The decrease in outsourcing services revenues also was attributable to the expiration as of December 31, 1999 of certain minimum service fee arrangements established effective April 1, 1999 with affiliated insurers to compensate the Company for maintaining an infrastructure to process certain lines of business of affiliated insurers that had not grown as rapidly as originally anticipated. If such minimum service fee requirements with respect to said lines of business had not been implemented as of April 1, 1999, aggregate affiliated outsourcing services revenues, which totaled $41.5 million in 1999, would have been $39.7 million in accordance with the terms of the affiliated service agreements as in effect prior to April 1, 1999.
and (iii) an increase in flood, homeowners and commercial premium processed on behalf of the Company's affiliated customers.
Income from Discontinued Operations, net of income tax, decreased 19.0% to $1.7 million in 2000 from $2.1 million in 1999, related to the following:
During 2001, the Company's principal sources of liquidity consisted of cash on-hand, cash flows from operations, and cash proceeds from the sale of the Company's Geotrac subsidiary in late December 2001. Prior to 2001, the Company funded its operations through cash generated from operations, receipt of service fees advanced from BIG and available borrowings under the Company's revolving line of credit (which line of credit was terminated by the bank in December 2000). Bank borrowings were used to finance fixed asset purchases.
On April 13, 2001, the Company entered into a Commitment Letter to advance service fee payments (the "Commitment Letter") with BIG pursuant to which BIG has agreed to advance to the Company, beginning June 1, 2001, up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under the Service Agreements. Such advances are available to the Company beginning June 1, 2001 continuing through December 1, 2002 and shall be payable upon demand by the Company. Any funds advanced by BIG to the Company under the Commitment Letter shall constitute a prepayment of, and shall be credited toward, the service fees charged to BIG by the Company during the month following such advance.
On August 14, 2001, the Company entered into a Credit and Security Agreement with BIG (together with the related loan documentation, the "Credit Agreement"), pursuant to which the Company established a short-term, secured line of credit in favor of BIG in the amount of up to $5.0 million (the "Line of Credit"). The principal purpose of the Line of Credit is to assist BIG, the Company's principal customer and shareholder, with certain short-term working capital needs. Pursuant to the Credit Agreement, all unpaid principal and interest became due and payable in full on February 28, 2002. As of such date, BIG owed the Company an aggregate of approximately $5.0 million under the Line of Credit. On March 14, 2002, the Company and BIG amended the Credit Agreement (the "Amended Credit Agreement") to extend the Line of Credit until May 31, 2002. Pursuant to the Amended Credit Agreement, interest is payable monthly on amounts outstanding under the Line of Credit at an annual rate equal to the Prime Rate (4.75% at December 31, 2001) as defined in the Amended Credit Agreement, plus 1.5%. As of March 31, 2001, the aggregate principal amount outstanding under the Line of Credit was $5.0 million.
The Company believes that cash on-hand (including the net cash proceeds from the Geotrac sale) and cash flows from operations will be sufficient to support the Line of Credit and to satisfy the Company's currently anticipated working capital requirements for the foreseeable future. See "Recent Trends" above.
The following financial statements of the Company and its independent certified public accountants' report are set forth on pages through of this report: