1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 6748 59-3422536
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
---------------------
360 CENTRAL AVENUE
ST. PETERSBURG, FLORIDA 33701
(813) 803-2040
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
C. ANTHONY SEXTON
ASSOCIATE GENERAL COUNSEL
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
360 CENTRAL AVENUE
ST. PETERSBURG, FLORIDA 33701
(813) 803-2040
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH COPIES TO:
G. WILLIAM SPEER, ESQ.
TODD B. PFISTER, ESQ. POWELL, GOLDSTEIN, FRAZER
FOLEY & LARDNER & MURPHY, LLP
100 NORTH TAMPA STREET 191 PEACHTREE STREET, N.E.
SUITE 2700 16TH FLOOR
TAMPA, FLORIDA 33602 ATLANTA, GEORGIA 30303
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
=================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------
Common Stock $.01 par value.................... $80,000,000 $23,600
=================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
================================================================================
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
SHARES
[LOGO]
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
COMMON STOCK
------------------------
Of the shares of Common Stock offered hereby,
shares are being issued and sold by Insurance Management
Solutions Group, Inc. ("IMSG" or the "Company") and shares are
being sold by the Selling Shareholder. The Company will not receive any proceeds
from the sale of Common Stock by the Selling Shareholder. See "Use of Proceeds"
and "Principal and Selling Shareholders."
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price for the
Common Stock will be between $ and $ per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price.
The Company has applied for inclusion of the Common Stock on the Nasdaq
National Market under the symbol "INMG".
------------------------
SEE "RISK FACTORS" ON PAGES 5 THROUGH 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
- ----------------------------------------------------------------------------------------------------------------------
Per Share........................ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------
Total(3)......................... $ $ $ $
======================================================================================================================
(1) The Company, its principal shareholder Bankers Insurance Group, Inc., and
the Selling Shareholder have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses, estimated at $ , payable by the Company.
(3) The Company and the Selling Shareholder have granted the Underwriters a
30-day option to purchase up to additional shares of Common
Stock on the same terms and conditions set forth above to cover
over-allotments, if any. If the Underwriters exercise the over-allotment
option in full, the total Price to Public will be $ , the total
Underwriting Discounts and Commissions will be $ , the total
Proceeds to Company will be $ and the total Proceeds to the Selling
Shareholder will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
certain other conditions, including the right of the Underwriters to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the shares will be made on or about ,1998, at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC. LEHMAN BROTHERS
FURMAN SELZ
The date of this Prospectus is , 1998.
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[COVER FLAP]
PROPERTY & CASUALTY FINANCIAL
INSURANCE COMPANIES INSTITUTIONS
INSURANCE
MANAGEMENT
SOLUTIONS
[LOGO]
GROUP
[PICTURE [COLLAGE [COLLAGE [COLLAGE
OF OF OF OF
A MAN AND TWO CAR, FLOODED TWO MEN AND A A HAND ON A
WOMEN HOUSE, WOMAN COMPUTER
VIEWING A BURNING HOME WORKING, AND A MOUSE,
COMPUTER AND HAND HOLDING A CLOCK,
SCREEN] A TELEPHONE] A MEASURING AND A
COMPASS, CALENDAR]
ALL OVERLAYING
A CLOCK]
POLICY CLAIMS FLOOD ZONE INFORMATION
ADMINISTRATION ADMINISTRATION DETERMINATIONS TECHNOLOGY
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS
OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
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[INSIDE SPREAD LEFT]
IMSG OFFERS PROPERTY & CASUALTY COMPANIES:
- Reduced overhead
- Cost-effective technology
- Fast, economic expansion of product lines
- Enhanced customer service
- Increased speed of product delivery
- Accounting and regulatory reporting
- Freedom to focus on strategic planning
IMSG OFFERS FINANCIAL INSTITUTIONS:
- Flood zone determinations
- Opportunities to add profit centers in
new lines of business
- A simplified flood compliance regulation
process
- Loan portfolio protection
- Increased speed of product delivery
OTHER POTENTIAL MARKETS INCLUDE:
- General Agencies
- Virtual Insurance Companies
- Governmental Agencies
- Lending Institutions
- Windpools
- Related Affinity Groups
INSURANCE
[LOGO] MANAGEMENT
SOLUTIONS
GROUP
COMPREHENSIVE
OUTSOURCING
SERVICES
FOR
INSURANCE
COMPANIES
&
FINANCIAL
INSTITUTIONS
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[INSIDE SPREAD RIGHT]
IMSG: RESOURCES FOR STRATEGIC INSURANCE MANAGEMENT
FLOOD, HOMEOWNERS & AUTOMOBILE INSURANCE PROGRAMS
- Comprehensive Policy Administration
- Experienced Claims Administration & Customer Service
- Integrated Technological Systems & Software
- Private Label Insurance Products
[Collage of a flood zone map, a hand - Flood Catastrophe Assistance
holding a measuring compass, a clock, a - Marketing & Advertising Support
car, a burning house, a flooded house, - Agent Training & Educational Courses
and two men and one woman working] - Financial & Statistical Reporting
FLOOD ZONE DETERMINATIONS
- Life-of-Loan Flood Compliance Tracking
- Force-placed Flood Insurance
- Database representing 85% of all U.S. Households
- National Flood Zone Database on CD ROM
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. As used herein, the "Company" means Insurance
Management Solutions Group, Inc. and its wholly-owned subsidiaries, Insurance
Management Solutions, Inc. and Geotrac, Inc. (formerly Bankers Hazard
Determination Services, Inc.) ("Geotrac"), unless the context otherwise
requires. Unless otherwise indicated, the information in this Prospectus (i)
reflects the consummation of the Company's acquisition (the "Geotrac
Acquisition") of Geotrac, Inc. ("Old Geotrac"), including the issuance of
shares of Common Stock pursuant thereto (assuming an initial
public offering price of $ per share), and (ii) assumes that the
Underwriters' over-allotment option will not be exercised. See "Geotrac
Acquisition" and "Underwriting."
THE COMPANY
The Company provides (1) comprehensive policy and claims outsourcing
services to the property and casualty ("P&C") insurance industry, with an
emphasis on providing these services to the flood insurance market, and (2)
flood zone determinations to financial institutions, mortgage lenders and
insurance companies. The Company's outsourcing services, which are offered on
either a bundled or "a la carte" basis, include policy administration, claims
administration and information technology services. The Company processed
approximately 575,000 insurance policies in 1997, including approximately
450,000 flood insurance policies, making it the second largest provider of flood
insurance outsourcing services in the United States. The Company provides
outsourcing services to its affiliate, Bankers Insurance Group, Inc. (together
with its subsidiaries, "BIG"), Mobile USA Insurance Company, Inc. and AAA Auto
Club South Insurance Company, as well as to insurance companies that offer flood
insurance utilizing BIG as their private label servicing carrier, such as Horace
Mann Insurance Company, Armed Forces Insurance Corporation and AMICA Mutual
Insurance Company. In conjunction with BIG, the Company is able to offer
insurance companies the ability to create a turnkey private label flood
insurance product. The Company believes this product is attractive to insurance
companies that desire to offer flood insurance but are not certified by the
Federal Emergency Management Agency ("FEMA") to sell and service flood
insurance. FEMA estimates that only 25% to 33% of U.S. properties required to be
covered by flood insurance are in fact covered. Accordingly, the Company
anticipates continued growth in the demand for flood insurance and related flood
outsourcing and flood zone determination services over the next several years.
In 1997, the Company processed approximately 1.4 million flood zone
determinations for over 750 customers, including financial institutions such as
SouthTrust Bank and SunTrust Bank, mortgage lenders such as ABN Amro North
America, Inc. and Mortgage Corporation of America, and P&C insurance companies
such as American International Group, Inc. and Royal Indemnity Company. Flood
insurance is required by federal law in connection with virtually all
residential mortgage loans, including refinancing loans, covering properties
located within federally designated high-risk flood zones. A flood zone
determination is necessary in order to ascertain a property's flood zone
classification. In addition, due to more stringent underwriting criteria, P&C
insurers increasingly require flood zone determinations prior to issuing
commercial property policies. The Company uses its proprietary database,
compiled and digitized from flood maps maintained and distributed by FEMA, to
determine whether a particular property or structure is located within a flood
zone classification that requires flood insurance. The Company estimates that
its electronic database includes over 85% of all U.S. households.
The Company is a % owned subsidiary of BIG, a holding company
chartered in Florida in 1976. BIG provides multiple lines of P&C insurance, most
notably flood, homeowners and automobile insurance, to individuals and
businesses throughout the United States. From 1993 to 1997, BIG's total written
premiums grew at a compound annual growth rate of 23.0% from $113.1 million to
$259.0 million. BIG is the largest underwriter of flood insurance policies
through independent agents (and the second largest overall) in the United
States. Upon completion of this offering, BIG will beneficially own % of
the Company's Common Stock. BIG is the Company's principal customer, accounting
for approximately 56% of the Company's total revenues (on a pro forma basis) and
98% of the Company's outsourcing revenues (on a pro forma basis) in 1997. See
"Risk Factors -- Reliance on Key Customer."
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The Company's principal growth strategies include (1) expanding the
Company's flood outsourcing business by (i) marketing flood outsourcing services
to existing carriers certified by FEMA, (ii) offering its outsourcing services
to potential new entrants into the flood insurance market, and (iii) marketing
its ability, in conjunction with BIG, to provide and service a private label
insurance product to insurance companies that desire to offer flood insurance
but are not certified by FEMA to sell and service flood insurance, (2) expanding
the Company's existing relationships with flood insurance outsourcing and flood
zone determination customers to generate additional outsourcing business, (3)
focusing on maximizing the Company's existing economies of scale to provide
customers with more cost-effective services, and continuing to expand such
efficiencies through greater utilization of the Company's existing
infrastructure and databases, (4) expanding the Company's direct sales force and
developing strategic relationships with other service providers, (5) generating
recurring revenues by providing services based on long-term contractual
relationships or based upon events which occur frequently in the course of a
customer's business, and (6) pursuing strategic acquisitions that offer
opportunities to increase market share or expand the Company's menu of
outsourcing services. See "Business -- Growth Strategy."
The Company is a holding company that was incorporated in the State of
Florida in December, 1996 by 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.
The Company's principal executive offices are located at 360 Central
Avenue, St. Petersburg, Florida 33701, and its telephone number is (813)
803-2040.
THE OFFERING
Common Stock offered by the
Company.................. shares (1)
Common Stock offered by the
Selling Shareholder...... shares (1)
Common Stock to be
outstanding after the
Offering................. shares (1)(2)
Use of Proceeds............ To repay outstanding indebtedness, and for general
corporate purposes, including capital expenditures
for upgraded technology, working capital and
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol............ INMG
- ---------------
(1) Excludes up to shares and shares that may be sold by the
Company and the Selling Shareholder, respectively, pursuant to the
Underwriters' over-allotment option. See "Underwriting."
(2) Excludes (a) shares of Common Stock reserved for issuance under the
Company's Long Term Incentive Plan, pursuant to which options to purchase
shares will be granted immediately upon the completion of this
offering, (b) shares of Common Stock reserved for issuance under the
Company's Non-Employee Directors' Stock Option Plan, and (c) shares
of Common Stock reserved for issuance under the Company's Non-Qualified
Stock Option Plan, pursuant to which options to purchase shares will
be granted immediately upon the completion of this offering. See
"Management -- Long Term Incentive Plan," "-- Non-Employee Directors' Stock
Option Plan" and "-- Non-Qualified Stock Option Plan."
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SUMMARY HISTORICAL AND PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The historical information presented for the years ended December 31, 1995,
1996 and 1997 was derived from the audited consolidated financial statements of
the Company. The historical information presented as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 was derived from the unaudited
consolidated financial information of the Company. With respect to the unaudited
financial information, the Company is of the opinion that all material
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Company's interim results of operations have been
included. The pro forma condensed consolidated financial data are based on
assumptions and adjustments described in the notes to the pro forma condensed
consolidated financial statements and are not necessarily indicative of the
results of operations that may be achieved in the future. The information set
forth below should be read in conjunction with "Selected Consolidated Financial
Data of the Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company," the Company's Consolidated
Financial Statements and the Company's Pro Forma Condensed Consolidated
Financial Statements (unaudited). The results of operations presented below are
not necessarily indicative of the results of operations that may be achieved in
the future.
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------------------ --------------------------
PRO PRO
FORMA FORMA
1995 1996 1997 1997(1) 1997 1998 1998(1)
------ ------- ------- ------- ------ ------- -------
STATEMENT OF OPERATIONS DATA:
Outsourcing services revenues..... $3,444 $ 5,125 29,714 30,577 6,856 8,655 8,655
Flood zone determination services
revenues........................ 5,127 7,705 8,792 22,600 1,947 2,291 6,864
------ ------- ------- ------- ------ ------- -------
Total revenues.................. 8,571 12,830 38,506 53,177 8,803 10,946 15,519
Operating expenses................ 8,083 11,742 32,807 46,281 7,422 9,495 12,539
Operating income.................. 488 1,088 5,699 6,896 1,381 1,451 2,980
Net income available for common
shareholders.................... 254 617 3,410 3,968 833 1,108 1,426
Net income per common share(2)....
Weighted average common shares
outstanding.....................
MARCH 31, 1998
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(1) AS ADJUSTED(3)
------- ------------ --------------
BALANCE SHEET DATA:
Working capital (deficiency)............................... $ (905) $ (669) $
Total assets............................................... 25,419 47,004
Long-term debt, less current portion....................... 1,921 10,805
Notes payable -- affiliate................................. 4,950 7,303
Preferred stock of subsidiary.............................. 6,750 6,750
Total shareholders' equity................................. 178 5,945
- ---------------
(1) Unaudited pro forma condensed consolidated financial data as of March 31,
1998 and for the three months ended March 31, 1998 and the year ended
December 31, 1997 reflect (i) the Geotrac Acquisition, which was completed
in June, 1998, using the purchase method of accounting as if the Geotrac
Acquisition had occurred at March 31, 1998 for the Balance Sheet Data and at
January 1, 1997 for the Statement of Operations Data, (ii) the new
affiliated service and administrative agreements that became effective
January 1, 1998 as though the new terms were in existence on January 1,
1997, and (iii) the purchase of certain fixed assets from affiliated
companies used in the business, which occurred in April, 1998, as if such
purchase had occurred at March 31, 1998 for the Balance Sheet Data and at
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January 1, 1997 for the Statement of Operations Data. See "Geotrac
Acquisition," "Certain Transactions" and the Company's Pro Forma Condensed
Consolidated Financial Statements (unaudited).
(2) Supplemental net income per common share for the year ended December 31,
1997 and the three months ended March 31, 1998, giving effect to the payment
of debt from a portion of the offering proceeds and the increased number of
common shares, is $ and $ per common share assuming
and weighted average common shares
outstanding. See "Use of Proceeds."
(3) Pro forma, as adjusted to reflect (i) the application of the net proceeds to
be received by the Company from the issuance and sale of
shares of Common Stock offered hereby (assuming an initial public offering
price of $ per share), after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, and (ii)
settlement or satisfaction of intercompany accounts from funds made
available to BIG by a loan from a subsidiary of the Selling Shareholder,
using a portion of the net proceeds of this offering received by the Selling
Shareholder. See "Use of Proceeds" and "Capitalization."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, as well as the other information set forth in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 27E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements other than statements of historical facts
included in this Prospectus, including without limitation statements set forth
under "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company," "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Geotrac" and "Business," regarding the Company's
financial position, business strategy and plans and objectives of management of
the Company for future operations, are forward-looking statements. When used in
this Prospectus, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, such as those disclosed under "Risk
Factors," including but not limited to the Company's reliance on a key customer,
dependence on economic and other factors, fluctuations in operating results,
changes in legal and regulatory requirements, integration of the Geotrac
Acquisition, conflicts of interest, and matters set forth elsewhere in this
Prospectus. Such statements reflect the current views of the Company with
respect to future events and are subject to those and other risks, uncertainties
and assumptions relating to the operations, results of operations, growth
strategy and liquidity of the Company. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
RELIANCE ON KEY CUSTOMER
The Company derives a substantial portion of its revenues from outsourcing
services provided to its principal shareholder, BIG. For the years ended
December 31, 1995, 1996, 1997 and 1997 (pro forma), revenues from services
provided to BIG accounted for approximately 40%, 37%, 76% and 56%, respectively,
of the Company's total revenues and approximately 100%, 93%, 98% and 98%,
respectively, of the Company's revenues from outsourcing services. The Company
has entered into contracts with BIG pursuant to which it will continue to
provide administrative services to BIG. See "Certain Transactions -- Service
Agreements." The Company's future financial condition and results of operations
will depend to a significant extent upon the commercial success of BIG and its
continued willingness to utilize the Company's services. Any significant
downturn in the business of BIG or its commitment to utilize the Company's
services could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Customers."
DEPENDENCE ON ECONOMIC AND OTHER FACTORS; FLUCTUATIONS IN QUARTERLY OPERATING
RESULTS
The Company's business is dependent upon various factors, such as general
economic conditions and weather patterns, that are beyond its control. For
example, the demand for flood zone determinations by lenders and their customers
is directly related to the affordability of mortgage financing and refinancing.
Current interest rates are relatively low and therefore conducive to a higher
volume of mortgage lending and flood zone determinations. An increase in
interest rates could have a negative impact on mortgage lending and consequently
also on the level of flood zone determinations requested. Fluctuations in
interest rates will likely produce fluctuations in the Company's quarterly
earnings and operating results. Likewise, natural disasters such as hurricanes,
tornadoes, and floods, all of which are unpredictable, directly impact the
demand for both the Company's outsourcing and flood zone determination services.
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GOVERNMENT REGULATION
As a provider of policy and claims processing to the flood insurance
industry, the Company is subject to extensive and continuously changing
guidelines of the Federal Insurance Administration. No assurance can be given
with respect to the extent to which the Company may become subject to regulation
in the future, the ability of the Company to comply with any such regulation,
the cost of compliance or an abrupt change in the overall concept or delivery of
the flood insurance product on behalf of the federal government. Moreover, if
the federal government were to curtail the current federal flood program, or if
as a result of the investigation of the participation of Bankers Insurance
Company ("BIC"), a subsidiary of BIG, in the program, as described below,
sanctions were imposed, it could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Market
Opportunities."
The P&C insurance industry is subject to extensive regulation by state
governments. Because the Company markets and sells its services to P&C insurers,
certain aspects of the Company's business are affected by such regulation. The
Company must continuously update its software to reflect changes in regulations.
In addition, changes in regulations that adversely affect the Company's existing
and potential customers could have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company's
services are not directly subject to insurance regulations in the states where
the Company currently provides such services, the Company's outsourcing services
may be subject to insurance regulations in states where the Company may do
business in the future. Such regulations could require the Company to obtain a
license as a managing general agent or third-party administrator. Failure to
perform in accordance with state regulations could result in the loss of
significant insurance clients. No assurance can be given with respect to the
extent to which the Company may become subject to regulation in the future, the
ability of the Company to comply with any such regulation, or the cost of
compliance.
BIC is currently subject to an investigation by the Florida Department of
Insurance (the "DOI"), the principal regulator of insurance activities in the
State of Florida, stemming from BIC's use of a private investigator to gather
information on a DOI employee. In addition, certain officers and employees of
BIC and the Company have been subpoenaed by FEMA to produce documentation in
connection with its investigation of, among other things, certain cash
management practices. Although BIC has informed the Company that it has no
reason to believe either of these investigations will have a material adverse
effect on BIC's business, financial condition or results of operations, no
assurances can be given in this regard. In the event either or both of these
investigations or any consequence thereof materially adversely affects the
business or operations of BIC, it could result in the loss or material decrease
in the Company's business from BIC, which would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Legal Proceedings."
INTEGRATION OF RECENT ACQUISITION
On July 31, 1997 the Company acquired a 49% equity interest in Old Geotrac.
On June , 1998, the Company acquired the remaining 51% equity interest in Old
Geotrac. The Company is in the process of consolidating its existing flood zone
determination operations with those of Old Geotrac in an effort to realize
economies of scale. There can be no assurance, however, that the Company will be
able to integrate the operations of Old Geotrac with its own operations, or that
such economies of scale will be realized. The failure to successfully integrate
its own operations with those of Old Geotrac could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Geotrac Acquisition."
CONTROL BY PRINCIPAL SHAREHOLDER; CONFLICTS OF INTEREST
Prior to this offering, BIG owned approximately % of the outstanding
shares of Common Stock. After this offering, BIG will own % of the
outstanding shares of Common Stock. As a result, BIG will continue to be able to
elect the Company's directors and determine the outcome of other matters
requiring shareholder approval. BIG's ultimate parent, Bankers International
Financial Corporation, Ltd., is wholly owned by a discretionary charitable
trust. David K. Meehan, the Company's Chairman of the Board, President and Chief
Executive Officer, and Robert M. Menke and Robert G. Menke, directors of the
Company,
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presently serve on the board of directors of a corporation that possesses
discretionary power with respect to this trust to (i) direct the trustee to
appoint the trust fund to another trust for the benefit of one or more of the
beneficiaries of the trust and (ii) remove the trustee and appoint one or more
new trustees. This corporation possesses the same discretionary powers with
respect to a discretionary charitable trust that wholly owns the Selling
Shareholder. See "Principal and Selling Shareholders."
The ownership by BIG of shares of Common Stock after this offering may
discourage or prevent unsolicited mergers, acquisitions, tender offers, proxy
contests or changes of incumbent management, even when shareholders other than
BIG consider such a transaction or event to be in their best interests.
Accordingly, holders of Common Stock may be deprived of an opportunity to sell
their shares at a premium over the trading price of the shares.
Certain officers and directors of the Company, including David K. Meehan,
the Company's Chairman of the Board, President and Chief Executive Officer, also
serve as officers and directors of BIG. Effective as of the completion of this
offering, certain of these officers and directors will resign from their
positions with BIG. However, Mr. Meehan will continue to serve as Vice Chairman
of the Board of Directors of BIG, Robert M. Menke will continue to serve as
President and Chairman of the Board of Directors of BIG, and Robert G. Menke
will continue to serve as Executive Vice President of BIG. In addition, as
described below, the Company will continue to have a variety of contractual
relationships with BIG. As the interests of the Company and BIG may differ,
Messrs. Meehan, Robert M. Menke and Robert G. Menke may face certain conflicts
of interests. See "Principal and Selling Shareholders" and "Certain
Transactions."
The Company's relationship with BIG is governed by various agreements,
including (i) an administration services agreement pursuant to which BIG
provides benefits administration, cash management, and certain limited
accounting and legal services to the Company, (ii) service agreements pursuant
to which the Company provides policy and claims administration services for BIG,
(iii) lease agreements pursuant to which BIG leases certain facilities to the
Company, and (iv) an employee leasing agreement pursuant to which BIG leases
certain of its employees to the Company. The agreements generally are intended
to maintain the relationship between the Company and BIG in a manner consistent
in material respects with past practice, except that certain changes in the fee
structure for the Company's services have been implemented and the Company does
not anticipate receiving any loans or capital contributions from BIG following
this offering. None of these agreements resulted from arm's-length negotiations
and, as a result, the terms of such agreements may be more or less favorable to
the Company than could be obtained from an independent third party. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company" and "Certain Transactions."
DEPENDENCE ON SENIOR MANAGEMENT
The success of the Company is largely dependent upon the efforts, direction
and guidance of its senior management, and in particular David K. Meehan, the
Company's Chairman of the Board, President and Chief Executive Officer, Jeffrey
S. Bragg, the Company's Executive Vice President and Chief Operating Officer,
and Daniel J. White, Geotrac's President and Chief Executive Officer. Although
each of the Company's executive officers, including Messrs. Meehan, Bragg and
White, is a party to an employment agreement with the Company, no assurances can
be given that any of them will remain in the employment of the Company. The
Company's continued growth and success depends in part on its ability to attract
and retain qualified managers, and on the ability of its executive officers and
key employees to manage its operations successfully. The loss of any of the
Company's senior management or key personnel, or its inability to attract and
retain key management personnel in the future, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management."
LIMITED OPERATING HISTORY IN THIRD-PARTY OUTSOURCING
Although the Company has provided outsourcing services to BIG since the
Company's inception, to date it has not derived significant revenue from
unaffiliated third-party outsourcing customers. A key element of the Company's
growth strategy is to leverage its experience and expertise in servicing BIG's
flood,
7
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homeowners and automobile business to market its outsourcing capabilities in
various P&C lines, including flood, homeowners and automobile insurance, to
other insurance companies and financial institutions. There can be no assurance
that the Company will be successful in implementing this growth strategy, and
the failure to do so could have a material adverse effect on the business,
financial condition and results of operations of the Company. See
"Business -- Growth Strategy."
COMPETITION
The Company competes principally in three markets -- the market for flood
insurance outsourcing services, the market for other P&C insurance outsourcing
services and the market for flood zone determinations and related services. The
markets for these services are highly competitive. The market for flood
insurance outsourcing services is dominated by the Company and several principal
competitors. The Company competes for these outsourcing customers largely on the
basis of price, customer service and responsiveness. The market for other P&C
insurance outsourcing services is fragmented. In the policy administration
services segment of this market, the Company competes for customers on the basis
of customer service, performance and price. The claims administration services
segment of the outsourcing market is also highly fragmented, with competition
from a large number of claims administration companies of varying size as well
as independent contractors. Competition in this segment of the outsourcing
market is principally price driven. The Company believes, however, that its most
significant competition for outsourcing services comes from policy and claims
administration performed in-house by insurance companies. Insurers that fulfill
some or all of their policy and claims administration needs in-house typically
have made a significant investment in their information processing systems and
may be less likely to utilize the Company's services. In addition, insurance
company personnel may have a vested interest in maintaining these
responsibilities in-house. The market for flood zone determination services is
dominated by the Company and several principal competitors. The Company believes
that the principal competitive factors in the market for flood zone
determinations include quality and reliability of services, response time and
price.
Certain of the Company's competitors in each of these markets have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company, including name recognition with current
and potential customers. As a result, these competitors may devote more
resources to the development, promotion and sale of their services or products
than the Company and respond more quickly to emerging technologies and changes
in customer requirements. In addition, current and potential competitors may
establish cooperative relationships among themselves or with third parties to
increase the ability of their services and products to address customer needs.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors, or that competitive pressure faced by the Company will not have a
material adverse effect on its business, financial condition and results of
operations. See "Business -- Competition."
IMPLEMENTATION OF ACQUISITION STRATEGY
A key element of the Company's growth strategy is to pursue potential
acquisitions that offer opportunities to increase market share or expand the
Company's menu of outsourcing services. Nevertheless, there can be no assurance
that the Company will be able to locate and consummate or, if consummated,
successfully integrate future acquisitions. Acquisitions involve significant
risks which could have a material adverse effect on the Company, including: (i)
the diversion of management's time and attention to the negotiation of the
acquisition and to the assimilation of the businesses acquired; (ii) the need to
modify financial and other systems and add management resources; (iii) potential
liabilities of the acquired business; (iv) unforeseen difficulties in the
acquired operations; (v) possible adverse short-term effects on the Company's
results of operations; (vi) the dilutive effect of the issuance of additional
equity securities; and (vii) the financial reporting effects of the amortization
of goodwill and other intangible assets. Furthermore, there can be no assurance
that any business interest acquired in the future will achieve acceptable levels
of revenue and profitability or otherwise perform as expected. Currently, the
Company has no arrangements or
8
14
understandings with any party with respect to any future acquisition. The
Company, however, continues to monitor potential acquisition opportunities. See
"Business -- Growth Strategy."
POTENTIAL LIABILITY TO CLIENTS
Many of the Company's contractual engagements involve projects that are
critical to the operations of its clients' business and provide benefits that
may be difficult to quantify. Any failure in a client's system could result in a
claim for substantial damages against the Company, regardless of the Company's
responsibility for such failure. Although the Company attempts to limit
contractually its liability for damages arising from negligent acts, errors,
mistakes or omissions in rendering its services, there can be no assurance that
the limitations of liability set forth in its service contracts will be
enforceable in all instances or would otherwise protect the Company from
liability for damages. Although the Company maintains general liability
insurance coverage, including coverage for errors or omissions, there can be no
assurance that such coverage will continue to be available on reasonable terms
or in sufficient amounts to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim. The successful assertion of
one or more large claims against the Company that exceed available insurance
coverage, or changes in the Company's insurance policies, including premium
increases or the imposition of large deductible or co-insurance requirements,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON TREND TOWARD OUTSOURCING
The Company's business and growth depends in large part on the insurance
industry's trend toward outsourcing administration and information technology
services. There can be no assurance that this trend will continue, as
organizations may elect to perform such services in-house. A significant change
in the direction of this trend could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Market Opportunities."
RELIANCE ON TECHNOLOGY AND COMPUTER SYSTEMS
The Company currently licenses its primary processing systems from BIG.
Under the terms of its licensing agreement, the Company is responsible for
maintaining and upgrading such systems. The Company anticipates that it will be
necessary to continue to invest in and develop new technology to maintain its
competitiveness. Significant capital expenditures may be required to keep its
technology up-to-date. The Company's future success will also depend in part on
its ability to anticipate and develop information technology solutions which
keep pace with evolving industry standards and changing customer demands. The
temporary or permanent loss of any such equipment or systems, through operating
malfunction or otherwise, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company," "Business -- Information Systems" and "Certain Transactions."
In addition, the nature of the Company's business requires that it recruit
and retain qualified technical personnel. The Company generally experiences
significant turnover of its information technology personnel and is continuously
required to recruit and train replacement personnel. The demand for qualified
personnel conversant with certain technologies is intense and may exceed supply
as new and additional skills are required to keep pace with evolving computer
technology. There can be no assurance that the Company will be successful in
attracting and retaining the information technology personnel it requires to
conduct its operations successfully. Failure to attract and retain such
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Employees."
YEAR 2000 ISSUES
There is significant uncertainty regarding the impact of Year 2000 issues,
which arise when computer systems do not properly recognize date-sensitive
information beyond December 31, 1999, thereby generating erroneous data or
failing altogether. The Company believes that its primary processing systems
will function properly with respect to dates in the Year 2000 and thereafter.
However, third parties that have relationships
9
15
with the Company, including suppliers, customers and creditors, may experience
significant Year 2000 issues. These issues may have a serious adverse impact on
the operations of such third parties, including a shut-down of operations for a
period of time, which may, in turn, have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
competitors, and other third parties may experience significant Year 2000 issues
and, as a result, seek to hire the Company's programmers and other
software-related personnel at higher salaries to address these issues. The loss
of certain employees or a significant number of employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Year 2000 Compliance" and
"Business -- Employees."
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have
shares of Common Stock outstanding. Of these shares, the shares
of Common Stock sold in this offering will be freely tradable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The remaining
shares of Common Stock will be "restricted securities" within the
meaning of Rule 144 under the Securities Act, and may not be sold in the absence
of registration under the Securities Act unless an exemption from registration
is available, including the exemptions contained in Rule 144. Upon completion of
the offering, the Company will have options outstanding to purchase
shares of Common Stock. In addition, and additional shares
will remain available for issuance under the Company's Long Term Incentive Plan
and Non-Employee Directors' Stock Option Plan, respectively. See
"Management -- Long Term Incentive Plan," "-- Non-Employee Directors' Stock
Option Plan" and "-- Non-Qualified Stock Option Plan" and "Shares Eligible for
Future Sale."
The restricted shares owned by BIG will, under Rule 144 (and
subject to the conditions thereof, including volume limitations), become
eligible for sale 90 days after the offering. However, BIG has agreed not to
sell, contract to sell or otherwise dispose of any of these shares of Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of Raymond James & Associates, Inc., on behalf of the
Underwriters. After such 180-day period, this restriction will expire and shares
permitted to be sold under Rule 144 will be eligible for sale. Raymond James &
Associates, Inc., on behalf of the Underwriters, may at any time and without
prior notice, release all or any portion of the shares of Common Stock subject
to such agreement. See "Underwriting."
Prior to this offering, there has been no public market for the Common
Stock and no predictions can be made of the effect, if any, that the sale or
availability for sale of additional shares of Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts of
such shares in the public market, or the perception that such sales could occur,
could materially and adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. See "Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE; DILUTION
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or continue following this offering, or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price for the Common Stock will be determined by negotiations
among the Company, the Selling Shareholder and the Underwriters based on several
factors, and may not be indicative of the market price for the Common Stock
after this offering. See "Underwriting."
The Company believes that various factors such as general economic
conditions and changes or volatility in the financial markets, changing market
conditions, and quarterly or annual variations in the Company's financial
results, some of which are unrelated to the Company's performance, could cause
the market price of the Common Stock to fluctuate substantially.
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16
In addition, purchasers of the Common Stock offered hereby will experience
immediate and substantial dilution of $ in the net tangible book value
per share of Common Stock, while the net tangible book value of the shares of
Common Stock owned by BIG and the Selling Shareholder will increase by $ per
share. See "Dilution."
BENEFITS OF THE OFFERING TO THE CURRENT SHAREHOLDERS
BIG and the Selling Shareholder will benefit from this offering in that a
public market will be created for their stock in the Company. The
shares of Common Stock that will be owned by BIG after this offering, which were
acquired at a cost of approximately $ , will have a value of
approximately $ , assuming a market price equal to the initial public
offering price. The shares of Common Stock that will be owned by the
Selling Shareholder after this offering, which were acquired at a cost of
approximately $ , will have a value of approximately $ ,
assuming a market price equal to the initial price to public. The Selling
Shareholder will also realize a substantial profit on the shares it sells in
this offering. See "Principal and Selling Shareholders."
GEOTRAC ACQUISITION
On July 31, 1997, the Company acquired a 49% equity interest in Geotrac,
Inc., an Ohio corporation ("Old Geotrac"), from Daniel J. White and his spouse
(the "Whites"), as joint tenants, for $6.75 million in cash. On June , 1998,
the Company acquired the remaining 51% equity interest in Old Geotrac from the
Whites in exchange for (i) shares of Common Stock (assuming an initial
public offering price of $ per share), (ii) a promissory note in the
principal amount of $1.5 million, and (iii) cash in the amount of $728,069. The
Company also granted the Whites certain demand and piggyback registration rights
with respect to the shares of Common Stock issued to them pursuant to this
transaction. The transaction was effected pursuant to the merger of Old Geotrac
into a wholly-owned subsidiary of the Company, with the surviving entity being
known as "Geotrac, Inc.".
Old Geotrac, a leading provider of flood zone determinations, began
operations in 1978. Old Geotrac's revenues and operating income were $14.1
million and $2.9 million (on a combined basis), respectively, in 1997 and $4.6
million and $1.6 million, respectively, for the three months ended March 31,
1998. Old Geotrac's President, Chief Executive Officer and joint majority
shareholder, Daniel J. White, now serves as President, Chief Executive Officer
and a director of Geotrac and as a director of the Company.
The acquisition of Old Geotrac (the "Geotrac Acquisition") strengthens the
Company's position as a leader in the flood zone determination business and
broadens the range of flood data services the Company is able to provide. In
addition, the Company is in the process of consolidating its own flood zone
determination operations with those of Old Geotrac in an effort to realize
economies of scale. Finally, the Company believes that access to Old Geotrac's
customer base of financial institutions and insurance companies will facilitate
cross-selling opportunities and expansion of the Company's outsourcing services.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares
of Common Stock offered by the Company (assuming an initial public offering
price of $ per share), after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company, are
estimated to be approximately $ million. The Company intends to use
approximately $ million of the net proceeds to repay indebtedness that
is outstanding at the time of this offering. The Company intends to use the
remaining net proceeds of approximately $ million for general corporate
purposes, including working capital, capital expenditures on upgraded technology
and possible acquisitions. The Company has no present commitments or
understandings with respect to the acquisition of any business, although the
Company continues to monitor potential acquisition opportunities. Pending such
uses, the Company intends to invest the net proceeds of this offering in
short-term, investment grade, interest-bearing securities. See "Management's
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17
Discussion and Analysis of Financial Condition and Results of Operations of the
Company -- Liquidity and Capital Resources" and "Business -- Growth Strategy".
The indebtedness to be repaid with proceeds from this offering includes a
term loan of Geotrac, which had an outstanding principal balance of $7,812,500
at March 31, 1998, bears interest at the current prime rate and matures June
2004, and various debt instruments of the Company including (i) a revolving line
of credit with a commercial bank, which had an outstanding balance of $600,000
at March 31, 1998, bears interest at the lender's prime interest rate plus 1.0%
and is payable on demand, (ii) a note payable to bank entered into December,
1997 (used to fund capital additions), which had an outstanding balance of
$1,972,162 at March 31, 1998, bears interest at 8.19% and matures December,
2000, (iii) various other term loans which totaled $985,889 at March 31, 1998,
bearing interest at rates ranging from 8.19% to 8.50%, maturing at various dates
from December, 1999 to December, 2000 and (iv) a note payable entered into May,
1998 (used to repurchase preferred stock of a subsidiary), which has an
outstanding balance of $6,750,000, bears interest at 8.5% and matures December,
1998.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholder. The net proceeds to be received by the Selling
Shareholder from the sale of the shares offered by the Selling
Shareholder (assuming an initial public offering price of $ per share) will
be approximately $ after deducting underwriting discounts and
commissions payable by the Selling Shareholder. A wholly-owned subsidiary of the
Selling Shareholder has agreed to loan $17.5 million to BIG on or before
September 30, 1998, in exchange for a subordinated note. It is anticipated that
this loan will be funded using a portion of the net proceeds to be received by
the Selling Shareholder in this offering. BIG has agreed with the Company to use
a portion of such loan proceeds to satisfy outstanding accounts and note payable
to the Company not later than ten business days following receipt of the loan
proceeds. As of March 31, 1998 (on a pro forma basis), BIG's accounts and note
payable to the Company totaled approximately $14.2 million. The balance of the
loan proceeds will provide BIG with additional capital to repay other
outstanding indebtedness and expand its operations. The Company, in turn, has
agreed with BIG to use a portion of the funds received from BIG to satisfy
accounts, income taxes and notes payable to BIG. As of March 31, 1998 (on a pro
forma basis), the Company's accounts, income taxes and notes payable to BIG
totaled approximately $14.8 million. See "Principal and Selling Shareholders"
and "Certain Transactions."
DIVIDEND POLICY
In December, 1996, December, 1997, and June, 1998, the Company paid
dividends of $1.0 million, $3.5 million, and $1.1 million, respectively, to BIG.
The Company currently anticipates that all of its earnings will be retained for
development and expansion of the Company's business and does not anticipate
declaring or paying any cash dividends in the foreseeable future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998: (1) on an actual basis; (2) on a pro forma basis to reflect (i)
the Geotrac Acquisition, which was completed in June, 1998, using the purchase
method of accounting as if the Geotrac Acquisition had occurred on March 31,
1998 and (ii) the purchase of certain fixed assets from affiliated companies to
be used in the business, which occurred in April 1998, as if such purchases had
occurred at March 31, 1998; and (3) on a pro forma basis, as adjusted to reflect
(i) the application of the net proceeds from the issuance and sale of
shares of Common Stock offered hereby (assuming an initial public
offering price of $ per share), after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, and (ii)
settlement or satisfaction of intercompany accounts from funds made available to
BIG by a loan from a subsidiary of the Selling Shareholder, using a portion of
the net proceeds of the offering received by the Selling Shareholder. See "Use
of Proceeds."
MARCH 31, 1998
---------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Current portion of long-term debt........................... $ 1,037 $ 3,060 $
Note payable................................................ 600 600
Due to affiliates........................................... 4,591 4,591
Income taxes payable to Parent.............................. 2,888 2,888
Long-term debt, less current portion........................ 1,921 10,805
Notes payable -- affiliate.................................. 4,950 7,303
Preferred stock of subsidiary............................... 6,750 6,750
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common stock, $.01 par value, 100,000,000 shares
authorized; 20,000,000 shares issued and outstanding;
shares issued and outstanding on a pro
forma basis; and shares issued and
outstanding on a pro forma basis, as adjusted(1)....... 200 205
Additional paid-in capital (deficit)...................... (30) 5,732
Retained earnings......................................... 8 8
------- ------- -------
Total shareholders' equity................................ 178 5,945
------- ------- -------
Total capitalization.............................. $22,915 $41,942 $
======= ======= =======
- ---------------
(1) Excludes (a) shares of Common Stock reserved for issuance under
the Company's Long Term Incentive Plan, pursuant to which options to
purchase shares will be granted immediately upon the completion of
this offering, (b) shares of Common Stock reserved for issuance
under the Company's Non-Employee Directors' Stock Option Plan, and (c)
shares of Common Stock reserved for issuance under the Company's
Non-Qualified Stock Option Plan, pursuant to which options to purchase
shares will be granted immediately upon the completion of this
offering. See "Management -- Long Term Incentive Plan," "-- Non-Employee
Directors' Stock Option Plan" and "-- Non-Qualified Stock Option Plan."
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DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value (deficiency) of their
Common Stock from the initial public offering price. The net tangible book value
(deficiency) of the Company as of March 31, 1998 was approximately $(11.4
million), or $( ) per share. Net tangible book value (deficiency) per share
represents the amount of the Company's tangible net worth (total tangible assets
less total liabilities) divided by the total number of shares of Common Stock
outstanding. After giving effect to the sale of shares of Common
Stock by the Company in this offering and the application of the estimated net
proceeds therefrom (after deduction of underwriting discounts and commissions
and estimated offering expenses payable by the Company), the pro forma net
tangible book value of the Company as of March 31, 1998 would have been $
million, or $ per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $ per share to the existing
shareholders and an immediate dilution of $ per share to purchasers of
shares of Common Stock in this offering. The following table illustrates the per
share dilution:
Assumed initial public offering price per share............. $
--------
Net tangible book value (deficiency) per share before this
offering............................................... $
--------
Increase per share attributable to new investors..........
--------
Pro forma net tangible book value after this offering(1)....
--------
Dilution in net tangible book value per share to new
investors................................................. $
========
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the net
tangible book value after this offering would be $ per share, resulting
in dilution to new investors in this offering of $ per share.
The following table sets forth on a pro forma basis as of March 31, 1998
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share of Common Stock paid by the
Company's existing shareholders and to be paid by new investors in this offering
and before deduction of estimated underwriting discounts and commissions and
estimated offering expenses (and assuming no exercise of the Underwriters'
over-allotment option):
SHARES
PURCHASED(1) TOTAL CONSIDERATION AVERAGE
----------------- -------------------- PER
NUMBER PERCENT AMOUNT PERCENT PRICE SHARE
------- ------- ---------- ------- -----------
Existing shareholders................... % $5,937,000 % $
New investors...........................
------- --- ---------- --- --------
Total......................... 100% $ 100% $
======= === ========== === ========
- ---------------
(1) Does not reflect the sale of shares of Common Stock by the
Selling Shareholder in this offering and does not include an aggregate of
shares of Common Stock issuable upon the exercise of stock options
to be granted upon the completion of this offering. See "Management -- Long
Term Incentive Plan," "-- Non-Employee Directors' Stock Option Plan" and
"-- Non-Qualified Stock Option Plan." Sales by the Selling Shareholder in
this offering will reduce the number of shares held by existing shareholders
to shares, or approximately %, and will increase the
number of shares held by new investors to , or approximately
%, of the total number of shares of Common Stock outstanding after this
offering. See "Principal and Selling Shareholders."
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SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and Notes
thereto, Pro Forma Condensed Consolidated Financial Statements (unaudited) of
the Company, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company" included elsewhere in the Prospectus.
The following selected consolidated financial data of the Company as of and for
the years ended December 31, 1995, 1996, and 1997 have been derived from the
Company's audited consolidated financial statements. The historical information
presented as of and for the years ended December 31, 1993 and 1994 and the three
months ended March 31, 1997 and 1998 was derived from the unaudited financial
statements of the Company. With respect to the unaudited financial information,
the Company is of the opinion that all material adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
Company's results of operations and financial position have been included. The
results of operations presented below are not necessarily indicative of the
results of operations that may be achieved in the future.
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- ----------------------------
PRO FORMA PRO FORMA
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
------ ------ ------- ------- ------- --------- ------ ------- ---------
STATEMENT OF OPERATIONS
DATA:
Revenues
Outsourcing services... $1,454 $1,861 $ 3,444 $ 5,125 $29,714 $30,577 $6,857 $ 8,655 $ 8,655
Flood zone
determination
services............. 2,661 2,975 5,127 7,705 8,792 22,600 1,947 2,291 6,864
------ ------ ------- ------- ------- ------- ------ ------- -------
Total
revenues...... 4,115 4,836 8,571 12,830 38,506 53,177 8,804 10,946 15,519
------ ------ ------- ------- ------- ------- ------ ------- -------
Expenses
Cost of outsourcing
services............. 1,000 1,586 2,955 3,896 21,989 22,097 5,019 6,428 6,146
Cost of flood zone
determination
services............. 2,052 1,842 3,415 5,362 4,764 10,552 975 1,192 3,067
Selling, general and
administrative....... 630 990 804 1,121 3,026 5,927 727 923 1,685
Management services
from Parent.......... 232 362 725 1,054 2,344 2,344 586 679 678
Deferred compensation
(non-recurring
item)................ -- -- -- -- -- 1,461 -- -- --
Depreciation and
amortization......... 37 106 184 309 684 3,900 116 273 963
------ ------ ------- ------- ------- ------- ------ ------- -------
Total
expenses...... 3,951 4,886 8,083 11,742 32,807 46,281 7,423 9,495 12,539
------ ------ ------- ------- ------- ------- ------ ------- -------
Operating income
(loss)................. 164 (50) 488 1,088 5,699 6,896 1,381 1,451 2,980
Equity in earnings of
Geotrac, Inc........... -- -- -- -- 201 -- -- 408 --
Other income (non-
recurring item)........ -- -- -- -- -- 1,700 -- -- --
Interest expense......... -- (48) (72) (75) (149) (1,372) (35) (83) (369)
------ ------ ------- ------- ------- ------- ------ ------- -------
Income (loss) before
income taxes........... 164 (98) 416 1,013 5,751 7,224 1,346 1,776 2,611
Provision (benefit) for
income taxes........... 69 (31) 162 396 2,112 3,027 513 535 1,052
------ ------ ------- ------- ------- ------- ------ ------- -------
Net income (loss)........ 95 (67) 254 617 3,639 4,197 833 1,241 1,559
Dividends on Preferred
Stock of Subsidiary.... -- -- -- -- 229 229 -- 133 133
------ ------ ------- ------- ------- ------- ------ ------- -------
Net income (loss)
available for common
shareholders........... $ 95 $ (67) $ 254 $ 617 $ 3,410 $ 3,968 $ 833 $ 1,108 $ 1,426
====== ====== ======= ======= ======= ======= ====== ======= =======
Net income (loss) per
common share(2)........ $ $ $ $ $ $ $ $ $
====== ====== ======= ======= ======= ======= ====== ======= =======
Weighted average common
shares outstanding.....
15
21
MARCH 31,
---------------------------------------------
DECEMBER 31, PRO FORMA,
------------------------------------------- PRO FORMA AS ADJUSTED
1993 1994 1995 1996 1997 1997 1998 1998(1) 1998(3)
------ ------ ------ ------ ------- ------ ------- ------------ -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital
(deficiency)......... $ 28 $ (146) $ (141) $ (425) $ (148) $ 398 $ (905) $ (669)
Total assets........... 1,186 1,311 2,649 3,441 19,532 8,738 25,419 47,004
Long-term debt, less
current portion...... 140 278 156 894 2,187 816 1,921 10,805
Notes payable,
affiliate............ -- -- -- -- -- -- 4,950 7,303
Preferred Stock of
Subsidiary........... -- -- -- -- 6,750 -- 6,750 6,750
Total shareholders'
equity............... 172 125 529 260 170 1,219 178 5,945
- ---------------
(1) Unaudited pro forma condensed consolidated financial data as of March 31,
1998 and for the three months ended March 31, 1998 and the year ended
December 31, 1997 reflect (1) the Geotrac Acquisition, which was completed
in June, 1998, using the purchase method of accounting as if the Geotrac
Acquisition had occurred at March 31, 1998 for the Balance Sheet Data and at
January 1, 1997 for the Statement of Operations Data, (ii) the new
affiliated service and administrative agreements that are effective January
1, 1998 as though the new terms were in existence on January 1, 1997 and
(iii) the purchase of certain fixed assets from affiliated companies used in
the business, which occurred in April, 1998, as if such purchases had
occurred at March 31, 1998 for the Balance Sheet Data and at January 1, 1997
for the Statement of Operations Data. See "Geotrac Acquisition," "Certain
Transactions" and the Company's Pro Forma Condensed Consolidated Financial
Statements (unaudited).
(2) Supplemental net income per common share for the year ended December 31,
1997 and the three months ended March 31, 1998, after giving effect to the
payment of debt from a portion of the offering proceeds to be received by
the Company and the increased number of common shares, is $ and
$ per common share assuming and weighted
average common shares outstanding. See "Use of Proceeds."
(3) Pro forma, as adjusted to reflect (i) the application of the net proceeds
from the issuance and sale of shares of Common Stock offered
hereby (assuming an initial public offering price of $ per share), after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company and (ii) settlement or satisfaction of
intercompany accounts from funds made available to BIG by a loan from a
subsidiary of the Selling Shareholder, using a portion of the net proceeds
of the offering received by the Selling Shareholder. See "Use of Proceeds"
and "Capitalization."
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
OVERVIEW
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. BIG is a diversified group of P&C
insurance companies with premium writings in all fifty states. BIG's principal
lines of business include flood, homeowners and automobile insurance lines. From
1993 to 1997, BIG experienced substantial growth in total written premiums from
$113.1 million to $259.0 million.
Prior to 1997, the Company's outsourcing services principally related to
information technology services provided to BIG on a cost reimbursement basis.
In 1997, the Company entered into service arrangements with BIG to provide a
broader menu of outsourcing services. These services primarily consisted of
policy and claims administration (including policy issuance, billing and
collection functions, claims adjusting and processing) and information
technology services provided for BIG's flood and homeowners insurance lines of
business. Revenues for these services were derived based on a percentage of
direct written premiums for policy administration services and direct paid
claims for claims administration services. The Company also provided claims
administration services for BIG's other insurance lines, excluding flood and
homeowners, on a cost reimbursement basis in 1997.
Effective January 1, 1998, the Company entered into written service
agreements with BIG which modified the existing arrangements to (i) expand the
services provided by the Company to include policy administration for certain
automobile lines of business, (ii) recognize claims outsourcing revenue based
not on a cost reimbursement basis, but rather on a percentage of earned premiums
and, with respect to certain types of claims, a percentage of incurred losses,
and (iii) implement a change in fee structure from a percentage of incurred loss
to a percentage of earned premiums with respect to homeowners claims services.
These changes were negotiated in order to effect more uniform revenue
recognition. To obtain BIG's agreement to such changes, the Company, in turn,
agreed to the revised fee structure with respect to homeowners claims services.
BIG presently accounts for approximately 98% of the Company's outsourcing
services revenues and is expected to continue to account for a significant
majority of the Company's outsourcing revenues in the near future. See "Risk
Factors -- Reliance on Key Customer" and "Certain Transactions -- Service
Agreements."
In July, 1997, the Company acquired a 49% interest in Old Geotrac, a
leading provider of flood zone determinations. Until June, 1998, when the
remaining 51% interest was acquired, this investment was accounted for on the
equity method.
Outsourcing service revenues are principally derived from written and
earned insurance premiums. Such premiums are affected by seasonal fluctuations
in volume of new and renewal policies received. Outsourcing service revenues
generated from the flood and homeowners lines of business increase in the late
second quarter and peak during the third quarter in conjunction with home sales.
In the Company's experience, increased levels of flood insurance purchases occur
in the Southeastern United States during the second and third quarters in
anticipation of the onset of the hurricane season.
During periods of peak demand for flood and homeowners insurance, the
number of policies waiting to be issued increases. This backlog represents
future service fee income to be earned, generally within one month.
Flood zone determination revenues, which are recognized as services are
performed, are cyclically impacted by both changes in mortgage interest rates
and trends in home sales.
17
23
The cost of outsourcing services primarily includes wages and related
benefits associated with personnel who perform policy and claims administration
services, as well as postage and telephone charges, data processing and other
direct costs associated with providing service to customers.
Cost of flood zone determination services primarily includes wages and
related benefits associated with personnel who perform flood zone determination
services, telephone expenses, general liability insurance, data processing and
other direct costs associated with providing service to customers. Due to the
ongoing automation of the Company's flood zone database, a gradual increase in
the number of automated flood zone determinations, versus manually determined
flood zones, has occurred. Automated flood zone determinations cost less for the
Company to perform than manually generated determinations.
Selling, general and administrative expenses include the wages and related
benefits of sales and marketing, executive, finance and accounting personnel, as
well as other general operating costs. In addition, wages and related benefits
of the management staff of each processing department (i.e. Customer Service,
Claims, and Information Services) are included in selling, general and
administrative expenses.
The Company presently purchases certain services, including human
resources, internal audit and legal services, from BIG. See "Certain
Transactions." If the Company develops the capability to provide these services
internally, certain sales and administrative support costs may fluctuate.
QUARTERLY RESULTS
The following table presents unaudited quarterly operating results for the
Company for the quarters included in years 1996 and 1997 and the first quarter
of 1998. This information has been prepared on the same basis as the Company's
Consolidated Financial Statements included elsewhere in this Prospectus, and
includes all adjustments, consisting of normal recurring accruals, that the
Company considers necessary for a fair presentation of the periods presented.
These operating results are not necessarily indicative of the Company's future
performance.
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- -------------
Revenues
Outsourcing services................ $1,200 $1,270 $1,279 $1,376 $6,856 $7,420 $ 7,901
Flood zone determination services... 1,822 2,237 1,888 1,758 1,948 2,393 2,241
------ ------ ------ ------ ------ ------ -------
Total revenues................ 3,022 3,507 3,167 3,134 8,804 9,813 10,142
------ ------ ------ ------ ------ ------ -------
Expenses
Cost of outsourcing services........ 964 963 952 1,017 5,019 5,787 5,722
Cost of flood zone determination
services.......................... 1,343 1,567 1,269 1,183 975 1,124 1,263
Selling, general and
administrative.................... 281 269 257 314 727 768 746
Management services from Parent..... 263 264 263 264 586 586 586
Depreciation and amortization....... 67 75 80 87 116 132 195
------ ------ ------ ------ ------ ------ -------
Total expenses................ 2,918 3,138 2,821 2,865 7,423 8,397 8,512
------ ------ ------ ------ ------ ------ -------
Operating income..................... 104 369 346 269 1,381 1,416 1,630
Equity in earnings (loss) of Geotrac,
Inc................................. -- -- -- -- -- -- (32)
Interest expense..................... (19) (19) (18) (19) (35) (37) (37)
------ ------ ------ ------ ------ ------ -------
Income before income taxes........... 85 350 328 250 1,346 1,379 1,561
Provision for income taxes........... 35 136 127 98 513 526 605
------ ------ ------ ------ ------ ------ -------
Net income........................... 50 214 201 152 833 853 956
Dividends on Preferred Stock of
Subsidiary.......................... -- -- -- -- -- -- 114
------ ------ ------ ------ ------ ------ -------
Net income available for Common
Shareholders........................ $ 50 $ 214 $ 201 $ 152 $ 833 $ 853 $ 842
====== ====== ====== ====== ====== ====== =======
QUARTER ENDED
------------------------
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
Revenues
Outsourcing services................ $7,537 $ 8,655
Flood zone determination services... 2,210 2,291
------ -------
Total revenues................ 9,747 10,946
------ -------
Expenses
Cost of outsourcing services........ 5,461 6,428
Cost of flood zone determination
services.......................... 1,403 1,192
Selling, general and
administrative.................... 785 923
Management services from Parent..... 586 679
Depreciation and amortization....... 241 273
------ -------
Total expenses................ 8,476 9,495
------ -------
Operating income..................... 1,271 1,451
Equity in earnings (loss) of Geotrac,
Inc................................. 233 408
Interest expense..................... (40) (83)
------ -------
Income before income taxes........... 1,464 1,776
Provision for income taxes........... 467 535
------ -------
Net income........................... 997 1,241
Dividends on Preferred Stock of
Subsidiary.......................... 115 133
------ -------
Net income available for Common
Shareholders........................ $ 882 $ 1,108
====== =======
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24
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain selected
historical operating results of the Company as a percentage of total revenues:
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- -------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997 1997 1998 1998
----- ----- ----- --------- ----- ----- ---------
Revenues
Outsourcing services................... 40.2% 39.9% 77.2% 57.5% 77.9% 79.1% 55.8%
Flood zone determination services...... 59.8 60.1 22.8 42.5 22.1 20.9 44.2
----- ----- ----- ----- ----- ----- -----
Total revenues.................. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- -----
Expenses
Cost of outsourcing services........... 34.5 30.4 57.1 41.6 57.0 58.7 39.6
Cost of flood zone determination
services............................. 39.8 41.8 12.4 19.8 11.1 10.9 19.8
Selling, general and administrative.... 9.4 8.7 7.8 11.1 8.2 8.4 10.8
Management services from Parent........ 8.5 8.2 6.1 4.4 6.7 6.2 4.4
Deferred compensation (non-recurring
item)................................ -- -- -- 2.8 -- -- --
Depreciation and amortization.......... 2.1 2.4 1.8 7.3 1.3 2.5 6.2
----- ----- ----- ----- ----- ----- -----
Total expenses.................. 94.3 91.5 85.2 87.0 84.3 86.7 80.8
----- ----- ----- ----- ----- ----- -----
Operating income......................... 5.7 8.5 14.8 13.0 15.7 13.3 19.2
Equity in earnings of Geotrac, Inc....... -- -- 0.5 -- -- 3.7 --
Other income (non-recurring item)........ -- -- -- 3.2 -- -- --
Interest expense......................... (0.8) (0.6) (0.4) (2.6) (0.4) (0.8) (2.4)
----- ----- ----- ----- ----- ----- -----
Income before income taxes............... 4.9 7.9 14.9 13.6 15.3 16.2 16.8
Provision for income taxes............... 1.9 3.1 5.5 5.7 5.8 4.9 6.8
----- ----- ----- ----- ----- ----- -----
Net income............................... 3.0% 4.8% 9.4% 7.9% 9.5% 11.3% 10.0%
===== ===== ===== ===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Outsourcing Services Revenues. Outsourcing services revenue increased $1.8
million, or 26.2%, to $8.7 million in the first quarter of 1998 from $6.9
million in the first quarter of 1997. The increase was primarily attributable to
(i) the expansion of the services provided to BIG to include policy
administration for certain of BIG's automobile lines of insurance, (ii) the
change in fee structure for claims administration (excluding BIG's flood and
homeowners lines) from a cost reimbursement basis to a percentage of earned
premium and, in certain instances, incurred losses, and (iii) increased services
provided to BIG due to the growth in the volume of BIG's flood insurance
business. The increase was partially offset by the revised fee structure
pertaining to policy administration and claims administration for BIG's
homeowners insurance line.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues increased $344,000, or 17.7%, to $2.3 million in the first
quarter of 1998 from $1.9 million in the first quarter of 1997. The revenue
growth was primarily attributable to the increased number of flood zone
determinations processed due to the large number of mortgage financings and
refinancings as a result of continued low interest rates.
Cost of Outsourcing Services. Cost of outsourcing services increased $1.4
million, or 28.1%, to $6.4 million in the first quarter of 1998 from $5.0
million in the first quarter of 1997. The increase in cost of outsourcing
services was primarily attributable to (i) increases in staffing due to the
expansion of the services provided to BIG to include policy administration for
certain of BIG's automobile lines of insurance, (ii) increased services provided
to BIG due to the growth in the volume of BIG's insurance business and (iii) the
Company assuming responsibility for claims costs for independent adjusters and
appraisers that were previously borne by BIG.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services increased $218,000, or 22.4%, to $1.2 million in the
first quarter of 1998 from $974,000 in the first quarter of 1997. As a
percentage of revenues, cost of flood zone determination services increased from
50.0% in the first quarter of 1997 to 52.0% in the first quarter of 1998. The
increase in cost of flood zone determination services as a percentage of
revenues primarily resulted from cross-licensing fees for database management
paid to Old Geotrac, which were terminated upon the merger of Old Geotrac into
the Company in June, 1998, partially
19
25
offset by a reduction in insurance cost associated with the Company's life of
loan program due to favorable loss experience under the life of loan program.
Effective June 1, 1998, the Company terminated its insurance policy associated
with its life of loan program. Consequently, from such date forward, the Company
will defer a portion of each life of loan fee received in order to account for
its obligation to perform future flood zone redeterminations.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $196,000, or 27.0%, to $923,000 for the first
quarter of 1998 from $727,000 in the first quarter of 1997. The increase is
primarily related to additional wages and related benefits associated with
adding executive management, accounting, sales and marketing and other
administrative staff during 1997 to support the Company's expanded operations.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $157,000, or 135.0%, to $273,000 in the first quarter of 1998
from $116,000 in the first quarter of 1997 primarily as a result of upgrading
existing data processing equipment.
Equity in Earnings of Geotrac, Inc. During July 1997, the Company
purchased a 49% interest in Old Geotrac. Equity in earnings of Old Geotrac
contributed $408,000 to net income of the Company for the first quarter of 1998.
Provision for Income Taxes. The Company's effective income tax rates were
30.1% and 38.1% for the first quarters of 1998 and 1997, respectively. Income
before income taxes for the first quarter of 1998, excluding the equity in
earnings of Old Geotrac, resulted in a effective income tax rate of 39.1%. The
equity in earnings in Old Geotrac are presented net of tax.
As a result of the Company's acquisition of the remaining 51% interest in
Old Geotrac during June, 1998, the Company recorded additional goodwill that is
non-deductible for income tax purposes. The annual amortization of the
non-deductible goodwill will total approximately $400,000. On a pro forma basis,
had the purchase occurred on January 1, 1998, the effective tax rate for the
first quarter of 1998 would have been 40.3%.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Outsourcing Services Revenues. Outsourcing services revenues increased
$24.6 million, or 479.8%, to $29.7 million in 1997 from $5.1 million in 1996.
During 1997, outsourcing services revenue was generated primarily from the
Company's service agreements with BIG to provide policy and claims
administration related to its flood and homeowners insurance programs. In
addition, during 1997, the Company provided claims administration services on a
cost reimbursement basis for most of BIG's other lines of business, excluding
flood and homeowners. During 1996, the Company provided only information
technology services to its affiliated companies on a cost reimbursement basis.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues increased $1.1 million, or 14.1%, to $8.8 million in 1997 from
$7.7 million in 1996. The increase in revenues was due to the increase in
determinations performed, offset by a decrease of approximately 6.0% in the
average fee per determination as a result of competitive pressures.
Cost of Outsourcing Services. Cost of outsourcing services increased $18.1
million, or 464.4%, to $22.0 million in 1997 from $3.9 million in 1996. The
increase was primarily the result of the transfer of various policy and claims
administration units from BIG to the Company, as well as upward pressure on
salaries resulting from continued competition for qualified employees.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services decreased $598,000, or 11.2%, to $4.8 million in 1997
from $5.4 million in 1996. As a percentage of flood zone determination services
revenue, cost of flood zone determination services decreased from 69.6% in 1996
to 54.2% in 1997. The decrease was primarily the result of reduced insurance
cost of the Company's life of loan program.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $1.9 million, or 169.9%, to $3.0 million in
1997 from $1.1 million in 1996. The increase was primarily related to additional
wages and related benefits associated with adding executive management,
accounting, sales and marketing and other administrative staff during 1997 to
support the Company's expanded operations.
20
26
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $375,000, or 121.1%, to $684,000 in 1997 from $309,000 in 1996
primarily as a result of upgrading existing data processing equipment.
Interest Expense. Interest expense increased $74,000, or 98.2%, to
$149,000 in 1997 from $75,000 in 1996 as a result of increased borrowings used
to fund the Company's capital expenditures.
Equity in Earnings of Geotrac, Inc. During July 1997, the Company
purchased a 49% interest in Old Geotrac. Equity in earnings of Old Geotrac
contributed $201,000 to the earnings of the Company in 1997.
Provision for Income Taxes. The Company's effective income tax rates were
36.7% and 39.1% in 1997 and 1996, respectively. Income before provision for
income taxes for 1997, excluding the equity in earnings of Old Geotrac, resulted
in an effective income tax rate of 38.1%. The equity in earnings in Old Geotrac
are presented net of tax.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Outsourcing Services Revenues. Outsourcing services revenues increased
$1.7 million, or 48.8%, to $5.1 million in 1996 from $3.4 million in 1995
primarily as a result of an increase in the information technology services
provided to BIG due to the growth in the volume of BIG's insurance business.
Flood Zone Determination Services Revenues. Flood zone determination
services revenue increased $2.6 million, or 50.3%, to $7.7 million in 1996 from
$5.1 million in 1995, primarily as a result of significant growth in the
Company's client base and in the number of requests for flood zone
determinations, partially offset by a decrease in the average fee per
determination due to competitive pressures.
Cost of Outsourcing Services. Cost of outsourcing services increased
$941,000, or 31.8%, to $3.9 million in 1996 from $3.0 million in 1995. The
increase resulted primarily from additions to the Company's information
technology staff due to the growth in the volume of BIG's insurance business, as
well as salary adjustments due to the competitive market for qualified
personnel.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services increased $2.0 million, or 57.0%, to $5.4 million in 1996
from $3.4 million in 1995. The increase was primarily attributable to an
increased demand for the Company's life of loan program, for which the Company
purchases insurance to fund its obligation to update flood zone determinations
under the life of loan program. Additionally, the increase in cost of flood zone
determination services was attributable to the addition of flood zone
determination staff to handle higher business volume levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $317,000 or 39.4%, to $1.1 million in 1996
from $804,000 for 1995, primarily as a result of adding additional
administrative staff to support the Company's growth.
Depreciation and Amortization. Depreciation and amortization increased
$125,000, or 67.9%, to $309,000 in 1996 from $184,000 in 1995 primarily as a
result of adding $885,000 of property and equipment in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations through cash generated
from operations and receipt of service fees advanced from BIG. Bank borrowings
have been used to finance fixed asset purchases. Net cash provided by operating
activities for the three months ended March 31, 1997 and 1998 was $2.2 million
and $1.1 million, respectively. For 1995, 1996 and 1997, net cash provided by
operating activities was $831,000, $963,000 and $7.7 million, respectively. The
significant increase in net cash provided by operating activities in 1997 was
primarily attributable to the increased level of net income, employee-related
accrued expenses and income taxes payable to BIG.
Net cash used in investing activities for the three months ended March 31,
1997 and 1998 was $241,000 and $233,000, respectively. For 1995, 1996 and 1997,
net cash used in investing activities was $464,000, $1.0 million and $8.2
million, respectively. In July 1997, BHDS issued $6.75 million in
non-cumulative, 8% Preferred Stock. The proceeds from the sale of the Preferred
Stock were used to fund the purchase of the Company's 49% interest in Old
Geotrac. In May 1998, the Company repurchased the outstanding Preferred
21
27
Stock in exchange for a note. The note is payable in its entirety on December
31, 1998 and accrues interest at 8.5%. The Company intends to use a portion of
the net proceeds from this offering to repay the note. See "Use of Proceeds."
Net cash used in financing activities for the three months ended March 31,
1997 and 1998 was $2.0 million and $979,000, respectively. For 1995, 1996 and
1997, net cash provided by (used in) financing activities was $(333,000),
$12,000 and $681,000, respectively. Cash dividends were paid to BIG in 1996 and
1997 in the amount of $1.0 million and $3.5 million, respectively. Additionally,
the Company paid a cash dividend of $1.1 million to BIG in June, 1998. Net
advances to BIG were $1.9 million and $5.1 million for the three months ended
March 31, 1997 and the year ended December 31, 1997, respectively.
At December 31, 1997 and March 31, 1998 amounts due from BIG totaled $8.8
million and $9.2 million, respectively. At the same dates, amounts due to BIG
and income tax payable to BIG, totaled $5.1 million and $7.5 million,
respectively. In addition, at March 31, 1998, a note payable to BIG totaled
$4.95 million. Upon completion of this offering, it is contemplated that
intercompany balances will be satisfied. At March 31, 1998, the Company
maintained a zero balance account arrangement with BIG. As a result of this
funding arrangement, the Company has a negative cash balance for financial
reporting purposes representing checks that have been issued but that have not
yet been presented to the bank for payment. This arrangement was discontinued in
June, 1998. See "Certain Transactions -- Miscellaneous."
The Company believes that cash flows from operations and net proceeds from
this offering will not only satisfy working capital needs for approximately one
year but also be sufficient to retire or redeem most existing debts of the
Company. Unanticipated rapid expansion, business or systems development, or
potential acquisitions may cause the Company to require additional funds. In
June, 1998, the Company received a commitment for a $5.0 million revolving line
of credit with a commercial bank that will provide bridge financing for working
capital or acquisition needs. The Company identifies and assesses, in the normal
course of its business, technologies or businesses which it believes to
strategically fit its business plan. The Company has no current commitments with
respect to any such transaction. The Company may, however, enter into such
transactions should opportunities present themselves in the future.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 130. In June, 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
of Comprehensive Income, which establishes standards of reporting and displaying
of comprehensive income and its components (revenues, expenses, gains and
losses) in the financial statements. SFAS No. 130 requires comprehensive income
to be reported with the same prominence as other items in the financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
presented for comparative purposes is required. The Company does not anticipate
that adoption of SFAS No. 130 will have a material effect on the consolidated
financial statements.
YEAR 2000 COMPLIANCE
The Company is currently addressing a universal situation commonly referred
to as the "Year 2000 Problem." The Year 2000 Problem relates to the inability of
certain computer software programs to properly recognize and process
date-sensitive information relative to the Year 2000 and beyond. The Company
believes it has made the necessary changes to the primary operating systems that
it licenses from BIG to ensure compliance with the Year 2000 Problem.
Additionally, the Company has implemented a plan requiring all third-party
software vendors to certify that their software products are Year 2000
compliant. The cost of executing this plan is not expected to have a material
impact on the Company's results of operations or financial condition. See "Risk
Factors -- Year 2000 Issues."
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SELECTED CONSOLIDATED FINANCIAL DATA OF GEOTRAC
(IN THOUSANDS)
The following selected financial data should be read in conjunction with
the Financial Statements of SMS Geotrac, Inc. (as the predecessor to Geotrac,
Inc. (formerly YoSystems, Inc.) ("Old Geotrac")) and the Notes thereto, the
Financial Statements of Old Geotrac and the Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Geotrac" included elsewhere in this Prospectus. The following selected financial
data of SMS Geotrac, Inc. for the years ended June 30, 1996 and 1997 and for the
one month ended July 31, 1997 and of Old Geotrac for the years ended December
31, 1995, 1996, and 1997 have been derived from the company's audited financial
statements. The selected financial data presented as of March 31, 1998 and the
three months ended March 31, 1997 and 1998 were derived from the unaudited
financial information of the Company. With respect to the unaudited financial
information, the Company is of the opinion that all material adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the company's interim results of operations have been included.
This data should be read in conjunction with the Financial Statements of SMS
Geotrac, Inc. and the Financial Statements of Old Geotrac included elsewhere in
this Prospectus.
SMS GEOTRAC, INC. OLD GEOTRAC (FORMERLY YOSYSTEMS, INC.)
----------------------------- -------------------------------------------
ONE THREE MONTHS
YEAR ENDED MONTH YEAR ENDED ENDED
JUNE 30, ENDED DECEMBER 31, MARCH 31,
------------------ JULY 31, ---------------------- ------------------
1996 1997 1997 1995 1996 1997 1997 1998
------- ------- -------- ---- ---- ------ ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $12,490 $12,522 $1,210 $ -- $ -- $6,336 $ -- $4,573
------- ------- ------ ---- ---- ------ ------ ------
Expenses:
Cost of revenues................. 6,219 5,914 530 -- -- 2,679 -- 1,874
Selling, general and
administrative................. 3,079 2,839 227 10 30 1,319 -- 762
Deferred compensation (non-
recurring item)................ -- -- -- -- -- 733 -- --
Depreciation and amortization.... 689 1,331 104 -- -- 594 -- 360
------- ------- ------ ---- ---- ------ ------ ------
Total expenses............. 9,987 10,084 861 10 30 5,325 -- 2,996
------- ------- ------ ---- ---- ------ ------ ------
Operating income (loss)........... 2,503 2,438 349 (10) (30) 1,011 -- 1,577
Other income (non-recurring
item)............................ -- -- -- 932 -- 1,700 -- --
Interest expense.................. (82) (79) (8) -- -- (338) -- (190)
------- ------- ------ ---- ---- ------ ------ ------
Income before income taxes........ 2,421 2,359 341 922 (30) 2,373 -- 1,387
Provision for income taxes........ 1,047 1,079 148 -- -- 272 -- 554
------- ------- ------ ---- ---- ------ ------ ------
Net income (loss)................. $ 1,374 $ 1,280 $ 193 $922 $(30) $2,101 $ -- $ 833
======= ======= ====== ==== ==== ====== ====== ======
COMBINED GEOTRAC(A)
-----------------------------------------
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------
1996 1997 1997 1998
------- ------- ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $13,375 $14,063 $2,985 $4,573
------- ------- ------ ------
Expenses:
Cost of revenues................. 6,673 6,043 1,380 1,874
Selling, general and
administrative................. 3,287 2,900 649 762
Deferred compensation (non-
recurring item)................ -- 733 -- --
Depreciation and amortization.... 955 1,505 308 360
------- ------- ------ ------
Total expenses............. 10,915 11,181 2,337 2,996
------- ------- ------ ------
Operating income (loss)........... 2,460 2,882 648 1,577
Other income (non-recurring
item)............................ -- 1,700 -- --
Interest expense.................. (69) (387) (5) (190)
------- ------- ------ ------
Income before income taxes........ 2,391 4,195 643 1,387
Provision for income taxes........ 975 1,113 296 554
------- ------- ------ ------
Net income (loss)................. $ 1,416 $ 3,082 $ 347 $ 833
======= ======= ====== ======
OLD GEOTRAC (FORMERLY
YOSYSTEMS, INC.)
-----------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
-------------- MARCH 31,
1996 1997 1998
---- ------- ------------
BALANCE SHEET DATA:
Working capital (deficiency)................................ $(25) $ 1,402 $ 1,828
Total assets................................................ -- 18,637 19,112
Long-term debt.............................................. -- 7,745 7,056
Total shareholders' equity (deficit)........................ (25) 7,126 7,959
- ---------------
(a) SMS Geotrac, Inc. and Old Geotrac are presented on a combined basis for
comparability purposes.
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29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GEOTRAC
The following discussion should be read in conjunction with the Financial
Statements of Old Geotrac and the Notes thereto and the Financial Statements of
SMS Geotrac, Inc. and the Notes thereto included elsewhere in this Prospectus.
OVERVIEW
During June, 1998, the Company completed the Geotrac Acquisition. The
Geotrac Acquisition occurred through a series of transactions beginning in July,
1997. At that time, the Company acquired 49% of the issued and outstanding
common stock of YoSystems, Inc. which had nominal net assets at the date of
acquisition. YoSystems, Inc. concurrently purchased all of the issued and
outstanding common stock of SMS Geotrac, Inc. ("SMS Geotrac"). SMS Geotrac
subsequently merged into YoSystems, Inc., which changed its name to "Geotrac,
Inc." ("Old Geotrac"). In June 1998, the Company acquired the remaining 51% of
the issued and outstanding common stock of Old Geotrac.
For comparative purposes, the operating results herein also reflect the
combined results of SMS Geotrac and Old Geotrac for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997. As Old Geotrac is on a
different accounting basis resulting from the application of purchase
accounting, not all of the combined results, such as depreciation and
amortization expense, are comparable. For all periods presented herein and until
August 1, 1997, Old Geotrac was a relatively inactive S Corporation whose
principal activity was to receive contingent earn-out payments from the prior
sale of its operating assets in 1994 and to distribute these earn-out payments
to its shareholders.
Geotrac's primary source of revenues is derived from the performance of
flood zone determinations principally for mortgage origination and P&C insurance
companies. Revenues are recognized upon completion of work performed. Mortgage
interest rates and weather patterns have historically impacted Geotrac's
revenues. The current low level of interest rates, which has stimulated the
increase in the number of mortgage financings and refinancings, and the
increased awareness of severe weather occurrences have resulted in an increase
in the number of determinations processed by Geotrac.
Cost of revenues primarily consists of wages and related benefits for
personnel who perform flood zone determinations. As Geotrac continues to migrate
towards performing more automated than manual determinations, management
believes cost of revenues as a percentage of revenues will decrease.
Because Old Geotrac had limited operations during the year ended December
31, 1996 and for the period January 1, 1997 through July 31, 1997, the date of
the acquisition of SMS Geotrac, Inc., no comparisons of the three months ended
March 31, 1998 and 1997, the years ended December 31, 1997 and 1996, and the
years ended December 31, 1996 and 1995 are provided. Similarly, no comparison to
the prior period is provided for SMS Geotrac with respect to the one month ended
July 31, 1997.
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30
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain income and expense items.
SMS GEOTRAC, INC. OLD GEOTRAC (FORMERLY YOSYSTEMS, INC.) COMBINED GEOTRAC(A)
------------------------- --------------------------------------- -----------------------------
THREE MONTHS THREE MONTHS
YEAR ENDED ONE MONTH YEAR ENDED ENDED YEAR ENDED ENDED
JUNE 30, ENDED DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
------------- JULY 31, ---------------------- -------------- ------------- -------------
1996 1997 1997 1995 1996 1997 1997 1998 1996 1997 1997 1998
----- ----- --------- ----- ----- ------ ----- ------ ----- ----- ----- -----
STATEMENT OF OPERATIONS
DATA:
Revenues.................... 100.0% 100.0% 100.0% 0.0% 0.0% 100.0% 0.0% 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- --- --- ----- --- ----- ----- ----- ----- -----
Expenses:
Cost of revenues........... 49.8 47.2 43.8 0.0 0.0 42.3 0.0 41.0 49.9 43.0 46.2 41.0
Selling, general and
administrative........... 24.7 22.7 18.7 0.0 0.0 20.8 0.0 16.6 24.6 20.6 21.8 16.6
Deferred compensation
(non-recurring item)..... 0.0 0.0 0.0 0.0 0.0 11.5 0.0 0.0 0.0 5.2 0.0 0.0
Depreciation and
amortization............. 5.5 10.6 8.6 0.0 0.0 9.4 0.0 7.9 7.1 10.7 10.3 7.9
----- ----- ----- --- --- ----- --- ----- ----- ----- ----- -----
Total expenses....... 80.0 80.5 71.1 0.0 0.0 84.0 0.0 65.5 81.6 79.5 78.3 65.5
----- ----- ----- --- --- ----- --- ----- ----- ----- ----- -----
Operating income............ 20.0 19.5 28.9 0.0 0.0 16.0 0.0 34.5 18.4 20.5 21.7 34.5
Other income (non-recurring
item)...................... 0.0 0.0 0.0 0.0 0.0 26.8 0.0 0.0 0.0 12.1 0.0 0.0
Interest expense............ (0.6) (0.7) (0.7) 0.0 0.0 (5.3) 0.0 (4.2) (0.5) (2.8) (0.2) (4.2)
----- ----- ----- --- --- ----- --- ----- ----- ----- ----- -----
Income before income
taxes...................... 19.4 18.8 28.2 0.0 0.0 37.5 0.0 30.3 17.9 29.8 21.5 30.3
Provision for income
taxes...................... 8.4 8.6 12.2 0.0 0.0 4.3 0.0 12.1 7.3 7.9 9.9 12.1
----- ----- ----- --- --- ----- --- ----- ----- ----- ----- -----
Net income.................. 11.0% 10.2% 16.0% 0.0% 0.0% 33.2% 0.0% 18.2% 10.6% 21.9% 11.6% 18.2%
===== ===== ===== === === ===== === ===== ===== ===== ===== =====
- ---------------
(a) SMS Geotrac, Inc. and Old Geotrac are presented on a combined basis for
comparability purposes.
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31
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 ON A COMBINED
BASIS -- GEOTRAC
Revenues. Revenues increased $1.6 million, or 53.2%, to $4.6 million in
the first quarter of 1998 from $3.0 million in the first quarter of 1997. This
revenue growth was attributable to the increased number of determinations
processed due to the large number of mortgage financings and refinancings as a
result of continued low interest rates.
Cost of Revenues. Cost of revenues increased $494,000, or 35.8%, to $1.9
million in the first quarter of 1998 from $1.4 million in the first quarter of
1997. As a percentage of revenues, cost of revenues decreased to 41.0% in the
first quarter of 1998 from 46.2% in the first quarter of 1997. The effect of the
efficiencies associated with the increased volume of determinations, coupled
with the greater proportion of automated determinations, resulted in the
improvement in this percentage in the first quarter of 1998.
Selling, General and Administrative Expense. Selling, general and
administrative increased $113,000, or 17.4%, to $762,000 in the first quarter of
1998 from $649,000 in the first quarter of 1997. As a percentage of revenues,
selling, general and administrative expenses decreased to 16.7% in the first
quarter of 1998 from 21.7% in the first quarter of 1997. This percentage
decrease was primarily due to spreading certain fixed costs over a larger
revenue base.
Depreciation and Amortization. Depreciation and amortization increased
$52,000, or 16.9%, to $360,000 in the first quarter of 1998 from $308,000 in the
first quarter of 1997. The amortization of intangibles related to Old Geotrac's
July, 1997 acquisition of SMS Geotrac accounted for the increase in the first
quarter of 1998.
Interest Expense. Interest expense increased $185,000, to $190,000 in the
first quarter of 1998 from $5,000 in the first quarter of 1997. The increase
principally relates to interest on the July, 1997 bank borrowings used to fund a
portion of the July, 1997 acquisition.
Provision for Income Taxes. The effective income tax rate was 40.0% for
1998 and 46.0% for 1997, reflecting additional provision for state income taxes
in the first quarter of 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996 ON A COMBINED
BASIS -- GEOTRAC
Revenues. Revenues increased $688,000, or 5.1%, to $14.1 million in 1997
from $13.4 million in 1996. Most of this revenue growth occurred after SMS
Geotrac, Inc. was acquired in July, 1997, as a result of the increased number of
determinations processed due to the large number of mortgage financings and
refinancings as a result of continued low interest rates.
Cost of Revenues. Cost of revenues decreased $630,000, or 9.4%, to $6.0
million in 1997 from $6.7 million in 1996. As a percentage of revenues, cost of
revenues decreased to 43.0% in 1997 from 49.9% in 1996. The decrease, in both
actual dollar amount and as a percentage of revenues, resulted primarily from
(i) efficiencies associated with an increased volume of determinations, (ii) a
greater proportion of automated determinations, and (iii) higher expenses
incurred in 1996 related to the expansion of Old Geotrac's automated database.
Selling, General & Administrative Expense. Selling, general and
administrative expenses decreased $387,000, or 11.8%, to $2.9 million in 1997
from $3.3 million in 1996. As a percentage of revenues, selling, general and
administrative expenses decreased from 24.6% in 1996 to 20.6% in 1997. This
decrease was the result of a reduction of bad debt expense in 1997 resulting
from improved billing and collection procedures.
Deferred Compensation (Non-Recurring Item). On September 11, 1997, Old
Geotrac's Board of Directors, recognizing the nonbinding commitment of the
president of SMS Geotrac, which commitment originated prior to the acquisition
of SMS Geotrac, approved and granted bonuses to certain current and former
employees of SMS Geotrac. Such bonuses were principally related to prior
services rendered by these employees and resulted in additional compensation in
1997 of $732,795, which amount is separately disclosed in the statement of
operations as deferred compensation (non-recurring item) and of which
approximately $362,000 and $371,000 relate to cost of revenues and selling,
general and administrative expenses, respectively. These amounts are to be paid
to the individuals on or before December 31, 1998.
26
32
Prior to and at the time of the acquisition of SMS Geotrac, the president
of SMS Geotrac also had a nonbinding commitment to grant to certain former and
current employees options to purchase shares of Old Geotrac common stock held
jointly by the president and his spouse, for prior employee services rendered.
On May 12, 1998, the president and his spouse awarded 46.45 shares of their
common stock to these individuals. In conjunction with the agreement and plan of
merger with the Company, Old Geotrac acquired the common stock held by these
individuals for approximately $728,069. In May, 1998, Old Geotrac will record
additional compensation expense (non-recurring item) of $728,069 and an increase
to contributed capital of $728,069.
Depreciation and Amortization. Depreciation and amortization increased
$550,000 or 57.6%, to $1.5 million in 1997 from $955,000 in 1996. The
depreciation and amortization in 1997 of the additional computer equipment,
furniture and fixtures and maps acquired in 1997 and 1996 principally accounted
for this increase. In addition, amortization of intangibles related to the July,
1997 acquisition approximated $260,000 in 1997.
Interest Expense. Interest expense increased $318,000 to $387,000 from
$69,000 in 1996. This increase relates to the interest on the bank borrowings
used to fund a portion of the July, 1997 acquisition.
Other Income (Non-Recurring Item). In 1997, Old Geotrac received a
contingent earn-out of $1,700,000, representing the final payment under a 1994
sale agreement. No payment was received in 1996.
Provision for Income Taxes. The effective income tax rate was 26.5% in
1997 and 40.8% in 1996. The lower rate in 1997 principally reflects that the
other income of $1,700,000 was not subject to income tax as Old Geotrac was an S
Corporation at the time the amount was received and earned.
COMPARISON OF THE YEAR ENDED JUNE 30, 1997 AND 1996 -- SMS GEOTRAC, INC.
Revenues. Revenues remained relatively unchanged at $12.5 million in
fiscal 1997 and 1996. The flat revenues were primarily attributable to a lack of
marketing emphasis.
Cost of Revenues. Cost of revenues decreased $305,000, or 4.9%, to $5.9
million in fiscal 1997 from $6.2 million for fiscal 1996. As a percentage of
revenues, cost of revenues decreased to 47.2% in fiscal 1997 from 49.8% in
fiscal 1996. Management attributes this decrease to a greater proportion of
automated determinations, which are less costly than manual determinations.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased $240,000, or 7.8%, to $2.8 million in fiscal
1997 from $3.1 million in fiscal 1996. As a percentage of revenues, selling,
general and administrative expense decreased to 22.7% in fiscal 1997 from 24.7%
in fiscal 1996. The reduction of bad debt expense in 1997, resulting from
improved billing and collections procedures, accounted for the decrease in the
dollar amount and percentage.
Depreciation and Amortization. Depreciation and amortization increased
$642,000, or 93.2%, to $1.3 million for fiscal 1997 from $689,000 for fiscal
1996. The depreciation and amortization of the additional computer equipment,
furniture and fixtures and maps acquired in 1997 and 1996 accounted for this
increase.
Provision for Income Taxes. The effective income tax rate was 45.8% in
fiscal 1997 and 43.2% in fiscal 1996, reflecting an additional provision for
state income taxes in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Geotrac has funded its operations primarily through cash
generated from operations and to a lesser extent from capital leases and a
revolving line of credit.
The July, 1997 acquisition of SMS Geotrac was funded by BHDS' contribution
of $6,750,000 in cash and proceeds of a new seven year term note of $8,750,000
entered into by Old Geotrac. The note, which had an outstanding balance of
$7,812,500 at March 31, 1998, bears interest at prime rate and is collateralized
by substantially all of the assets of Old Geotrac. It is anticipated that the
note will be repaid from a portion of the offering proceeds. In conjunction with
BHDS' purchase of the remaining 51% of Old Geotrac, BHDS was the surviving
company and changed its name to "Geotrac, Inc." Accordingly, Geotrac is
presently a wholly-owned subsidiary of the Company. As such, the above
information should be read in conjunction with "Selected Consolidated Financial
Data of the Company," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company," the Company's Consolidated
Financial Statements and the Company's Pro Forma Condensed Consolidated
Financial Statements (unaudited).
27
33
BUSINESS
GENERAL
The Company provides (1) comprehensive policy and claims outsourcing
services to the property and casualty ("P&C") insurance industry, with an
emphasis on providing these services to the flood insurance market, and (2)
flood zone determinations to financial institutions, mortgage lenders and
insurance companies. The Company's outsourcing services, which are offered on
either a bundled or "a la carte" basis, include policy administration, claims
administration and information technology services. The Company processed
approximately 575,000 insurance policies in 1997, including approximately
450,000 flood insurance policies, making it the second largest provider of flood
administration services in the United States. The Company currently provides
flood outsourcing services to its affiliate, Bankers Insurance Group, Inc.
(together with its subsidiaries, "BIG"), Mobile USA Insurance Company, Inc. and
AAA Auto Club South Insurance Company, as well as to insurance companies that
offer flood insurance utilizing BIG as their private label servicing carrier,
such as Horace Mann Insurance Company, Armed Forces Insurance Corporation and
AMICA Mutual Insurance Company. In conjunction with BIG, the Company is able to
offer insurance companies the ability to create a turnkey private label flood
insurance product. The Company believes this product is attractive to insurance
companies that desire to offer flood insurance but are not certified by the
Federal Emergency Management Agency ("FEMA") to sell and service flood
insurance. FEMA estimates that only 25% to 33% of U.S. properties required to be
covered by flood insurance are in fact covered. The Company anticipates
continued growth in the demand for flood insurance, and related flood
outsourcing and flood zone determination services, over the next several years.
In 1997, the Company processed approximately 1.4 million flood zone
determinations for over 750 customers, including financial institutions such as
SouthTrust Bank and SunTrust Bank, mortgage lenders such as ABN Amro North
America, Inc. and Mortgage Corporation of America, and P&C insurance companies
such as American International Group, Inc., and Royal Indemnity Company. Flood
insurance is required by federal law in connection with virtually all
residential mortgage loans, including refinancing loans, covering properties
located within federally designated high-risk flood zones. A flood zone
determination is necessary in order to ascertain a property's flood zone
classification. In addition, due to more stringent underwriting criteria, P&C
insurers increasingly require flood zone determinations prior to issuing
commercial property policies. The Company uses its proprietary database,
compiled and digitized from flood maps distributed by FEMA, to determine whether
a particular property or structure is located within a flood zone classification
that requires flood insurance. The Company estimates that its electronic
database includes over 85% of all U.S. households.
The Company is a % owned subsidiary of BIG, a holding company
chartered in Florida in 1976. BIG provides multiple lines of P&C insurance, most
notably flood, homeowners and automobile insurance, to individuals and
businesses throughout the United States. From 1993 to 1997, BIG's premiums grew
at a compound annual growth rate of 23.0% from $113.1 million to $259.0 million.
BIG is the largest underwriter of flood insurance policies through independent
agents (and the second largest overall) in the United States. Upon completion of
this offering, BIG will beneficially own % of the Company's Common Stock.
BIG is the Company's principal customer, accounting for approximately 56% of the
Company's total revenues (on a pro forma basis) and 98% of the Company's
outsourcing revenues (on a pro forma basis) in 1997.
OVERVIEW OF THE FEDERAL FLOOD INSURANCE PROGRAM
The U.S. flood insurance market is regulated by FEMA, which launched the
National Flood Insurance Program (the "Flood Program") in 1968. FEMA created the
Flood Program to provide federally-backed flood insurance to residents in
designated floodplain communities, on the condition that such communities comply
with the Flood Program's floodplain management requirements. The Flood Program,
as it exists today, is administered by the Federal Insurance Administration
("FIA").
The Flood Program was launched in 1968, and in 1983, FIA opened the flood
insurance market to private insurance companies by establishing the National
Flood Insurance Write Your Own ("WYO") program. The
28
34
WYO program permits private insurance companies who meet FEMA requirements to
sell flood insurance underwritten by the federal government and subject to
federal regulation.
In 1994, Congress passed the National Flood Insurance Reform Act of 1994
(the "1994 Reform Act"). The 1994 Reform Act clarified and strengthened the
obligations of mortgage lenders to oversee and ensure the purchase of flood
insurance by borrowers who obtain federally-insured residential mortgage loans
on properties located in federally designated high-risk flood zones. Under the
1994 Reform Act, mortgage lenders must notify borrowers when flood insurance is
required, require flood insurance as a condition to making certain loans, and
place flood insurance premiums in escrow. Lenders who fail to comply with the
1994 Reform Act are subject to substantial monetary penalties.
MARKET OPPORTUNITIES
Growth in the Flood Market. The U.S. flood insurance market has grown
significantly in recent years. Currently, almost 19,000 communities participate
in the Flood Program, and approximately 100 insurance companies are registered
to offer WYO flood insurance. The following table illustrates the growth in
flood insurance policies and premiums under the Flood Program since 1987 and
highlights the Company's increased penetration of this growing market:
PERCENTAGE OF
ANNUAL TOTAL FLOOD
NUMBER OF FLOOD PROGRAM FLOOD PREMIUMS
TOTAL NUMBER OF FLOOD POLICIES TOTAL ANNUAL PREMIUMS ADMINISTERED
POLICIES IN ADMINISTERED BY FLOOD ADMINISTERED BY BY THE
AS OF SEPTEMBER 30, FLOOD PROGRAM THE COMPANY PREMIUMS THE COMPANY COMPANY
- ------------------- --------------- --------------- ------------- --------------- -------------
(IN 000'S) (IN 000'S) (IN 000'S) (IN 000'S)
1987.......... 2,023 58 $ 554,249 $ 16,185 2.9%
1988.......... 2,052 68 571,265 17,918 3.1
1989.......... 2,167 75 623,409 21,277 3.4
1990.......... 2,341 88 658,359 27,055 4.1
1991.......... 2,459 107 716,650 33,171 4.7
1992.......... 2,530 121 779,746 37,723 4.8
1993.......... 2,690 146 859,128 49,191 5.7
1994.......... 2,805 211 946,898 60,739 6.4
1995.......... 3,265 274 1,114,059 79,960 7.2
1996.......... 3,546 376 1,209,178 102,047 8.4
1997.......... 3,811 453 1,390,015 132,041 9.5
The following table illustrates the growth in the number of flood zone
determinations performed by the Company from 1994 through 1997:
TOTAL NUMBER OF TOTAL NUMBER OF
FLOOD ZONE DETERMINATIONS 1-4 FAMILY MORTGAGE
YEAR GENERATED BY THE COMPANY LOAN ORIGINATIONS IN U.S.
- ---- ------------------------- --------------------------
1994..................................... 449,789 7,484,600
1995..................................... 744,454 5,976,700
1996..................................... 1,191,182 6,882,300
1997..................................... 1,384,089 7,192,000
The Company believes that the demand for flood outsourcing services and
flood zone determinations will continue to grow as a result of the following
factors:
- Higher Levels of Compliance with Federal Flood Laws. The 1994
Reform Act has compelled mortgage lenders to enforce federal flood
insurance requirements or be subject to substantial monetary
penalties. As a result, a higher percentage of purchasers of
residential property located in federally designated high-risk flood
zones are being required to purchase flood insurance as a condition
to receiving mortgage financing from a federally-backed financial
institution. Based on a FEMA estimate that only 25% to 33% of U.S.
properties required to be covered by flood insurance
29
35
are in fact covered, and given that only approximately 3.8 million
U.S. properties were covered as of September 30, 1997, management
estimates that approximately 11.4 million to 15.2 million U.S.
properties are in fact required to be covered by flood insurance.
The Company believes the demand for flood insurance outsourcing
services will grow as compliance with federal flood insurance
requirements increases. The Company also believes such compliance
will result in greater demand for flood zone determinations, since a
flood zone determination is necessary in order to determine whether
a property is located in a high-risk flood zone.
- Increase in Voluntary Purchase of Flood Insurance. The Company
expects the number of property owners who purchase flood insurance
on a voluntary basis to increase over the next several years.
Management believes consumers are increasingly aware that affordable
flood insurance is available to them through the Flood Program.
Management attributes this growing awareness to a number of factors,
including (1) the Flood Program's national advertising campaign,
known as Cover America, which began in 1995, (2) increasing consumer
awareness that the typical homeowners' policy does not cover flood
damage, and (3) the occurrence of several recent flooding disasters,
such as the Mississippi River floods of 1993 and the Red River
floods of 1997. Similarly, the substantial media attention given the
El Nino phenomenon and the resulting severe weather patterns, have
heightened the public's awareness that flood insurance may be
necessary even for properties not located in high-risk flood zone
classifications. Approximately 25% to 30% of flood damage claims
paid relate to properties located outside such flood zone
classifications. According to the National Flood Insurance Program
Bureau and Statistical Agency, the number of flood insurance
policies purchased by homeowners on a voluntary basis has increased
from 118,000 policies as of September 30, 1994 to 442,000 policies
as of September 30, 1997, a compound annual growth rate of 55.3%.
- Growth in Commercial Flood Zone Determination Business. The demand
for flood zone determinations by commercial property insurers and
commercial mortgage lenders has increased recently and the Company
expects this growth pattern to continue. Commercial property
insurance policies generally cover floods and similar events. As
public attention has focused more closely on severe weather patterns
in recent years and insurers have become increasingly aware of the
importance of flood coverage, P&C insurers that issue such policies
have been developing more stringent underwriting criteria.
Trend Toward Outsourcing in the P&C Industry. The P&C industry provides
financial protection for individuals, businesses and others against losses of
property or losses by third parties for which the insured is liable. P&C
insurers underwrite policies that cover various types of risk, which can
generally be divided into personal lines of insurance covering individuals and
commercial lines of insurance covering businesses. Personal lines are comprised
primarily of automobile and homeowners insurance. Commercial lines cover a wide
range of commercial risks that affect businesses.
The P&C industry is highly competitive, with insurance companies competing
primarily on the basis of price, consumer satisfaction and the ability to pay
claims. According to A.M. Best, as of December 31, 1997, there were
approximately 3,300 P&C insurance companies in the United States. These
companies generated approximately $277 billion in annual premium revenues in
1997, 41% of which were written by the top ten insurers. According to A.M. Best,
premium revenues in the P&C industry have increased by an average of 3.5%
annually since 1990.
30
36
Over the past decade, many P&C insurance companies have begun using
third-party vendors to provide certain policy and claims administration services
that were traditionally performed in-house. This outsourcing of services allows
insurers to focus on their core competencies, reduce costs and eliminate capital
expenditures for the development, installation, operation and maintenance of
information management and automation systems. Insurance companies historically
have invested less in information technology than companies in other industries.
In 1996, for example, insurance companies spent only 2.4% of revenues on
information technology, as compared to 6.6% for banking firms and 2.9% for all
industry sectors combined. The Company believes that insurance companies will
increase their levels of outsourcing as they determine that policy and claims
administration and regulatory compliance are complicated and too costly to
perform efficiently in-house. According to forecasts published by The Yankee
Group, the amount spent annually by insurers on outsourcing is expected to
increase from $5 billion in 1997 to $13 billion within the next five years. The
Company believes it will have significant opportunities to market its
outsourcing services for the following reasons:
- Consolidation and Drive for Cost Efficiencies. Providers of
outsourcing services are able to consolidate large volumes of business
into automated and effective processing systems, thereby creating
significant cost efficiencies. The Company believes insurance
companies typically outsource administrative services because
outsource providers can provide better quality services at a lower
cost.
- Technological Challenges and Complexities. The investment in the
specialized technical knowledge required to develop, install and
operate information systems necessary for P&C insurers to remain
competitive is often cost prohibitive, particularly for smaller
companies and new entrants to the market. Insurance companies can take
advantage of the economies of technology created by an outsource
provider's investment in information systems. For example, the Company
believes the Year 2000 issue will generate additional demand for
outsourcing services because many insurance companies will resolve the
Year 2000 issue by either purchasing new software systems or
outsourcing some or all of their policy and claims requirements.
- Changing Distribution Channels. The Company believes that demand for
outsourcing services will increase as banks, credit unions and other
financial service companies enter the P&C market. These new entrants
were generally precluded from selling insurance until the U.S. Supreme
Court decision in Barnett Bank v. Nelson in 1996. The Company believes
that, following this decision, and despite continuing restrictions and
pressure from state regulators, banks and other financial institutions
will enter the P&C market at an increasing rate, often forming joint
ventures and other alliances with certain insurers to sell P&C
insurance. Many new entrants lack the technology, expertise or desire
to perform policy and claims processing in-house. These so-called
"virtual insurance companies" often focus their resources on the core
marketing, underwriting and financial aspects of the P&C business and
seek to outsource their policy and claims administration to
third-party vendors. The Company believes that it is well-positioned
to provide services to new entrants to the P&C market.
- Regulatory Reporting Requirements. State insurance regulators closely
regulate the product offerings, claims processes and premium rate
structures of insurance companies. To comply with such regulations,
companies must file annual and other reports relating to their
financial condition. Third-party vendors with effective policy and
claims administration systems can facilitate compliance with many
regulatory requirements by automating statutory reporting and other
compliance tasks.
THE IMSG SOLUTION
The Company believes it has positioned itself to capitalize on the
foregoing market opportunities in the following ways:
- Flood Insurance Experience. The Company believes it is currently the
second largest provider of flood insurance outsourcing services in the
United States, currently servicing over 450,000 flood
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insurance policies. As a result, the Company has developed
substantial expertise and scale in virtually all aspects of the
flood insurance servicing business.
- Flexible, Comprehensive, Turnkey Solutions. The Company offers a
comprehensive range of outsourcing services, both individually and
on a bundled basis, giving clients flexibility in selecting and
matching services to their needs. The Company's turnkey solutions
allow clients to focus on core competencies and better manage costs
and allow new market entrants an opportunity to offer insurance
products on a cost-effective basis by leveraging the Company's
systems and business processes.
- Insurance Industry Expertise. Unlike certain of its competitors,
the Company's senior management has substantial experience in the
insurance industry. See "Management." As a result of this core
competence, management believes the Company is better suited to
understand and address its customers' needs.
- Flood Zone Determination Services. The Company offers a highly
automated flood zone determination service based on its proprietary
national database. This service provides an accurate, prompt and
relatively low cost determination of a residential or commercial
property's status with respect to national flood zones. Insurance
companies, credit unions, banks and other financial institutions use
this service to comply with federal laws requiring mortgage lenders
to oversee and ensure the purchase of flood insurance by certain
borrowers, create a competitive advantage in loan approval/insurance
underwriting response time and generate additional fees from their
borrowers.
- Modular, Integrated and Real-time Systems. The Company's
information systems are table-driven and modular in design, enabling
the Company to provide systems that address the specific needs of
the client, such as distinct underwriting rules. The core system
permits integration of a client's database, thereby eliminating the
need for data re-entry for multiple applications. The system
provides real-time processing of key functions, such as policy
processing and endorsements, that enhances completeness and accuracy
in processing. The Company's system also has a proven track record
of reliability and low system "down-time." The Company is committed
to upgrading and maintaining its systems in an effort to remain
competitive.
- Customer Service to Independent Agent Networks and
Policyholders. Because residential flood insurance rates are set by
FEMA and therefore are not directly subject to competitive
pressures, the Company believes customer service is a critical
consideration for independent sales agents in determining which
carrier's flood insurance policies to sell. BIG is the largest
underwriter of flood insurance policies through independent agents
in the United States, and the Company processes and services all of
BIG's flood insurance policies. The Company believes that as a
result of its affiliation with BIG it has developed a customer
service-oriented culture that strengthens its clients' relationships
with their independent sales agent networks and policyholders. The
Company focuses on providing superior service, such as timely policy
issuance and rapid and professional response to agent and
policyholder inquiries. The Company maintains and monitors quality
service standards and continually seeks to measures customer
satisfaction. The Company believes that its focus on customer
service has enabled it to retain all of its principal outsourcing
customers since 1994.
GROWTH STRATEGY
The Company's objectives are (1) to become a leading provider of
outsourcing services to the P&C industry and (2) to become the leading provider
of flood zone determinations to financial institutions, mortgage lenders and P&C
insurers. The Company's principal strategies for achieving these objectives are
as follows:
- Expand Flood Outsourcing Business. The Company has extensive
experience and expertise in virtually all aspects of the flood
insurance servicing business and occupies a leading position in that
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market. Key aspects of the Company's growth strategy include (1)
marketing flood outsourcing services to existing WYO carriers that
it believes will benefit for cost or infrastructure reasons from the
Company's services, (2) offering its outsourcing services to new
entrants that lack the infrastructure or expertise necessary to
service flood insurance customers, and (3) marketing its ability, in
conjunction with BIG, to provide and service a private label
insurance product to insurance companies that desire to offer flood
insurance but are not certified by FEMA to sell and service flood
insurance.
- Expand Relationships with Existing Customers. The Company intends
to capitalize on its existing flood insurance outsourcing customer
base and substantial flood zone determination customer base by
cross-marketing its flood, homeowners and automobile outsourcing
services to certain of these customers. Management believes these
marketing opportunities are especially prevalent today, given that
recent regulatory changes have permitted non-traditional insurance
companies -- most notably banks, credit unions and other financial
services companies -- to enter the P&C insurance industry. These new
entrants -- many of which are existing flood zone determination
customers of the Company -- often do not have the necessary
infrastructure or expertise in place and are natural candidates for
outsourcing. See "-- Market Opportunities."
- Focus on Maximizing Economies of Scale. The Company believes that
demand for P&C insurance outsourcing services will grow as such
services become more affordable and cost effective. To achieve such
affordability and cost effectiveness, a P&C outsourcing provider
must develop certain economies of scale. The Company currently
services over 575,000 insurance policies annually. As a result, it
has developed a large number of efficiencies in most aspects of its
operations, from the receipt of policy applications to billings and
collections. By deploying internally developed applications
software, rating disks for applications input, lockbox and cash
office processing, automated voice response, computerized forms and
automated policy assembly, the Company has attained expense
efficiencies that management believes are characteristic of insurers
processing substantially greater policy volumes. As a consequence,
the Company believes it is well-positioned to capitalize on the
growing trend toward outsourcing administrative functions in the P&C
industry by offering insurers better quality and more cost-effective
"back office" operations. Moreover, the Company intends to continue
expanding these efficiencies by increasing the utilization of its
existing infrastructure and databases.
- Expand Direct Sales Force and Develop Strategic Relationships. The
Company has recently begun to develop a direct sales force and sales
support organization to focus on new customer opportunities and
generate additional business from the Company's current customer
base. The Company is also seeking to develop new business
opportunities by creating additional strategic distribution and
marketing alliances. For example, the Company's flood zone
determination business targets credit unions of all sizes through
its marketing alliance with CUNA Mutual Group, the largest provider
of insurance products to credit unions, and large mortgage lenders
through its marketing alliance with Equifax Mortgage Services, the
nation's largest mortgage credit reporting agency. See
"-- Services."
- Generate Recurring Revenues. The Company seeks to generate
recurring revenues by entering into contractual relationships
(typically one to three years) with its outsourcing customers and by
offering services that are structured to generate revenues based on
events that occur frequently in the normal course of a customer's
business, such as claims, mortgage applications and insurance policy
renewals.
- Pursue Strategic Acquisitions. A key element of the Company's
growth strategy is to pursue potential acquisitions that offer
opportunities to increase market share or expand the Company's line
of outsourcing services. The Company's recent Geotrac Acquisition
enabled it to solidify its position as a leader in the flood zone
determination business and broaden the range of ancillary services
the Company is able to provide. Moreover, the Company is currently
in the process of
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consolidating its own flood zone determination operations with those of
Old Geotrac. See "Geotrac Acquisition."
SERVICES
Outsourcing Services. The Company's outsourcing services include policy
administration, claims administration and information technology services. The
Company works with each customer in an effort to ensure a seamless integration
of the customer's in-house and outsourced activities.
Policy administration describes the range of services the Company offers
customers that are considering outsourcing their policy administration
functions. When policy administration is outsourced, the customer retains all
financial risk and works with the Company to set underwriting and rating
guidelines. The Company typically receives a percentage of premiums for
performing policy administration services. The Company's policy administration
menu includes the following services: policy processing and related data entry;
policy issuance and acceptance; premium management and distribution; accounting,
billing and collections; customer service phone center for policyholders and
agents; and data collection, statutory reporting and regulatory compliance.
Claims administration describes the range of services the Company offers in
connection with the management of insurance claims. In reviewing a claim, the
Company performs a thorough claim analysis and, if warranted, prepares a check
for payment of the claim. The Company has a special investigative unit that
assists in detecting and deterring fraud in the claim review process. The
Company also offers a fully automated, stand-alone catastrophe claims operation,
distinguishing its outsourcing services in the P&C insurance market. The Company
is typically compensated for claims administration services on either a
percentage of earned premiums or claims-paid basis. The Company's claims
administration menu includes the following services: toll-free claim reporting;
initial coverage confirmation services; loss investigation and determination;
review and appraisal of claims; special investigation services, including fraud
detection; adjustment of claims and vendor management; litigation management;
and settlement and payment of claims.
The Company also offers a range of information technology services to
assist customers in operating, maintaining and enhancing information systems.
The Company integrates the customer's system platform with the Company's
processing platform, including the installation of all necessary hardware
components, depending on the customer's needs. This integration allows the
customer to administer its policies and claims internally by using the Company's
systems and software. The Company typically receives a percentage of premiums as
compensation, subject to a minimum fee. The Company's information technology
menu includes the following services: information management via integrated,
secure computer systems; document imaging; on-line rating and underwriting
services; monetary systems services, including payment processing; automated
printing, packaging and distribution of documents; generation of agent
commission statements and production reports; security administration and access
control; software application enhancement and maintenance; problem resolution
and reporting; and data backup and disaster recovery functions.
Because the Company is affiliated with and provides comprehensive
outsourcing services to BIG, a certified WYO carrier under the Flood Program, it
emphasizes to prospective customers its ability to provide third-party
administration outsourcing for flood insurance. The Company offers its flood
outsourcing services, including software and processing functions, policy
administration, claims administration and statistical reporting, on either a
bundled or "a la carte" basis. New market entrants and certain other insurers
may prefer to purchase unbundled services, allowing them to retain in-house
control over specific aspects of their businesses. The Company makes available
virtually any combination of outsourcing services required by the customer.
The Company also offers flood outsourcing services to insurance companies
that seek to provide flood insurance, but do not want to become certified WYO
carriers. In this case, the services are provided in conjunction with a
proprietary flood product. An insurance company can establish a private label
insurance product written through BIG whereby the customer's name and logo
appear on the policy documents, while BIG acts as the servicing carrier. The
Company also intends to market its outsourcing services to banks, credit unions
and other financial institutions as they become increasingly involved in the
sale of insurance.
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Flood Zone Determination Business. For a fixed fee, the Company will
provide a customer -- typically a mortgage loan originator or an insurance
company -- with a determination as to whether a specified property is located
within a federally-designated flood zone classification. The Company uses its
proprietary national flood zone database to make flood zone determinations. This
database, which is continually updated, allows the Company to determine if a
particular structure is located within the special flood hazard areas
established by FEMA. These determinations assist mortgage lenders in complying
with federal regulations under which they must require borrowers to purchase the
appropriate level of flood insurance. Management estimates that approximately
85% of all U.S. households are captured in the Company's flood zone database.
For approximately 70% of determinations requested, the Company is able to
perform automated flood zone determinations in a matter of seconds.
Determinations made on a fully-automated basis are significantly more cost
effective than manual determinations. In some cases, particularly where a
property is not clearly within or outside a flood hazard area, the database
search will not produce an automatic determination, or "hit," and a manual
search becomes necessary. Manual searches require extra time and labor and are
not nearly as cost effective as fully-automated searches.
The Company provides both one-time and life-of-loan flood zone
determinations. Under a "life of loan" determination, the Company is responsible
for updating the initial flood zone determination based on revisions to the
federal flood maps occurring during the term of the loan. The Company also
provides portfolio analyses and audits for mortgage service agencies by
reviewing blocks of loans that usually require between 100 and 50,000 flood zone
determinations.
In addition to flood zone determinations, the Company provides
flood-related ancillary services. For example, the Company provides a standard
flood compliance packet to lenders which includes information on community
status, mapping, specific structure location, amount of flood insurance
required, secondary market and government program restrictions, and floodway and
coastal zone barrier restrictions. The life-of-loan product tracks both
community status and FEMA map changes on a daily basis for the life of the loan.
If changes occur that affect the subject property, a new report is automatically
generated for no additional charge. Certain ancillary services are transferable
if the mortgage loan for which the flood zone determination was done is sold or
transferred. Through its GeoCompass(R) service, the Company provides certain
CD-ROM services on-site at customer locations. The CD-ROM delivery system offers
customers the ability to perform certain flood zone determinations at their own
desktops.
The Company also actively seeks to leverage its expertise in mapping
technology by providing ancillary mapping services. For example, the Company has
been engaged by various municipalities to digitize manual property tax maps and
then integrate these maps with appraisal data. Most municipality property tax
maps have not been digitized and the Company believes there is a significant
opportunity to penetrate this market. Additionally, the Company was recently
hired by the Columbus, Ohio Police Department to digitize property records and
then integrate these records with crime statistics in order to better monitor
crime trend activity. The Company believes there are numerous other related
opportunities to apply its core mapping technology expertise.
The Company has established a relationship with Kirloskar Computer Services
("KCS"), located in India, which the Company believes can provide certain
services that will increase the efficiency of the Company's flood zone
determination business. KCS currently builds databases and creates digitized
maps that the Company uses in connection with its flood zone determination
business. In addition, KCS is able to perform manual flood zone determination
searches at costs significantly below U.S. market rates. The Company currently
plans to capitalize on its relationship with KCS by implementing a pilot program
pursuant to which the Company will outsource approximately 20% of its manual
searches to KCS over the next several years. This pilot program is subject to
change based upon political and economic conditions in India.
The Company uses different pricing and contractual arrangements for
one-time and life-of-loan flood zone determinations. The Company performs flood
zone determinations for both residential and commercial properties, with
determinations for residential properties comprising approximately 85% of such
business.
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CUSTOMER SUPPORT AND INSTALLATION
The Company's outsourcing services are provided from two separate customer
service centers in St. Petersburg, Florida -- one for policy and claims
administration and one for catastrophic claims administration.
The policy administration center has approximately 200 employees, most of
whom are trained customer service representatives. Customer service
representatives are responsible for the timely handling and resolution of
incoming phone calls related to underwriting, rating, billing, policy status and
other policy administration matters. While most calls come from insurance
agents, the phone center also handles calls from mortgage companies,
policyholders and insureds. The policy administration phone center handles an
average of approximately 7,000 calls per week.
The claims administration customer service center is responsible primarily
for handling calls from claimants and insureds reporting property losses. The
center also handles calls from agents and others related to coverage of existing
claims. The center has approximately 170 employees, approximately half of which
are licensed claims representatives responsible for the adjustment of claims.
Incoming calls are taken by 15 customer service representatives who are trained
to handle all types of insurance claims. Unlike many other claims administration
centers, the Company's service center is able to immediately assign each claim
to a licensed adjuster for processing. The claims administration switchboard is
open weekdays from 7:30 a.m. to 9:00 p.m. (Eastern time), and customer service
representatives and licensed adjusters are available 24 hours a day, seven days
a week, to handle emergency claims.
The Company currently maintains two separate customer service centers
relating exclusively to its flood zone determination business, one of which was
acquired as part of the acquisition of Geotrac. The Company is currently in the
process of consolidating its own flood zone determination operations with those
of Geotrac. See "Geotrac Acquisition." The Company believes the service center
acquired as part of the Geotrac Acquisition is one of the largest flood zone
determination service centers in the industry. A team comprised of a senior
manager and up to four service representatives is assigned to each customer
account. The team advises the customer in all matters of flood compliance and
will train a customer's staff at their own or the Company's offices. The team
also provides direct support to their customers' independent direct sales agent
networks.
The Company installs its GeoCompass(R) CD-ROM system on site at customer
locations. GeoCompass(R), which enables customers to make their own flood zone
determinations, is based on the Windows operating system, operates on the
customer's network and is relatively simple for customers to learn to use.
SALES AND MARKETING
The Company seeks to market its outsourcing capabilities by leveraging its
existing expertise in flood insurance administration, expanding its
relationships with existing flood zone determination customers and targeting
prospective customers, such as insurers with high expense ratios or limited
expertise in certain P&C lines. The Company recently formed a sales and
marketing division dedicated to direct sales of its outsourcing services. The
Company began staffing its sales and marketing division in 1997. This division
now includes a senior vice president, two full-time sales representatives, two
project managers and a marketing assistant. The Company plans to add two
additional full-time sales representatives and a marketing vice president in the
near future. In addition to direct marketing, the Company markets its P&C
outsourcing services through insurance brokers, reinsurers and other strategic
partners. The Company also advertises in various trade publications and
participates in industry conventions and trade shows to enhance the penetration
of its flood and non-flood markets.
The Company markets its flood zone determination services both directly
through its own sales personnel and indirectly through its alliances with other
service providers. For example, the Company targets credit unions of all sizes
through its alliance with CUNA Mutual Group, the nation's largest provider of
insurance products to credit unions, and large mortgage lenders through its
alliance with Equifax Mortgage Services, believed by the Company to be the
largest mortgage credit reporting agency in the U.S.
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INFORMATION SYSTEMS
The Company utilizes fully-integrated, real-time, processing systems at its
St. Petersburg facilities to provide many of its outsourcing services. These
systems, which run on an IBM AS/400 platform coupled with a relational database,
enable the Company to provide on-line ratings and underwriting information,
issue required insurance forms to policyholders and agents and produce renewal
and non-renewal notices. The processing systems interface with a disbursement
system which enables the Company to generate checks automatically.
A separate IBM AS/400 is used to develop, enhance, and test new and
existing systems. In the event of a power failure, the AS/400 site is supported
by a fully-functional backup system that provides additional processing time of
one hour under full load. Insurance policies and related documents are scanned
to optical disks, and are retrievable at most LAN workstations. The Company also
has an optical jukebox that can store approximately 10 million documents. The
Company data center has controls to ensure security and a disaster recovery plan
which is tested regularly.
The Company also utilizes computer systems at its Geotrac location,
including two IBM AS/400 processors. Geotrac also has several major production
systems, including GeoCompass(R) and life-of-loan tracking.
The Company is capable of developing modifications or enhancements to its
licensed software to meet its outsourcing customers' particular needs. Business
analysts from the Company work with each customer to ensure that the Company
understands the customer's system requirements. Once the system requirements
have been documented, the Company dedicates a team of systems analysts to
develop the appropriate modifications or enhancements to its software system.
The Company believes that the principal computer equipment and software
currently used by the Company will function properly with respect to dates in
the year 2000 and thereafter. See "Risk Factors -- Year 2000 Issues."
CUSTOMERS
The Company currently provides outsourcing services to 18 companies. The
Company's largest customer, BIG, accounted for approximately 40%, 37%, 76% and
56%, respectively, of the Company's revenues in 1995, 1996, 1997 and 1997 (pro
forma). Any material decrease in the outsourcing business from BIG would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Reliance on Key Customer." The
Company provides outsourcing services to other WYO carriers, including AAA Auto
Club South Insurance Company and Mobile USA Insurance Company, Inc. The Company
also provides outsourcing services to various insurance companies, such as
Horace Mann Insurance Company, Armed Forces Insurance Corporation and AMICA
Mutual Insurance Company, that utilize BIG as their servicing carrier.
The Company provides flood zone determination services to over 750 banks,
credit unions, mortgage lenders, insurance companies and, other financial
institutions. The Company's principal financial institution customers for such
services include SouthTrust Bank and SunTrust Bank. The Company's principal
insurance company customers for such services include American International
Group, Inc., and Royal Indemnity Company. In addition, the Company provides
flood zone determination services to numerous credit unions, a number of which
became customers as a result of the Company's alliance with CUNA Mutual Group,
the nation's largest provider of insurance products to credit unions. The
Company also provides such services to mortgage lenders such as ABN Amro North
America, Inc. and Mortgage Corporation of America primarily through its alliance
with Equifax Mortgage Services, believed by the Company to be the largest
mortgage credit reporting agency in the U.S.
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COMPETITION
The Company competes principally in three markets: (1) the market for flood
insurance outsourcing services, (2) the market for other P&C insurance
outsourcing services and (3) the market for flood zone determination services.
The markets for these services are highly competitive.
The market for flood insurance outsourcing services is dominated by the
Company and several principal competitors, including National Con-Serv, Inc. and
Electronic Data Systems, Inc. The Company competes for these outsourcing
customers largely on the basis of price, customer service and responsiveness.
The market for other P&C insurance outsourcing services is fragmented. In
the policy administration services segment of this market, principal competitors
include Policy Management Services Corporation and INSpire Insurance Solutions,
Inc. In this segment of the market, the Company competes for customers on the
basis of customer service, performance and price. The claims administration
services segment of the P&C outsourcing market also is highly fragmented, with
competition from a large number of claims administration companies of varying
size, as well as independent contractors. Competition in this segment of the
outsourcing market is principally price driven. Competitors include Lindsey
Morden Claim Services, Inc., Crawford & Company, Inc. and INSpire Insurance
Solutions, Inc.
The Company believes, however, that its most significant competition for
P&C insurance outsourcing services comes from policy and claims administration
performed in-house by insurance companies. Insurers that fulfill some or all of
their policy and claims administration needs in-house typically have made a
significant investment in their information processing systems and may be less
likely to utilize the Company's services. In addition, insurance company
personnel have a vested interest in maintaining these responsibilities in-house.
The market for flood zone determination services is dominated by the
Company and several principal competitors, including First American Financial,
Pinnacle Data Corporation (a subsidiary of National Insurance Group),
TransAmerica and Palma Lazar & Ulsh. The Company believes that the principal
competitive factors in the market for flood zone determinations include price,
quality and reliability of services, and response time.
Certain of the Company's competitors in each of these markets have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company, including name recognition with current
and potential customers. As a result, these competitors may devote more
resources to the development, promotion and sale of their services or products
than the Company and respond more quickly to emerging technologies and changes
in customer requirements. There can be no assurance that the Company will be
able to compete successfully against current and future competitors, or that
competitive pressure faced by the Company will not have a material adverse
effect on its business, financial condition and results of operations.
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FACILITIES
The following table sets forth certain information with respect to the
principal facilities used in the Company's operations:
SQUARE
LOCATION FEET FUNCTION LEASE EXPIRATION
-------- ------ -------- ----------------
St. Petersburg,
Florida(1)............ 76,700 Corporate Headquarters December 1999(2)
St. Petersburg, and Outsourcing
Florida(1)............ 7,400 Outsourcing December 1999(2)
St. Petersburg,
Florida(1)............ 6,600 Flood Zone Determination May 1999(3)
Norwalk, Ohio........... 12,400 Flood Zone Determination August 1999(4)
Norwalk, Ohio........... 21,000 Flood Zone Determination November 2002(4)
- ---------------
(1) Each of these facilities is leased or subleased from BIG. See "Certain
Transactions."
(2) The Company has the option to renew each of these leases for an additional
two-year period.
(3) The Company is currently negotiating with BIG to reassign this lease to BIG
as of the end of 1998. No assurances can be given that such assignment will
occur.
(4) The Company has the option to renew each of these leases for an additional
five-year period.
The Company believes that its existing facilities and additional or
alternate space available to it are adequate to meet its requirements for the
foreseeable future.
EMPLOYEES
As of June 1, 1998, the Company had 800 full-time employees, consisting of
14 in sales and marketing, 444 in customer service and support, 310 in technical
support, and 32 in management, administration and finance. None of the Company's
employees is subject to a collective bargaining agreement, and the Company
considers its relations with its employees generally to be good.
LEGAL PROCEEDINGS
The Company is not involved in any pending legal proceedings other than
routine litigation arising in the ordinary course of business. The Company does
not believe that the results of such litigation, even if the outcome were
unfavorable to the Company, would have a material adverse effect on the
Company's business, financial condition or results of operations.
Bankers Insurance Company ("BIC"), a subsidiary of BIG, the Company's
principal shareholder and customer, is currently subject to an investigation by
the Florida Department of Insurance (the "DOI"), the principal regulator of
insurance activities in the State of Florida, stemming from BIC's use of a
private investigator to gather information on a DOI employee. In addition, BIC
and certain of its employees (one of whom is now an officer of IMS and several
of whom are now employees of the Company) have been subpoenaed on behalf of FEMA
to produce documentation in connection with its investigation of, among other
things, certain of BIC's cash management practices. Although BIC has informed
the Company that it has no reason to believe either of these investigations will
have a material adverse effect on BIC's business, financial condition or result
of operations, no assurances can be given in this regard. In the event either or
both of these investigations or any consequence thereof materially adversely
affects the business or operations of BIC, it could result in the loss of or
material decrease in the Company's business from BIC, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors consists of eight members divided into
three classes, with the members of each class serving three-year terms expiring
at the third annual meeting of shareholders. The following table sets forth
information, as of the date of this Prospectus, regarding the directors and
executive officers of the Company.
TERM AS
DIRECTOR
NAME AGE POSITION EXPIRES
- ---- --- -------- --------
David K. Meehan........................... 51 Chairman of the Board, President, Chief 1999
Executive Officer and Director
Jeffrey S. Bragg.......................... 49 Executive Vice President, Chief Operating 1998
Officer and Director
Kelly K. King............................. 40 Vice President, Treasurer, Chief Financial
Officer and Secretary
Daniel J. White........................... 48 President and Chief Executive Officer of 1999
Geotrac and Director
Robert M. Menke........................... 65 Director 2000
Robert G. Menke........................... 36 Director 1998
John A. Grant, Jr......................... 54 Director 1999
William D. Hussey......................... 64 Director 2000
E. Ray Solomon............................ 69 Director 2000
David K. Meehan has served as the Chairman of the Board, Chief Executive
Officer and a director of the Company since December, 1996. Mr. Meehan joined
BIG in 1976 as Corporate Secretary. He was appointed President of BIG in 1979
and will serve in such capacity until the completion of this offering. He is
currently Vice Chairman of the Board of BIG and Bankers Insurance Company. Mr.
Meehan has served on the Board of Governors of each of the Florida Joint
Underwriting Association, the Florida Property and Casualty Joint Underwriting
Association and the Florida Residential Property and Casualty Joint Underwriting
Association. Mr. Meehan is Director/Vice Chairman of the Florida Insurance
Council and past Chairman and President of the Florida Association of Domestic
Insurance Companies.
Jeffrey S. Bragg has served as Executive Vice President and Chief Operating
Officer of the Company since November, 1997 and as a director of the Company
since May, 1997. Mr. Bragg has 20 years experience in the insurance and
insurance related information technology industries. He was with Policy
Management Systems Corporation from 1987 to 1995, most recently serving as
Senior Vice President and Group Manager. He was also appointed by President
Reagan in 1981 to head the Federal Insurance Administration, with responsibility
for administering the Flood Program, Federal Crime Insurance program, and
Federal Riot Reinsurance programs. Mr. Bragg has served on Legislating and
Advising Boards for the Alliance of American Insurance and the National
Association of Mutual Insurance Companies.
Kelly K. King has served as Vice President, Treasurer and Chief Financial
Officer of the Company since December, 1996 and as Secretary of the Company
since May, 1998. Mr. King joined BIG in 1992 and served as Vice President and
Chief Financial Officer from February, 1993 to October, 1997. Prior to 1992, he
was employed in various capacities with Integon Insurance Corporation, NAC Re
Corporation, A.M. Best Company and Kemper Group. He is a CPA and a Chartered
Property Casualty Underwriter.
Daniel J. White has served as a director of the Company since May, 1998.
Mr. White founded Geotrac in 1977 and has served as President of Geotrac since
August, 1987 and as Chief Executive Officer of Geotrac since September, 1994.
Mr. White also currently serves as a director of Independent Community Bank
Corp.
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Robert M. Menke has served as a Director of the Company since December,
1996. Mr. Menke founded BIG in 1976 and has been the Chairman of the Board since
1979. He was honored as "Insurance Man Of The Year" in 1986 by the Florida
Association of Domestic Insurance Companies. Mr. Menke is also a member of the
Florida Insurance Council. Mr. Menke is currently Chairman of the Board and
President of First Community Insurance Company, Bankers Security Insurance
Company, Bankers Life Insurance Company and Bankers Insurance Company, all
affiliates of BIG and the Company. He is also a director of the Florida
Windstorm Association and First Community Bank of America.
Robert G. Menke has served as a Director of the Company since December,
1996. Mr. Menke, the son of Robert M. Menke, joined BIG in 1985 and has held
positions as programmer, systems analyst, systems manager, manager of
information services, and Vice President and Senior Vice President of Corporate
Services. He is currently Executive Vice-President of BIG and has served in such
capacity since October, 1997.
John A. Grant, Jr. has served as a Director of the Company since December,
1996. Mr. Grant has been a partner with the St. Petersburg, Florida-based law
firm of Harris, Barrett, Mann, and Dew since 1989. Since 1986, he has also been
a member of the Florida State Senate, where he currently serves as Chairman of
the Education Committee and where he previously served as the Chairman of the
Banking & Insurance, Commerce, Criminal Justice, Judiciary, and Government
Reform committees. He was a former Advisory Board Member of the United States
Small Business Administration and served on the Graduate Fellows Board of the
United States Department of Education.
William D. Hussey has served as a Director of the Company since December,
1996. Mr. Hussey is a retired President and Chief Executive Officer of the
Florida League of Financial Institutions and is an advisor with the Florida
Bankers Association.
E. Ray Solomon, Ph.D., CLU, has served as a Director of the Company since
December, 1996. Dr. Solomon is a retired Professor and the former Dean of the
School of Business at Florida State University.
Messrs. Robert M. Menke, Meehan and Hussey are also members of the Board of
Directors of First Community Insurance Company (a company owned 72% by BIG and
28% by Bankers Life Insurance Company). Messrs. Robert M. Menke and Meehan are
on the Board of Directors of Bankers Security Insurance Company, which is
wholly-owned indirectly by BIG. Messrs. Robert M. Menke and Meehan are on the
Board of Directors of each of Bankers Insurance Company and Bankers Life
Insurance Company, which are owned directly or indirectly by BIG.
KEY EMPLOYEES
Kathleen M. Batson has served as Senior Vice President of Insurance
Management Solutions, Inc., the Company's outsourcing subsidiary ("IMS"), since
December, 1996. She also served as Senior Vice President of the Company from
December, 1996 to June, 1998. Mrs. Batson joined BIG in 1983 and most recently
served as Senior Vice President of BIG from June, 1992 to December, 1996. Prior
to such time, she was employed with Colonial Penn Insurance Company as Sales
Manager from 1977 to 1983. Mrs. Batson was the founding Director and Secretary
and past President of the Flood Insurance Servicing Companies Association of
America, Inc. and is a member of the National Write Your Own (WYO) Flood
Marketing Committee and the Institute for Business and Home Safety Flood
Committee.
S. Kyle Moll has served as Vice President and Chief Information Officer of
IMS since December, 1996. He also served as Vice President and Chief Information
Officer of the Company from December, 1996 to June, 1998. Mr. Moll joined BIG in
1993 and served as its Vice President and Chief Information Officer from
October, 1996 to October, 1997. Prior to joining BIG, he was employed by
Electronic Data Systems from July, 1985 to September, 1993 as Systems Engineer
Manager.
Robert G. Gantley has served as Vice President -- Claims of IMS since
August, 1997. He also served as Vice President-Claims of the Company from
August, 1997 to June, 1998. Mr. Gantley joined BIC in October, 1996 and will
serve as Vice President -- Claims until the completion of this offering. Prior
to joining BIC,
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Mr. Gantley was the Assistant Director of the Massachusetts State Lottery from
1993 to 1996 and a Territorial Claims Manager with Allstate Insurance Company
from 1989 to 1993.
Howard B. Davis has served as Vice President -- Customer Service and
Residual Markets of IMS since December, 1996. He also served as Vice
President -- Customer Service and Residential Markets of the Company from
August, 1997 to June, 1998. Mr. Davis joined BIG in 1988 and served as its Vice
President -- Customer Service and Residual Markets from 1990 to 1997. He was
appointed Executive Vice President of Universal Acceptance Corporation in 1991
and will continue to serve in such capacity until the completion of this
offering. Prior to joining BIG, Mr. Davis was with Colonial Penn Insurance
Company. He is a past President of the Florida Premium Finance Association and
past Chairman of the Florida Auto Joint Underwriting Association Operating
Committee.
Karen R. Kiedrowicz has served as Vice President -- Human Resources of
Geotrac since January, 1996. Ms. Kiedrowicz joined Geotrac in September, 1993
and served as Training Leader from September, 1993 to May, 1995 and as Human
Resources Manager from May, 1995 to January, 1996. Prior to joining Geotrac, she
served as Recruiting and Training Manager of KPMG Peat Marwick, LLP from
September, 1989 to July, 1992.
Thomas Becker has served as Vice President -- Production and Operations of
Geotrac since March, 1996. Prior to joining Geotrac, Mr. Becker spent over 15
years with Equifax, Inc., most recently as Regional Office Manager from October,
1988 to February, 1996.
James J. Andrews has served as Vice President -- Information Systems of
Geotrac since March, 1998. Mr. Andrews joined Geotrac in June, 1996 as AS/400
Project Leader and served in such capacity until March, 1998. Prior to joining
Geotrac, Mr. Andrews was President and owner of Andrews Technical Services,
Inc., a computer consulting firm, from May, 1995 to June, 1996, and MIS Manager
of Green Circle Growers, Inc. and Express Seed Company from August, 1984 to May,
1995.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
paid to or earned by the Company's Chairman of the Board and Chief Executive
Officer and each of the Company's three other current executive officers for the
year ended December 31, 1997.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------
OTHER
NAME AND ANNUAL
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
------------------ -------- ------- ---------------
David K. Meehan
Chairman of the Board and Chief Executive
Officer(2).......................................... $220,999 $58,000 --
Jeffrey S. Bragg
Executive Vice President and Chief Operating
Officer(3).......................................... 84,806 10,000 --
Kelly K. King
Vice President, Treasurer, Chief Financial Officer
and Secretary(4).................................... 56,151 7,500 --
Daniel J. White
President and Chief Executive Officer of
Geotrac(5).......................................... -- -- --
- ---------------
(1) Does not include the value of the perquisites provided to certain of the
named executive officers which in the aggregate did not exceed 10% of such
officer's salary and bonus. Also excludes benefits, if any,
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accruing to Messrs. Meehan, Bragg and King under the Executive Phantom Stock
Plan of Bankers Financial Corporation, the parent of BIG. Upon completion of
this offering, no officers or directors of the Company (with the exception of
Robert G. Menke) will be eligible to receive additional grants under such
Phantom Stock Plan.
(2) During the year ended December 31, 1997, certain of the executive officers
of the Company were also executive officers or employees of BIG, and BIG
paid a portion of their respective compensation. Consequently, Mr. Meehan
was the only executive officer of the Company who was paid in excess of
$100,000 by the Company in 1997.
(3) Mr. Bragg joined the Company in May, 1997.
(4) Excludes $56,151 in salary and $7,500 in bonus paid to Mr. King by BIG for
his service as an executive officer of BIG during the year ended December
31, 1997.
(5) Mr. White did not join the Company as an officer until the consummation of
the Geotrac Acquisition on June , 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Meehan, Bragg and King, which shall become effective as of the completion of
this offering. The initial annual base salary payable to these executive
officers under their respective employment agreements are as follows: David K.
Meehan, $245,000; Jeffrey S. Bragg, $145,000; and Kelly K. King, $125,000. The
remaining terms of each of the employment agreements are substantially the same.
Each employment agreement provides for an initial term of three years, subject
to automatic continuation until terminated by either party. Each agreement
further provides that, if the employee is terminated by the Company without
cause (as defined therein), the employee shall be entitled to severance
payments, payable in accordance with the Company's usual payroll practices,
equal to the employee's then current annual base salary. In the event the
employee secures employment during the twelve months following termination, then
the Company shall be entitled to a credit against its obligation to make
severance payments in the amount of 75% of the base salary paid to the employee
by his or her new employer during the twelve-month period following termination
by the Company.
Each employment agreement provides that the employee shall be provided
benefits, such as health, life and disability insurance, on the same basis as
the Company's other employees. In addition, to the extent authorized by the
Board of Directors, the employee also shall be entitled to participate in the
Company's bonus, stock option and other plans, if any. Each agreement further
provides that, during the term of the agreement and for a period of two years
thereafter, the employee will not, directly or indirectly, compete with the
Company by engaging in certain proscribed activities.
In connection with the Geotrac Acquisition, Geotrac entered into an
employment agreement with Daniel J. White pursuant to which Mr. White will
continue to serve as President and Chief Executive Officer of Geotrac. This
agreement provides for an initial term of four years and shall continue in
effect thereafter until terminated by either party upon 90 days prior written
notice. The agreement provides for an initial annual base salary of $150,000,
subject to annual review by Geotrac's board of directors. To the extent
authorized by Geotrac's board of directors, Mr. White shall be entitled to
participate in any bonus programs established by Geotrac. Mr. White shall also
be entitled comparable benefits, including health, life and disability
insurance, as are offered to any of Geotrac's other executive officers. In the
event of Mr. White's death or disability, Geotrac's obligations under the
agreement will automatically terminate, except that Mr. White shall be entitled
to severance equal to his then current annual base salary. The agreement further
provides that, in the event of termination by Geotrac without cause (as defined
therein) or by Mr. White for good reason (as defined therein), or in the event
the agreement is not renewed for any reason other than death, disability or for
cause, then Geotrac shall pay Mr. White at the rate of his annual base salary
then in effect for the longer of (i) the remainder of the term of the agreement
and (ii) one year after such termination date, subject to a credit of up to 75%
of the base salary paid to Mr. White by his new employer, if any.
This agreement also provides that, for a period of two years following Mr.
White's termination of employment other than by Mr. White for good reason or by
Geotrac without cause, Mr. White will not, directly or indirectly, engage (or
have an interest) in the flood zone compliance business nor in any other
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business engaged or planned to be engaged in by Geotrac within any state or
country in which Geotrac is doing or plans to do business. Finally, the
agreement provides that, during the term of the agreement and for a period of
two years thereafter, Mr. White will not, directly or indirectly, employ,
attempt to employ, or solicit for employment, any of Geotrac's employees.
LONG TERM INCENTIVE PLAN
The Company currently maintains a Long Term Incentive Plan (the "Incentive
Plan") to attract, retain and motivate participating employees of the Company
and its subsidiaries through awards of shares of Common Stock, options to
purchase shares of Common Stock and stock appreciation rights ("SARs"). A total
of shares of Common Stock may be issued pursuant to the Incentive
Plan. The Incentive Plan has been adopted by the Company's Board of Directors
and is expected to be approved by the shareholders of the Company prior to the
consummation of this offering.
The Incentive Plan provides for the grant of incentive or nonqualified
stock options to purchase shares of Common Stock. Upon the completion of this
offering, the executive officers of the Company will be granted options to
purchase a total of shares of Common Stock at the initial public
offering price as follows: David K. Meehan, shares; Jeffrey S. Bragg,
shares; Kelly K. King, shares; and Daniel J. White,
shares. All employees of the Company as a group, including these
executive officers, will be granted options to purchase a total shares
of Common Stock at the initial public offering price. All of such options expire
on the tenth anniversary of the date of grant. Options shall become exercisable
over a period of five years in equal amounts. The Incentive Plan is administered
by the Compensation Committee of the Board of Directors.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Company also maintains a Non-Employee Directors' Stock Option Plan (the
"Non-Employee Director Plan") to secure for the Company and its shareholders the
benefits of the incentive inherent in increased Common Stock ownership by the
members of the Company's Board of Directors who are not employees of the
Company. The Non-Employee Director Plan has been adopted by the Company's Board
of Directors and is expected to be approved by the shareholders of the Company
prior to the consummation of this offering.
The Non-Employee Director Plan provides for the grant of nonqualified stock
options to purchase up to shares of Common Stock to members of the
Board of Directors who are not employees of the Company. As of the date of this
Prospectus, such members held no options under the Non-Employee Director Plan.
Each non-employee director shall be granted options to purchase shares
of Common Stock as of the adjournment of each annual meeting of shareholders of
the Company. In addition, each non-employee director shall be granted options to
purchase an additional 400 shares of Common Stock ( shares in the event
the non-employee director is absent from, arrives late for, or departs early
from, such meeting) upon the adjournment of each regularly scheduled quarterly
meeting of the Board of Directors (other than following the annual meeting of
shareholders). Notwithstanding the foregoing, neither Robert M. Menke nor Robert
G. Menke will accept any option grants under the Non-Employee Director Plan. All
options granted will have an exercise price equal to the fair market value of
the Common Stock as of the date of grant, will become exercisable on the date of
grant, and will expire on the sixth anniversary of the date of grant. The Non-
Employee Director Plan is a formula plan and accordingly is intended to be
self-governing. To the extent that questions of interpretation arise, they will
be resolved by the Board of Directors.
NON-QUALIFIED STOCK OPTION PLAN
The Company's Board of Directors also has adopted a Non-Qualified Stock
Option Plan (the "Non-Qualified Plan"), which plan is expected to be approved by
the shareholders of the Company prior to the consummation of this offering. The
Non-Qualified Plan provides for the grant of non-qualified stock options to
purchase up to shares of Common Stock. Upon the completion of this
offering, options to purchase shares of Common Stock at the initial
public offering price will be granted to certain executive
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officers of BIG, including options to purchase shares each to Messrs.
Robert M. Menke and Robert G. Menke, directors of the Company. All of such
options expire on the tenth anniversary of the date of grant. Options shall
become exercisable over a period of five years in equal amounts. The
Non-Qualified Plan is administered by the Compensation Committee of the Board of
Directors of the Company.
DIRECTOR COMPENSATION
Directors who are executive officers of the Company receive no compensation
as such for service as members of either the Board of Directors or committees
thereof. Directors who are not executive officers of the Company receive $1,000
per Board meeting attended and $150 ($200 in the case of a committee
chairperson) per committee meeting attended, plus reimbursement of reasonable
expenses. The outside directors are also eligible to receive options to purchase
Common Stock under the Company's 1998 Non-Employee Directors' Stock Option Plan.
See " -- Stock Option Plans -- 1998 Non-Employee Directors' Stock Option Plan."
COMMITTEES OF THE BOARD
The Board of Directors has established committees whose responsibilities
are summarized as follows:
Audit Committee. The Audit Committee is comprised of Messrs. Solomon,
Hussey and Grant and is responsible for reviewing the independence,
qualifications and activities of the Company's independent certified public
accountants and the Company's financial policies, control procedures and
accounting staff. The Audit Committee recommends to the Board the
appointment of the independent certified public accountants and reviews and
approves the Company's financial statements. The Audit Committee is also
responsible for the review of transactions between the Company and any
Company officer, director or entity in which a Company officer or director
has a material interest.
Compensation Committee. The Compensation Committee is comprised of
Messrs. Solomon, Hussey and Grant and is responsible for establishing the
compensation of the Company's directors, officers and other managerial
personnel, including salaries, bonuses, termination arrangements, and other
executive officer benefits. In addition, the Compensation Committee is
responsible for the administration of the Employee Plan, including the
recipients, amounts and terms of stock option grants thereunder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee recently was established in connection
with this offering. Except for David K. Meehan, no officer or employee of the
Company has participated in deliberations of the Board of Directors prior to
this offering concerning executive officer compensation.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of the date of this Prospectus, and as adjusted to
reflect the sale of Common Stock offered hereby, with respect to: (i) each of
the Company's directors and the executive officers named in the Summary
Compensation Table; (ii) all directors and executive officers of the Company as
a group; and (iii) each person known by the Company to own beneficially more
than 5% of the Common Stock. Each of the shareholders listed below has sole
voting and investment power over the shares beneficially owned.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING SHARES AFTER OFFERING
------------------- BEING -------------------
NAME SHARES PERCENT OFFERED SHARES PERCENT
- ---- -------- -------- ------- -------- --------
Bankers Insurance Group, Inc.(1)............... % -- %
Venture Capital Corporation(2).................
David K. Meehan(3)............................. -- -- -- -- --
Jeffrey S. Bragg............................... -- -- -- -- --
Kelly K. King.................................. -- -- -- -- --
Daniel J. White................................ (4) -- (4)
Robert M. Menke(3)............................. -- -- -- -- --
Robert G. Menke................................ -- -- -- -- --
John A. Grant, Jr.............................. -- -- -- -- --
William D. Hussey.............................. -- -- -- -- --
E. Ray Solomon................................. -- -- -- -- --
All directors and executive officers as a group
(9 persons)(3)(4)............................ -- -- -- -- --
- ---------------
* Less than 1%.
(1) The business address of Bankers Insurance Group, Inc. is 360 Central Avenue,
St. Petersburg, Florida 33701. Bankers Insurance Group, Inc. is an indirect
subsidiary of Bankers International Financial Corporation, Ltd. ("BIFC"), a
Cayman Islands corporation wholly owned by Bankers International Financial
Corporation II Trust, a discretionary charitable trust. The sole trustee of
this trust is Ansbacher (Cayman) Limited, a Cayman Islands corporation
unaffiliated with BIG, the Company or their respective officers or
directors. Pursuant to the trust's declaration of trust, Independent
Foundation for the Pursuit of Charitable Endeavors, Ltd., a not for profit
Cayman Islands corporation ("IFPCE"), possesses the discretionary power to
(i) direct the trustee to appoint the trust fund to another trust for the
benefit of one or more of the beneficiaries of the trust and (ii) remove the
trustee and appoint one or more new trustees outside the Cayman Islands. A
majority vote of the directors of IFPCE is required to take either of these
actions. The Articles of Association of IFPCE provide that the Board of
Directors shall consist of seven members, three of whom shall be the top
three executives of Bankers International Financial Corporation, a Florida
corporation and subsidiary of BIFC, three of whom shall be Mr. Robert M.
Menke and his lineal descendants, and one of whom shall be a director
elected by a majority vote of the remaining six directors (or, if they
cannot agree, appointed by a court of competent jurisdiction). Until his
death or adjudication of incompetency, Robert M. Menke shall have five votes
and all other directors shall have one vote, and Robert M. Menke's presence
at a meeting shall be required for a quorum. As of the date of this
Prospectus, the directors of IFPCE include David K. Meehan, Robert M. Menke
and Robert G. Menke.
(2) The business address of Venture Capital Corporation is Bank America
Building, Fort Street, Georgetown, Grand Cayman, British West Indies.
Venture Capital Corporation is a Cayman Islands corporation wholly owned by
Venture II Trust, a discretionary charitable trust. The sole trustee of this
trust is Cayman National Bank, a Cayman bank unaffiliated with BIG, the
Company or their respective officers or directors. Pursuant to the trust's
declaration of trust, IFPCE possesses the same discretionary powers as
described in note (1) above.
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(3) Excludes shares held by Bankers Insurance Group, Inc. and
shares held by Venture Capital Corporation. See Notes (1) and
(2) above.
(4) Held jointly with his spouse. Constitutes the number of shares of Common
Stock issued jointly to the Whites in connection with the Geotrac
Acquisition, assuming an initial public offering price of $ . If
the initial public offering price is greater or less than $ , the
number of shares held jointly by the Whites will be adjusted
proportionately. See "Geotrac Acquisition."
CERTAIN TRANSACTIONS
ADMINISTRATION SERVICES AGREEMENT
Effective as of January 1, 1998, the Company and BIG entered into an
Administration Services Agreement (the "Administration Agreement") pursuant to
which BIG (i) provides the Company with various administrative and support
services, including benefits administration, accounting, legal, cash management
and investment services, requested by the Company from time to time and
reasonably necessary in the conduct of its operations, and (ii) makes available
its facilities to the Company as requested by the Company from time to time and
as reasonably necessary to the conduct of its operations. The Company reimburses
BIG for all direct and directly allocable expenses determined by BIG to be
attributable to the provision of such services and facilities, plus an agreed
upon assessment for direct overhead. For the services and facilities being
provided in 1998, the Company shall pay BIG a quarterly fee of $392,500, subject
to renegotiation by either party. In addition, the Company shall pay BIG at
established hourly rates or negotiated fees for any legal and corporate
communications services provided. The term of the Administration Agreement
expires on March 31, 1999. The Administration Agreement memorializes the
administrative service arrangements that existed between the Company and BIG
prior to such time.
SERVICE AGREEMENTS
During 1995, 1996 and 1997, the Company provided information technology
services to BIG based generally on actual cost incurred (including selling,
general and administrative expenses), which amounted to $3,443,628, $4,787,772
and $3,236,255 in outsourcing revenue for 1995, 1996 and 1997, respectively.
Under the terms of its service arrangements with BIG in 1997, the Company
charged a monthly fee for its policy and claims administration services based on
certain factors. For policy and claims administration, the Company charged a fee
based on a percentage of direct written premiums and a percentage of direct paid
losses for certain lines of business, respectively. The fee ranged from 8.5% to
9.0% for services rendered in connection with policy administration and 0.5% to
15.0% for claims administration services related to these policies. Also, in
1997, the Company processed claims for BIG and its other affiliates related to
those lines of business not covered under the service agreement and provided
other miscellaneous services on a cost reimbursement basis. Charges related to
this claims processing and other miscellaneous services amounted to $9,518,525
for 1997.
Effective as of January 1, 1998, the Company entered into a separate
Service Agreement (each a "Service Agreement") with each of Bankers Insurance
Company, First Community Insurance Company and Bankers Security Insurance
Company, all direct or indirect subsidiaries of BIG, pursuant to which the
Company will continue to provide 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 P&C lines of business. Under
the Service Agreements, each entity pays the Company as follows: (1) for its
policy administration services a monthly fee based upon direct written premiums
for the flood, homeowners and automobile insurance programs; (2) for its claims
administration services a monthly fee based upon direct earned premiums for the
property, casualty, automobile property, automobile casualty, flood, and
workers' compensation insurance programs (In addition, a monthly fee based upon
direct incurred losses is charged for flood claims administration and a
reimbursement not to exceed 5% of direct incurred losses from a single event in
excess of $2 million is charged to property claims.); (3) for its data
processing services, a monthly fee based upon direct
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earned premiums for all insurance programs; and (4) for certain customer
services such as mailroom, policy assembly and cash office a monthly fee based
upon direct earned premiums (except, if provided in connection with their flood,
homeowner and automobile insurance lines, where no such fees are imposed). The
term of each Service Agreement shall expire on June 1, 2001, provided that it
shall thereafter be automatically extended until terminated upon 90 days prior
notice by either party.
PROPERTY LEASES
The Company currently leases from BIC approximately 76,700 square feet of
office space in St. Petersburg, Florida at a monthly rate of approximately
$76,700. The initial term of this lease expires on December 31, 1999. The
Company has an option to renew this lease for an additional two-year term at a
monthly rate not to exceed approximately $83,200.
The Company currently leases from BIG approximately 7,400 square feet of
office space in St. Petersburg, Florida at a monthly rate of approximately
$7,400. The initial term of this lease also expires on December 31, 1999,
subject to the Company's right to renew the lease for an additional two-year
period at a monthly rate not to exceed approximately $8,000.
Effective January 1, 1998, BIG assigned to the Company a lease of
approximately 6,600 square feet of office space in St. Petersburg, Florida. This
lease expires on May 31, 1999, subject to the Company's right to renew the lease
for four successive one-year terms. The current monthly rental rate under this
lease is approximately $2,500. The Company is currently negotiating with BIG to
reassign this lease to BIG as of the end of 1998. No assurances can be given
that such assignment will occur.
EMPLOYEE LEASING AGREEMENT
Effective as of January 1, 1998, the Company entered into an Employee
Leasing Agreement with BIC (the "Employee Leasing Agreement") pursuant to which
the Company continues to lease customer service personnel from BIC. The number
of employees to be leased will vary depending on the needs of the Company and
the availability of employees from BIC. The Company shall be responsible for all
expenses associated with such leased employees, including salaries, bonuses and
benefits. The Company may terminate any leased employee for disloyalty,
misconduct or other similar cause. The Employee Leasing Agreement is terminable
by either the Company or BIC upon 60 days prior notice.
SALES AND ASSIGNMENT AGREEMENT
In May, 1998, the Company entered into a sales and assignment agreement
with BIG and certain affiliated companies whereby certain assets were
transferred and assigned to the Company, effective retroactively to April, 1998,
for use in its business. The assets, including, but not limited to, telephone
equipment, computer hardware and software, and service marks were transferred at
their net book value as of the date of transfer. The Company paid consideration
consisting of $325,075 in cash and entered into two promissory notes amounting
to $2,802,175. The notes require monthly installment payments of $10,417 plus
accrued interest and mature on April 1, 1999 and December, 2000. In addition,
the Company assumed the existing leases with unaffiliated third parties relating
to various computer equipment.
SOFTWARE LICENSING AGREEMENT
Effective January 1, 1998, the Company entered into a non-exclusive license
agreement with BIG and BIC pursuant to which the Company licenses its primary
operating systems from BIG and BIC in exchange for a nominal fee. The term of
the license is perpetual. The license agreement provides that the Company shall
be solely responsible for maintaining and upgrading the systems and shall have
the authority to sell or license such systems to third parties.
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GEOTRAC TRANSACTIONS
During the year ended June 30, 1996 and on July 30, 1997, SMS Geotrac, Inc.
("SMS Geotrac") made payments of $932,222 and $1,700,000, respectively, to SMS
Geotrac's former owner in conjunction with the August 1, 1994 purchase of SMS
Geotrac. The amounts were recorded as an increase to goodwill and an additional
capital contribution to SMS Geotrac.
During the year ended June 30, 1997, SMS Geotrac and its parent agreed to
treat all outstanding amounts owed to the parent, $1,611,140, as an additional
capital contribution. In addition, the parent contributed $500,000 to SMS
Geotrac.
During the one month period ended July 31, 1997, SMS Geotrac, Inc. advanced
$796,596 to YoSystems, Inc. ("YoSystems").
On July 31, 1997, the Company, through its subsidiary, BHDS, acquired a 49%
interest in YoSystems. YoSystems concurrently acquired all of the issued and
outstanding shares of capital stock of SMS Geotrac. SMS Geotrac merged into
YoSystems, with YoSystems being the surviving entity and changing its name to
Geotrac. The Company acquired its 49% interest in YoSystems for $6,750,000 in
cash. YoSystems acquired SMS Geotrac for $15,000,000, consisting of $6,750,000
in cash and a term note in the principal amount of $8,250,000.
In connection with the Company's purchase of a 49% interest in YoSystems,
BHDS issued 675,000 shares of non-cumulative 8% preferred stock to Heritage
Hotel Holding Company ("Heritage"), a corporation owned by the half brother of
Robert M. Menke, a director of the Company. Heritage funded the preferred stock
purchase by entering into a note agreement with a commercial bank for
$6,750,000, with the preferred stock serving as collateral. On May 8, 1998, the
Company purchased the outstanding preferred stock of BHDS in exchange for a note
to Heritage in the principal amount of $6,750,000. The note is payable in its
entirety on December 31, 1998 and accrues interest at a rate of 8.5%. After May
8, 1998, the preferred stock of BHDS held by the Company was exchanged for
675,000 shares of 8.5% cumulative preferred stock of BHDS. The shares of
non-cumulative 8% preferred stock were then retired. The new preferred stock
serves as collateral on the note payable to the commercial bank.
On June , 1998, the Company acquired the remaining 51% interest in Old
Geotrac pursuant to the merger of Old Geotrac with and into BHDS, with the
surviving entity being known as "Geotrac, Inc." In connection with this
transaction, Geotrac entered into an employment agreement with Daniel J. White
pursuant to which Mr. White will serve as President and Chief Executive Officer
of Geotrac. See "Geotrac Acquisition" and "Management -- Employment Agreements."
Geotrac currently leases a 12,400 square-foot facility in Norwalk, Ohio
from DanYo LLC, a limited liability company wholly owned by Daniel J. White and
his spouse. This lease is for a term of five years, expiring on August 31, 1999,
and provides for monthly rental payments of approximately $8,717, plus payment
of utilities, real estate taxes and assessments, insurance, repairs and similar
expenses.
MISCELLANEOUS
A wholly-owned subsidiary of the Selling Shareholder has agreed to loan
$17.5 million to BIG on or before September 30, 1998, in exchange for a
subordinated note. It is anticipated that this loan will be funded by using a
portion of the net proceeds to be received by the Selling Shareholder in this
offering. BIG has agreed with the Company to use a portion of such loan proceeds
to satisfy outstanding accounts and note payable to the Company not later than
ten business days following receipt of the loan proceeds. As of March 31, 1998
(on a pro forma basis), BIG's accounts and note payable to the Company totaled
approximately $14.2 million. The balance of the loan proceeds will provide BIG
with additional capital to repay other outstanding indebtedness and expand its
operations. The Company, in turn, has agreed with BIG to use a portion of the
funds received from BIG to satisfy accounts, income taxes and notes payable to
BIG. As of March 31, 1998 (on a pro forma basis), the Company's accounts, income
taxes and notes payable to BIG totaled approximately $14.8 million. See "Use of
Proceeds" and "Principal and Selling Shareholders."
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The Audit Committee of the Board of Directors is responsible for reviewing
all future transactions between the Company and any officer or director of the
Company or any entity in which an officer or director has a material interest.
Any such transactions must be on terms no less favorable than those that could
be obtained on an arms-length basis from independent third parties.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, and 20,000,000 shares of Preferred
Stock, par value $.01 per share. As of the date of this Prospectus, there were
issued and outstanding shares of Common Stock and no shares of
Preferred Stock. See "Principal and Selling Shareholders." The following
description is qualified in its entirety by reference to the Company's Amended
and Restated Articles of Incorporation (the "Articles of Incorporation") and
Amended and Restated Bylaws (the "Bylaws"), which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Cumulative voting in
the election of directors is not permitted. Subject to preferences that may be
granted to holders of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference, if any, which may be granted to the
holders of Preferred Stock. Holders of Common Stock have no conversion,
preemptive or other rights to subscribe for additional shares or other
securities, and there are no redemption or sinking fund provisions with respect
to such shares. The issued and outstanding shares of Common Stock are, and the
shares offered hereby will be upon payment therefor, fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 20,000,000 shares
of Preferred Stock in one or more series and to fix the number of shares
constituting any such series and the rights and preferences thereof, including
dividend rates, terms of redemption (including sinking fund provisions),
redemption price or prices, voting rights, conversion rights and liquidation
preferences of the shares constituting such series, without any further vote or
action by the Company's shareholders. The issuance of Preferred Stock by the
Board of Directors could adversely affect the rights of holders of Common Stock.
For example, an issuance of Preferred Stock could result in a class of
securities outstanding that would have preferences over the Common Stock with
respect to dividends and liquidations, and that could (upon conversion or
otherwise) enjoy all of the rights appurtenant to Common Stock.
CERTAIN STATUTORY AND OTHER PROVISIONS
The Florida Business Corporation Act (the "Florida Act"), the Company's
Articles of Incorporation and the Company's Bylaws contain provisions that could
have an anti-takeover effect. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board and in
the policies formulated by the Board and to discourage certain types of
transactions described below, which may involve an actual or threatened change
of control of the Company. The provisions are designed to encourage any person
interested in acquiring the Company to negotiate with and obtain the approval of
the Board in connection with the transaction. However, certain of these
provisions may discourage a future acquisition of the Company not approved by
the Board in which shareholders might receive the maximum value for their shares
or which a substantial number and perhaps even a majority of the Company's
shareholders believes to
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be in the best interests of all shareholders. As a result, shareholders who
might desire to participate in such a transaction may not have the opportunity
to do so. See "Risk Factors -- Anti-Takeover Considerations."
Statutory Provisions. The Company is subject to several anti-takeover
provisions under Florida law that apply to a public corporation organized under
Florida law unless the corporation has elected to opt out of such provisions in
its Articles of Incorporation or (depending on the provision in question) its
Bylaws. The Company has not elected to opt out of these provisions. The Florida
Act contains a provision that prohibits the voting of shares in a publicly held
Florida corporation which are acquired in a "control share acquisition" unless
the board of directors approves the control share acquisition or the holders of
a majority of the corporation's voting shares (exclusive of shares held by
officers of the corporation, inside directors or the acquiring party) approve
the granting of voting rights as to the shares acquired in the control share
acquisition. A control share acquisition is defined as an acquisition that
immediately thereafter entitles the acquiring party to vote in the election of
directors within each of the following ranges of voting power: (i) one-fifth or
more but less than one-third of such voting power, (ii) one third or more but
less than a majority of such voting power and (iii) a majority or more of such
voting power. This statutory voting restriction is not applicable in certain
circumstances set forth in the Florida Act.
The Florida Act also contains an "affiliated transaction" provision that
prohibits a publicly-held Florida corporation from engaging in a broad range of
business combinations or other extraordinary corporate transactions with an
"interested shareholder" unless (i) the transaction is approved by a majority of
disinterested directors before the person becomes an interested shareholder,
(ii) the interested shareholder has owned at least 80% of the Company's
outstanding voting shares for at least five years, or (iii) the transaction is
approved by the holders of two-thirds of the Company's voting shares other than
those owned by the interested shareholder. An interested shareholder is defined
as a person who, together with affiliates and associates, beneficially owns (as
defined in Section 607.0901(1)(e), Florida Statutes) more than 10% of the
Company's outstanding voting shares.
Classified Board of Directors. Under the Company's Articles of
Incorporation and Bylaws, the Board of Directors of the Company is divided into
three classes, with staggered terms of three years each. Each year the term of
one class expires. The Company's Articles of Incorporation provide that any
vacancies on the Board of Directors shall be filled only by the affirmative vote
of a majority of the directors then in office, even if less than a quorum. The
Articles of Incorporation of the Company also provide that any director may be
removed from office, with or without cause.
Special Voting Requirements. The Company's Articles of Incorporation
provide that all actions taken by shareholders must be taken at an annual or
special meeting of the shareholders or by unanimous written consent. The
Articles of Incorporation provide that special meetings of shareholders may be
called by only a majority of the members of the Board of Directors, the Chairman
of the Board or the holders of not less than 10% of the Company's outstanding
voting shares. Under the Company's Bylaws, shareholders will be required to
comply with advance notice provisions with respect to any proposal submitted for
shareholder vote, including nominations for elections to the Board of Directors.
The Articles of Incorporation and Bylaws of the Company contain provisions
requiring the affirmative vote of the holders of at least two-thirds of the
Common Stock to amend certain provisions thereof.
Indemnification and Limitation of Liability. The Florida Act authorizes
Florida corporations to indemnify any person who was or is a party to any
proceeding (other than an action by, or in the right of, the corporation), by
reason of the fact that he or she is or was a director, officer, employee, or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee, or agent of another corporation or other
entity, against liability incurred in connection with such proceeding, including
any appeal thereof, if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or on behalf of a corporation, indemnification may not be made if the
person seeking indemnification is adjudged liable, unless the court in which
such action was brought determines such person is fairly and reasonably entitled
to indemnification. The indemnification provisions of the Florida Act require
indemnification if a director or
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officer has been successful on the merits or otherwise in defense of any action,
suit or proceeding to which he or she was a party by reason of the fact that he
or she is or was a director or officer of the corporation. The indemnification
authorized under Florida law is not exclusive and is in addition to any other
rights granted to officers and directors under the Articles of Incorporation or
Bylaws of the corporation or any agreement between officers and directors and
the corporation. A corporation may purchase and maintain insurance or furnish
similar protection on behalf of any officer or director against any liability
asserted against the officer or director and incurred by the officer or director
in such capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him or her
against such liability under the Florida Act.
The Company's Articles of Incorporation provide for the indemnification of
directors, officers, employees and agents of the Company to the maximum extent
permitted by Florida law and for the advancement of expenses incurred in
connection with the defense of any action, suit or proceeding that the director,
officer, employee or agent was a party to by reason of the fact that he or she
is or was a director or executive officer of the Company so long as he or she
has undertaken to repay such amount if it is ultimately determined that such
person is not entitled to indemnification.
Under the Florida Act, a director is not personally liable for monetary
damages to the Company or any other person for acts or omissions in his or her
capacity as a director except in certain limited circumstances such as certain
violations of criminal law and transactions in which the director derived an
improper personal benefit. As a result, shareholders may be unable to recover
monetary damages against directors for actions taken by them which constitute
negligence or gross negligence or which are in violation of their fiduciary
duties, although injunctive or other equitable relief may be available.
The foregoing provisions of the Florida Act and the Company's Articles of
Incorporation and Bylaws could have the effect of preventing or delaying a
person from acquiring or seeking to acquire a substantial equity interest in, or
control of, the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have
shares of Common Stock outstanding. Of these shares, the
shares of Common Stock sold in this offering will be freely
tradable by persons other than affiliates of the Company, without restriction
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining shares of Common Stock will be "restricted" securities
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of registration under the Securities Act unless an exemption from
registration is available, including the exemptions contained in Rule 144. All
of the restricted shares beneficially owned by BIG will be eligible for public
sale pursuant to Rule 144 commencing 90 days after the date of this Prospectus,
subject to the volume restrictions discussed below. However, BIG has agreed not
to sell, contract to sell or otherwise dispose of any shares of Common Stock for
a period of 180 days after the date of this Prospectus without the prior written
consent of the Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned his or her shares for at least one year (including the prior
holding period of any prior owner other than an affiliate) is entitled to sell
within any three-month period that number of shares which does not exceed the
greater of 1% of the outstanding shares of the Common Stock, or the average
weekly trading volume during the four calendar weeks preceding each such sale.
Sales under Rule 144 also are subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not or has not
been deemed an "affiliate" of the Company for at least three months, and who has
beneficially owned shares for at least two years (including the holding period
of any prior owner other
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than an affiliate) would be entitled to sell such shares under Rule 144 without
regard to the limitations discussed above.
Prior to this offering, there has been no public market for the Common
Stock. Sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company and the Selling Shareholder have agreed to sell to each
of the Underwriters listed below, and the Underwriters, for whom Raymond James &
Associates, Inc., Lehman Brothers Inc. and Furman Selz LLC are acting as
representatives (the "Representatives"), have severally agreed to purchase, the
respective number of shares of Common Stock set forth opposite their names
below:
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Raymond James & Associates, Inc.............................
Lehman Brothers Inc.........................................
Furman Selz LLC.............................................
--------
Total.............................................
========
Raymond James & Associates, Inc. and Lehman Brothers Inc. are acting as
Joint Lead Managers and Joint Lead Bookrunners of this offering.
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all the shares of Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any are purchased.
The Company and the Selling Shareholder have been advised by the
Representatives that the Underwriters propose to offer the Common Stock to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price, less a concession of not in
excess of $ per share, and that the Underwriters and such dealers may
re-allow a concession of not in excess of $ per share to other dealers. The
public offering price and concessions and re-allowances to dealers may be
changed by the Representatives after the initial public offering.
The Company and the Selling Shareholder have granted to the Underwriters an
option, exercisable within 30 days after the date of the initial public
offering, to purchase up to an additional shares of Common Stock
to cover over-allotments, at the same price per share to be paid by the
Underwriters for the other shares offered hereby. If the Underwriters purchase
any such additional shares pursuant to this option, each of the Underwriters
will be committed to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments, if any, in connection with the offering.
This offering of Common Stock is made for delivery when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Until the distribution of Common Stock in this offering is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with this offering, i.e., if
they sell more shares of Common Stock than are set forth on the cover page of
this Prospectus, the Representatives may reduce the short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above. The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of this offering. In general, purchases of
a security for the purpose of stabilization or to reduce a short position could
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cause the price of the security to be higher than it might be in the absence of
such purchases. The imposition of a penalty bid might also have an effect on the
price of a security to the extent that it discouraged resales of any security.
Neither the Company, the Selling Shareholder nor any of the Underwriters makes
any representations or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the Common
Stock. In addition, neither the Company, the Selling Shareholder nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
The Company, BIG, the Selling Shareholder and certain officers and
directors of the Company have agreed that they will not, without the prior
written consent of Raymond James & Associates, Inc., sell, offer to sell,
contract to sell or otherwise transfer or dispose of any shares of Common Stock
(other than the shares offered by the Selling Shareholder in this offering),
options, rights or warrants to acquire shares of Common Stock, or securities
exchangeable for or convertible into shares of Common Stock, during the 180-day
period commencing on the date of this Prospectus, except that the Company may
grant additional options under the Incentive Plan and the Non-Employee Director
Plan, provided that without the prior written consent of Raymond James &
Associates, Inc., such additional options shall not be exercisable during such
period. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price was determined by negotiation among the
Company, the Selling Shareholder and the Representatives. The factors considered
in determining the initial public offering price include the history of and
prospects for the business in which the Company operates, past and present
operations, revenues and earnings of the Company and the trend of such earnings,
the prospects for such earnings, the general condition of the securities markets
at the time of the offering and the demand for similar securities of reasonably
comparable companies.
The Representatives have informed the Company that the Underwriters do not
intend to make sales to any accounts over which they exercise discretionary
authority.
The Company, BIG, the Selling Shareholder and the Underwriters have agreed
to indemnify, or to contribute to payments made by, each other against certain
civil liabilities, including certain civil liabilities under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Foley & Lardner, Tampa, Florida. Certain
legal matters in connection with the sale of the Common Stock offered hereby
will be passed upon for the Underwriters by Powell, Goldstein, Frazer & Murphy
LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Insurance Management Solutions
Group, Inc. as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997 appearing in this Prospectus and in the
Registration Statement, have been audited by Grant Thornton LLP, independent
certified public accountants, as set forth in their report thereon appearing
elsewhere herein and in the Registration Statement, and are included herein in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Geotrac, Inc. (formerly YoSystems, Inc.) as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 appearing in this Prospectus and in the Registration
Statement, have been audited by Grant Thornton LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
in the Registration Statement, and are included herein in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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The financial statements of SMS Geotrac, Inc. for each of the two years in
the period ended June 30, 1997 and for the one month period ended July 31, 1997
appearing in this Prospectus and in the Registration Statement, have been
audited by Grant Thornton LLP, independent certified public accountants, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
under the Securities Act with respect to the securities offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. Statements contained in the Prospectus as to
the contents of any contract or other document are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference and the exhibits and schedules
thereto. For further information regarding the Company and the Common Stock
offered hereby, reference is hereby made to the Registration Statement and such
exhibits and schedules which may be obtained from the Commission at the public
reference facilities maintained by the Commission at 450 Fifth Street, N. W.,
Washington, D. C. 20549, at prescribed rates. The Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants, including the Company, that file
electronically with the Commission. The address of such web site is
http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements certified by an independent public
accounting firm and quarterly reports containing unaudited financial statements
for the first three quarters of each fiscal year.
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INDEX TO FINANCIAL STATEMENTS
PAGE
----
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pro forma Condensed Consolidated Financial Information...... F-2
Pro forma Condensed Consolidated Financial Statements:
Balance Sheet as of March 31, 1998 and Notes to Pro Forma
Balance Sheet.......................................... F-3
Statement of Income for the year ended December 31, 1997
and for the three months ended March 31, 1998 and Notes
to Pro Forma Statements of Income...................... F-6
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. CONSOLIDATED
FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......... F-11
Consolidated Balance Sheets as of December 31, 1996 and
1997, and March 31, 1998 (unaudited)...................... F-12
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-13
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1996 and 1997, and for the
three months ended March 31, 1998 (unaudited)............. F-14
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the three months
ended March 31, 1997 and 1998 (unaudited)................. F-15
Notes to Consolidated Financial Statements.................. F-16
GEOTRAC, INC. (FORMERLY YOSYSTEMS, INC.) FINANCIAL
STATEMENTS
Report of Independent Certified Public Accountants.......... F-31
Balance Sheets as of December 31, 1996 and 1997, and March
31, 1998 (unaudited)...................................... F-32
Statements of Operations for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1998 (unaudited)...................................... F-33
Statement of Shareholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997, and for the three
months ended March 31, 1998 (unaudited)................... F-34
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997, and for the three months ended March
31, 1998 (unaudited)...................................... F-35
Notes to Financial Statements............................... F-37
SMS GEOTRAC, INC. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.......... F-45
Statements of Income for the years ended June 30, 1996 and
1997, and for the one month period ended July 31, 1997.... F-46
Statement of Shareholder's Equity for the years ended June
30, 1996 and 1997, and for the one month period ended July
31, 1997.................................................. F-47
Statements of Cash Flows for the years ended June 30, 1996
and 1997, and for the one month period ended July 31,
1997...................................................... F-48
Notes to Financial Statements............................... F-49
F-1
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PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The accompanying unaudited pro forma condensed consolidated balance sheet
as of March 31, 1998, and the unaudited pro forma condensed consolidated
statements of income for the year ended December 31, 1997 and for the three
months ended March 31, 1998 reflect (i) the acquisition of Geotrac, Inc., which
was completed in June 1998, using the purchase method of accounting as if the
acquisition of Geotrac, Inc. had occurred at March 31, 1998 for balance sheet
purposes and at January 1, 1997 for income statement purposes, (ii) the new
affiliated service and administrative agreements that are effective January 1,
1998 as though the new terms were in existence on January 1, 1997 and (iii)
fixed asset purchases from affiliated companies, consisting of telephone
equipment and computer hardware and software, to be used in operating the
business, which occurred in April 1998, as if the purchase had occurred at March
31, 1998 for balance sheet purposes and at January 1, 1997 for income statement
purposes.
The unaudited pro forma condensed consolidated statements of income are
based on currently available information and do not purport to represent what
the Company's results of operations would have been if the events referred to
occurred on the above dates, or to project the Company's results of operations
for any future periods.
The pro forma condensed consolidated financial statements should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company," "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Geotrac," the Company's
Consolidated Financial Statements, Geotrac, Inc.'s (formerly YoSystems, Inc.)
Financial Statements and SMS Geotrac, Inc.'s financial statements.
F-2
64
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
INSURANCE
MANAGEMENT
SOLUTIONS GROUP PRO FORMA PRO
AND SUBSIDIARIES GEOTRAC, INC. COMBINED ADJUSTMENTS FORMA(1)
---------------- ------------- ----------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........ $ -- $ 2,073,279 $ 2,073,279 $ (728,069)(a)
(379,598)(c) $ 965,612
Accounts receivable, trade....... 1,251,564 2,844,241 4,095,805 -- 4,095,805
Due from affiliates.............. 9,220,150 -- 9,220,150 -- 9,220,150
Deferred tax assets and other
current assets................. 242,984 548,128 791,112 -- 791,112
----------- ----------- ----------- ------------ -----------
Total current assets...... 10,714,698 5,465,648 16,180,346 (1,107,667) 15,072,679
PROPERTY AND EQUIPMENT, net........ 2,334,409 3,312,670 5,647,079 3,545,249(c) 9,192,328
INVESTMENT IN GEOTRAC, INC......... 7,244,397 -- 7,244,397 7,994,250(a) --
(15,238,647)(b)
GOODWILL, net...................... -- 8,552,215 8,552,215 7,279,911(b) 15,832,126
NOTE RECEIVABLE -- AFFILIATE....... 4,950,000 -- 4,950,000 -- 4,950,000
OTHER NON-CURRENT ASSETS, net...... 175,021 1,781,868 1,956,889 -- 1,956,889
----------- ----------- ----------- ------------ -----------
Total assets.............. $25,418,525 $19,112,401 $44,530,926 $ 2,473,096 $47,004,022
=========== =========== =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term
debt........................... $ 1,037,404 $ 1,538,952 $ 2,576,356 $ 484,100(c) $ 3,060,456
Note payable..................... 600,000 -- 600,000 -- 600,000
Accounts payable, trade.......... 318,357 224,183 542,540 -- 542,540
Due to affiliates................ 4,590,788 -- 4,590,788 -- 4,590,788
Accrued expenses................. 2,090,817 1,312,737 3,403,554 -- 3,403,554
Income taxes payable............. 2,888,160 562,000 3,450,160 -- 3,450,160
Deferred revenue................. 93,993 -- 93,993 -- 93,993
----------- ----------- ----------- ------------ -----------
Total current
liabilities............. 11,619,519 3,637,872 15,257,391 484,100 15,741,491
LONG-TERM DEBT..................... 1,920,647 7,055,793 8,976,440 1,500,000(a)
328,127(c) 10,804,567
NOTES PAYABLE -- AFFILIATE......... 4,950,000 -- 4,950,000 2,353,424(c) 7,303,424
DEFERRED REVENUE................... -- 460,000 460,000 -- 460,000
PREFERRED STOCK OF SUBSIDIARY...... 6,750,000 -- 6,750,000 -- 6,750,000
SHAREHOLDERS' EQUITY............... 178,359 7,958,736 8,137,095 5,766,181(a)
(7,958,736)(b) 5,944,540
----------- ----------- ----------- ------------ -----------
Total liabilities and
shareholders' equity.... $25,418,525 $19,112,401 $44,530,926 $ 2,473,096 $47,004,022
=========== =========== =========== ============ ===========
See accompanying notes.
F-3
65
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED)
MARCH 31, 1998
(1) See the introduction to Pro Forma Condensed Consolidated Financial
Information.
(2) The following pro forma adjustments were made to reflect the June 1998
acquisition of the remaining 51% interest in Geotrac, Inc. using the
purchase method of accounting as if it had occurred at March 31, 1998.
(a) To record the Company's investment in Geotrac as a result of acquiring,
in June 1998, the remaining 51% of outstanding shares of Common Stock
not held by the Company. In July 1997, the Company acquired a 49%
interest in Geotrac, Inc. and, accordingly, is reflected in the
historical balance sheet at March 31, 1998. A summary of the total
consideration paid for the 51% interest consists of the following:
shares of Company's Common Stock valued at per
share, the estimated initial public offering price........ $5,766,000
Promissory note............................................. 1,500,000
Cash........................................................ 728,000
----------
$7,994,000
==========
The following is a summary of the Company's total investment in Geotrac
at March 31, 1998 assuming the remaining 51% was acquired on March 31,
1998:
Initial July 1997 investment (including goodwill
$3,442,500)............................................... $ 6,750,000
49% share in equity earnings, net of amortization of
goodwill.................................................. 494,000
-----------
March 31, 1998 historical basis............................. 7,244,000
Additional June 1998 investment............................. 7,994,000
-----------
March 31, 1998 investment on pro forma basis................ $15,238,000
===========
In July 1997, Geotrac, Inc. acquired 100% of SMS Geotrac's outstanding
Common Stock for $15,000,000, with $6,750,000 of the Company's
contributed cash along with a note of $8,250,000. The purchase price was
allocated based upon estimated fair value as follows:
Current assets.............................................. $ 3,026,000
Property and equipment...................................... 3,547,000
Goodwill.................................................... 8,847,000
Customer contracts.......................................... 1,600,000
Other assets................................................ 288,000
Liabilities assumed......................................... (2,308,000)
-----------
$15,000,000
===========
In June 1998, the Company paid $7,994,000 to purchase the remaining 51%
of Geotrac, of which approximately $7,280,000 has been allocated to
goodwill, with the remaining $714,000 being associated with the
identifiable net assets acquired. Accordingly, on a pro forma basis, as
if the July 1997 and June 1998 transactions occurred January 1, 1997,
aggregate goodwill would have been approximately $16,127,000
(unamortized goodwill of $15,830,000 at March 31, 1998) consisting of
the July 1997 component of $8,847,000 and the June 1998 component of
$7,280,000. In addition to goodwill, the Company also has assigned
$1,600,000 (unamortized balance of approximately $1,467,000 included in
other assets at March 31, 1998) of the total purchase price to customer
contracts. Based on various factors including the nature of the product
or service provided, the Company's strong market position, historical
and projected operating results, management intends to
F-4
66
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED) -- (CONTINUED)
amortize these assets using the straight-line method over 20 years for
goodwill (approximately $805,000 a year) and 8 years for customer
contracts ($200,000 a year).
(b) Eliminate the Company's investment in Geotrac, Inc. and reflect the
results of Geotrac, Inc. on a consolidated basis.
(c) Reflect certain assets, consisting of telephone equipment, computer
hardware and software, transferred and assigned to the Company for use
in its business. The Company paid consideration consisting of $325,075
in cash, entered into two promissory notes amounting to $2,802,175, and
assumed the existing leases relating to various computer equipment.
(3) The following is provided for informational purposes only:
As a result of the acquisition of Geotrac, the Company will write-off
(charge to expense) approximately $130,000 of duplicate database costs in
June 1998.
F-5
67
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
INSURANCE
MANAGEMENT COMBINED/
SOLUTIONS GROUP CONFORMED PRO FORMA PRO FORMA
AND SUBSIDIARIES GEOTRAC, INC.(2) COMBINED ADJUSTMENTS(3) ADJUSTMENTS(4) PRO FORMA(1)
---------------- ---------------- ----------- -------------- -------------- ------------
REVENUES
Outsourcing services... $29,714,044 $ -- $29,714,044 $ -- $ 862,756(g) $ 30,576,800
Flood zone
determination
services............. 8,791,935 14,062,665 22,854,600 (254,683)(a) -- 22,599,917
----------- ----------- ----------- ----------- ----------- ------------
Total revenues... 38,505,979 14,062,665 52,568,644 (254,683) 862,756 53,176,717
----------- ----------- ----------- ----------- ----------- ------------
EXPENSES
Cost of outsourcing
services............. 21,988,824 -- 21,988,824 -- 1,124,810(h)
(1,016,349)(i) 22,097,285
Cost of flood zone
determination
services............. 4,763,723 6,042,664 10,806,387 (254,683)(a) -- 10,551,704
Selling, general and
administrative....... 3,026,388 2,900,281 5,926,669 -- -- 5,926,669
Management services
from Parent.......... 2,343,866 -- 2,343,866 -- -- 2,343,866
Deferred compensation
(non-recurring
item)................ -- 732,795 732,795 728,069(b) -- 1,460,864
Depreciation and
amortization......... 683,672 1,505,484 2,189,156 694,383(c) 1,016,349(i) 3,899,888
----------- ----------- ----------- ----------- ----------- ------------
32,806,473 11,181,224 43,987,697 1,167,769 1,124,810 46,280,276
----------- ----------- ----------- ----------- ----------- ------------
Operating income....... 5,699,506 2,881,441 8,580,947 (1,422,452) (262,054) 6,896,441
Equity in earnings of
Geotrac, Inc......... 201,009 -- 201,009 (201,009)(d) -- --
Interest expense....... (149,345) (386,730) (536,075) (437,891)(e-1)
(127,500)(e-2) (270,619)(j) (1,372,085)
Other income (non-
recurring item)...... -- 1,700,000 1,700,000 -- -- 1,700,000
----------- ----------- ----------- ----------- ----------- ------------
Income before income
taxes................ 5,751,170 4,194,711 9,945,881 (2,188,852) (532,673) 7,224,356
Provision for income
taxes................ 2,112,200 1,112,900 3,225,100 2,000(f) (200,400)(k) 3,026,700
----------- ----------- ----------- ----------- ----------- ------------
Net income............. 3,638,970 3,081,811 6,720,781 (2,190,852) (332,273) 4,197,656
Dividends on Preferred
Stock of
Subsidiary........... 229,315 -- 229,315 -- -- 229,315
----------- ----------- ----------- ----------- ----------- ------------
Net income available
for common
shareholders......... $ 3,409,655 $ 3,081,811 $ 6,491,466 $(2,190,852) $ (332,273) $ 3,968,341
=========== =========== =========== =========== =========== ============
Net income per common
share................ $ .17 $
=========== ============
Weighted average common
shares outstanding... 20,000,000
=========== ============
See accompanying notes.
F-6
68
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) See the introduction to Pro Forma Condensed Consolidated Financial
Information.
(2) Represents the combined historical financial statements of SMS Geotrac, Inc.
and Geotrac, Inc. (formerly YoSystems, Inc.) to reflect the combined 1997
operations of the two entities on a calendar year basis. Geotrac, Inc.
acquired SMS Geotrac on July 31, 1997 and accordingly SMS Geotrac, Inc. is
reflected in Geotrac, Inc.'s results of operations for the five months ended
December 31, 1997. In order to reflect SMS Geotrac, Inc.'s operations for an
entire year for pro forma purposes, SMS Geotrac, Inc.'s results of
operations for the seven months ended July 31, 1997 have been combined with
Geotrac, Inc.'s results of operations. As a result of the July 1997
acquisition, the accounting basis of SMS Geotrac, Inc. and Geotrac, Inc. are
different principally relating to goodwill amortization. SMS Geotrac, Inc.
had a June 30th fiscal year end, which has been conformed to a calendar year
in order to facilitate the combination. A summary of the combining and
conforming for selected captions follows:
COMBINED/
CONFORMED
SMS GEOTRAC, INC. GEOTRAC, INC. GEOTRAC
------------------------------------------------- ----------------- -----------------
SIX MONTHS ONE MONTH
YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31,1996 JULY 31, 1997 DECEMBER 31, 1997 DECEMBER 31,1997
(AUDITED)(1) (UNAUDITED)(2) (AUDITED)(3) (AUDITED)(4) (UNAUDITED)(5)
------------- ----------------- ------------- ----------------- -----------------
Total Revenues....... $12,521,507 $6,004,546 $1,209,679 $6,336,025 $14,062,665
Operating Income..... 2,437,398 916,387 349,236 1,011,194 2,881,441
Net Income........... 1,279,448 491,461 193,021 2,100,803 3,081,811
Columns (1) -- (2) + (3) + (4) = (5)
(3) The following pro forma adjustments were made to reflect the results of
operations as though Geotrac, Inc. was purchased in its entirety on January
1, 1997.
(a) Eliminate intercompany transactions between the Company and Geotrac,
Inc. related to the Cross-License Agreement.
(b) In conjunction with the acquisition, Geotrac, Inc.'s shareholders
granted 46.45 shares of Common Stock to certain former and current
employees for prior employee services rendered while employed at
Geotrac. These shares were granted immediately prior to the closing of
this transaction. In accordance with the purchase agreement, the
Company is to reacquire for $728,000 the stock held for these
individuals. Accordingly, the compensation expense has been reflected.
This will be recognized in Geotrac's historical financial statements in
May 1998.
(c) Reflect amortization of goodwill and customer contracts assuming
Geotrac, Inc. was purchased in its entirety on January 1, 1997.
Goodwill of approximately $16,127,000 and customer contracts of
approximately $1,600,000 are being amortized using the straight-line
method over a 20 and 8 year amortization period, respectively.
(d) Eliminate the equity in earnings of Geotrac, Inc. which has been
reflected historically on the equity method of accounting.
(e-1) Reflect interest, at a rate of 9.5%, on a promissory note, of which
$8,250,000 was used as partial consideration to acquire SMS Geotrac,
Inc. on July 31, 1997.
(e-2) Reflect interest, at a rate of 8.5%, on a $1,500,000 promissory note
issued as partial purchase consideration for the acquisition of the
remaining 51% interest in Geotrac, Inc. in June 1998.
F-7
69
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME (UNAUDITED) -- (CONTINUED)
(f) Reflect the income tax effect of combining the Company and Geotrac,
Inc., and of recognizing the pro forma adjustments:
Total pro forma adjustments (loss) before income taxes...... $(2,189,000)
Equity in earnings.......................................... 201,000
Non-deductible goodwill amortization........................ 293,000
S Corporation earnings not previously taxed *............... 1,700,000
-----------
Additional pre-tax earnings................................. $ 5,000
===========
- ---------------
* Prior to August 1, 1997 Geotrac, Inc. was an S Corporation.
Since the above items relate to Geotrac, Inc., its statutory rate of
approximately 40% was used to calculate the income tax effect.
(4) The following pro forma adjustments were made to reflect the results of
operations for the year ended December 31, 1997 under the Company's new
service agreements, which were effective January 1, 1998:
(g) Reflects outsourcing revenues based on the revised policy and claims
administration agreements adopted January 1, 1998. The adjustment
reflects (i) a change in the service fee percentage charged for policy
administration for certain lines of business, (ii) a change in the
claims service fee from a cost reimbursement basis to percentage of
earned premium for certain lines of business, (iii) a change in the
claims service fee from a percentage of direct incurred losses to a
percentage of direct earned premium for certain lines of business, and
(iv) claims administration revenue related to the Florida Automobile
Joint Underwriting Association ("FAJUA") and the Florida Residential
Property and Casualty Joint Underwriting Association ("FRPCJUA"). The
FAJUA and FRPCJUA contracts are currently in run-off and were charged
on a cost reimbursement basis during 1997. Also included is a Pro Forma
adjustment to reflect a deferral of claims service fee income based on
the 1998 service agreement as claims service fees are being charged on
an earned premium basis, which is in advance of the total claims
expense that will be recognized by the Company.
(h) Reflects additional claims adjustment expenses that would have been
recognized by the Company during 1997 had it operated under the
provisions of the 1998 service agreements. Such expenses were
previously passed through to the affiliated companies under the 1997
service agreements.
(i) Reclassify amounts previously charged to the Company related to fixed
assets that were owned by affiliated companies and purchased at their
net book value by the Company.
(j) Reflect interest, at a rate of 8.5%, on two promissory notes entered
into to fund equipment purchases from affiliated companies.
(k) Represents the income tax effects on the year ended December 31, 1997
pro forma adjustments at the statutory rate of 37.63%.
(5) The following is provided for informational purposes only:
(A) As a result of the acquisition of Geotrac, in June 1998 the Company
will write-off (charge to expense) approximately $130,000 of duplicate
database costs.
(B) Effective January 1, 1998, the Company began servicing its affiliated
companies automobile lines of insurance under its servicing agreements.
Had this servicing commenced January 1, 1997, outsourcing service
revenue and cost of outsourcing services would have increased by
approximately $2,670,000 and $2,472,000, respectively, for the year
ended December 31, 1997.
F-8
70
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
INSURANCE
MANAGEMENT
SOLUTIONS
GROUP AND PRO FORMA
SUBSIDIARIES GEOTRAC, INC. COMBINED ADJUSTMENTS(2) PRO FORMA(1)
------------ ------------- ----------- -------------- ------------
REVENUES
Outsourcing services....... $ 8,655,019 $ -- $ 8,655,019 $ -- $ 8,655,019
Flood zone determination
services................ 2,290,920 4,572,866 6,863,786 -- 6,863,786
----------- ---------- ----------- --------- -----------
Total revenues..... 10,945,939 4,572,866 15,518,805 -- 15,518,805
----------- ---------- ----------- --------- -----------
EXPENSES
Cost of outsourcing
services................ 6,427,537 -- 6,427,537 (282,015)(a) 6,145,522
Cost of flood zone
determination
services................ 1,192,462 1,874,263 3,066,725 -- 3,066,725
Selling, general and
administrative.......... 922,976 761,866 1,684,842 -- 1,684,842
Management services from
Parent.................. 678,572 -- 678,572 -- 678,572
Depreciation and
amortization............ 272,921 360,196 633,117 282,015(a)
47,961(b) 963,093
----------- ---------- ----------- --------- -----------
9,494,468 2,996,325 12,490,793 47,961 12,538,754
----------- ---------- ----------- --------- -----------
Operating income............. 1,451,471 1,576,541 3,028,012 (47,961) 2,980,051
Equity in earnings of
Geotrac, Inc............... 408,138 -- 408,138 (408,138)(c) --
Interest expense............. (83,190) (189,607) (272,797) (31,800)(d-1)
(64,177)(d-2) (368,774)
----------- ---------- ----------- --------- -----------
Income before income taxes... 1,776,419 1,386,934 3,163,353 (552,076) 2,611,277
Provision for income taxes... 534,900 554,000 1,088,900 (36,900)(e) 1,052,000
----------- ---------- ----------- --------- -----------
Net income................... 1,241,519 832,934 2,074,453 (515,176) 1,559,277
Dividends on Preferred Stock
of Subsidiary.............. 133,151 -- 133,151 -- 133,151
----------- ---------- ----------- --------- -----------
Net income available for
common shareholders........ $ 1,108,368 $ 832,934 $ 1,941,302 $(515,176) $ 1,426,126
=========== ========== =========== ========= ===========
Net income per common share.. $ .06 $
=========== ===========
Weighted average common
shares outstanding......... 20,000,000
=========== ===========
See accompanying notes.
F-9
71
NOTES TO PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(1) See the introduction to Pro Forma Condensed Consolidated Financial
Information.
(2) The following pro forma adjustments were made to reflect the results of
operations as though Geotrac was purchased in its entirety on January 1,
1997.
(a) Reclassify amounts previously charged to the Company related to fixed
assets that were owned by affiliated companies and purchased at their net
book value by the Company.
(b) Reflects amortization additional goodwill assuming Geotrac was purchased
in its entirety on January 1, 1997. Goodwill is being amortized using the
straight-line method over a 20 year amortization period.
(c) Eliminate the equity in earnings of Geotrac, which has been reflected
historically on the equity method of accounting.
(d-1) Reflect interest, at a rate of 8.5%, on a $1,500,000 promissory note
issued as partial purchase consideration for the acquisition of the
remaining 51% interest in Geotrac, Inc.
(d-2) Reflect interest, at a rate of 8.5%, on two promissory notes entered into
to fund equipment purchases from affiliated companies.
(e) Represents the income tax effects on the three months ended March 31, 1998
pro forma adjustments, not including the equity in earnings of $408,138
and non-deductible goodwill amortization of $47,961, at the statutory rate
of 40%.
F-10
72
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Insurance Management Solutions Group, Inc.
We have audited the accompanying consolidated balance sheets of Insurance
Management Solutions Group, Inc. and subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Insurance Management Solutions Group, Inc. and subsidiaries as of December 31,
1996 and 1997, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
May 29, 1998
(Except for Notes 1 and 3
as to which the date is June , 1998)
The foregoing auditors report is in form which will be signed upon the
consummation of the purchase transaction described in Notes 1 and 3 of the
financial statements.
GRANT THORNTON LLP
Tampa, Florida
June 24, 1998
F-11
73
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------ MARCH 31,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash................................................. $ -- $ 115,070 $ --
Accounts receivable, trade........................... 894,323 1,218,741 1,251,564
Due from affiliates.................................. 903,789 8,834,733 9,220,150
Prepaid expenses and other assets.................... 63,119 108,150 242,984
---------- ----------- -----------
Total current assets......................... 1,861,231 10,276,694 10,714,698
PROPERTY AND EQUIPMENT, net............................ 1,446,376 2,331,336 2,334,409
INVESTMENT IN GEOTRAC, INC............................. -- 6,879,291 7,244,397
OTHER ASSETS
Note receivable -- affiliate......................... -- -- 4,950,000
Deferred tax assets.................................. 128,700 -- 111,800
Other................................................ 4,935 44,384 63,221
---------- ----------- -----------
Total assets................................. $3,441,242 $19,531,705 $25,418,525
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt.................... $ 315,500 $ 1,522,822 $ 1,037,404
Note payable......................................... 600,000 600,000 600,000
Accounts payable, trade.............................. 53,519 271,165 318,357
Due to affiliates.................................... 26,303 2,889,212 4,590,788
Employee related accrued expenses.................... 570,312 1,850,553 1,486,691
Other accrued expenses............................... 241,257 596,424 604,126
Income taxes payable to Parent....................... 472,729 2,239,058 2,888,160
Deferred revenue..................................... 6,811 455,827 93,993
---------- ----------- -----------
Total current liabilities.................... 2,286,431 10,425,061 11,619,519
LONG-TERM DEBT, less current portion................... 894,475 2,186,653 1,920,647
NOTE PAYABLE -- AFFILIATE.............................. -- -- 4,950,000
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK OF SUBSIDIARY.......................... -- 6,750,000 6,750,000
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding...... -- -- --
Common Stock, $.01 par value; 100,000,000 shares
authorized, 20,000,000 shares issued and
outstanding....................................... 200,000 200,000 200,000
Additional paid-in capital (deficit)................. 60,336 (30,009) (30,009)
Retained earnings.................................... -- -- 8,368
---------- ----------- -----------
Total shareholders' equity................... 260,336 169,991 178,359
---------- ----------- -----------
Total liabilities and shareholders' equity... $3,441,242 $19,531,705 $25,418,525
========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-12
74
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
REVENUES
Outsourcing services -- affiliated...... $ 3,443,628 $ 4,787,772 $29,114,601 $ 6,764,655 $ 8,493,788
Outsourcing services.................... -- 337,458 599,443 91,702 161,231
----------- ----------- ----------- ----------- -----------
3,443,628 5,125,230 29,714,044 6,856,357 8,655,019
Flood zone determination services....... 5,126,926 7,705,240 8,791,935 1,947,193 2,290,920
----------- ----------- ----------- ----------- -----------
Total revenues................... 8,570,554 12,830,470 38,505,979 8,803,550 10,945,939
----------- ----------- ----------- ----------- -----------
EXPENSES
Cost of outsourcing services............ 2,954,766 3,895,801 21,988,824 5,019,131 6,427,537
Cost of flood zone determination
services.............................. 3,415,023 5,362,154 4,763,723 974,046 1,192,462
Selling, general and administrative..... 804,003 1,121,467 3,026,388 726,877 922,976
Management services from Parent......... 724,904 1,053,546 2,343,866 585,966 678,572
Depreciation and amortization........... 184,155 309,188 683,672 116,133 272,921
----------- ----------- ----------- ----------- -----------
Total expenses................... 8,082,851 11,742,156 32,806,473 7,422,153 9,494,468
----------- ----------- ----------- ----------- -----------
OPERATING INCOME.......................... 487,703 1,088,314 5,699,506 1,381,397 1,451,471
EQUITY IN EARNINGS OF GEOTRAC, INC. ...... -- -- 201,009 -- 408,138
INTEREST EXPENSE.......................... 71,493 75,350 149,345 35,466 83,190
----------- ----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME
TAXES................................... 416,210 1,012,964 5,751,170 1,345,931 1,776,419
PROVISION FOR INCOME TAXES................ 162,400 396,000 2,112,200 512,900 534,900
----------- ----------- ----------- ----------- -----------
NET INCOME................................ 253,810 616,964 3,638,970 833,031 1,241,519
DIVIDENDS ON PREFERRED STOCK OF
SUBSIDIARY.............................. -- -- 229,315 -- 133,151
----------- ----------- ----------- ----------- -----------
NET INCOME AVAILABLE FOR COMMON
SHAREHOLDERS............................ $ 253,810 $ 616,964 $ 3,409,655 $ 833,031 $ 1,108,368
=========== =========== =========== =========== ===========
NET INCOME PER COMMON SHARE............... $ .01 $ .03 $ .17 $ .04 $ .06
=========== =========== =========== =========== ===========
Weighted average common shares
outstanding............................. 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
F-13
75
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL
PAID-IN RETAINED
COMMON CAPITAL EARNINGS
STOCK (DEFICIT) (DEFICIT) TOTAL
-------- ---------- ----------- -----------
Balance at January 1, 1995...................... $200,000 $ (9,000) $ (66,138) $ 124,862
Capital contribution from Parent.............. -- 150,000 -- 150,000
Net income.................................... -- -- 253,810 253,810
-------- --------- ----------- -----------
Balance at December 31, 1995.................... 200,000 141,000 187,672 528,672
Capital contribution from Parent.............. -- 114,700 -- 114,700
Cash dividends to Parent...................... -- (195,364) (804,636) (1,000,000)
Net income.................................... -- -- 616,964 616,964
-------- --------- ----------- -----------
Balance at December 31, 1996.................... 200,000 60,336 -- 260,336
Cash dividends to Parent...................... -- (90,345) (3,409,655) (3,500,000)
Cash dividend declared on Preferred Stock of
Subsidiary................................. -- -- (229,315) (229,315)
Net income.................................... -- -- 3,638,970 3,638,970
-------- --------- ----------- -----------
Balance at December 31, 1997.................... 200,000 (30,009) -- 169,991
Cash dividend declared on Preferred Stock of
Subsidiary (unaudited)..................... -- -- (133,151) (133,151)
Cash dividend declared to Parent
(unaudited)................................ -- -- (1,100,000) (1,100,000)
Net income (unaudited)........................ -- -- 1,241,519 1,241,519
-------- --------- ----------- -----------
Balance at March 31, 1998 (unaudited)........... $200,000 $ (30,009) $ 8,368 $ 178,359
======== ========= =========== ===========
The accompanying notes are an integral part of this consolidated statement.
F-14
76
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
--------- ----------- ----------- ----------- ----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................. $ 253,810 $ 616,964 $ 3,638,970 $ 833,031 $1,241,519
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 184,155 309,188 683,672 116,133 272,921
Loss on disposal of property and
equipment.............................. 7,124 72,726 2,329 -- --
Equity in earnings of Geotrac, Inc....... -- -- (201,009) -- (408,138)
Deferred income taxes, net............... (4,200) (119,800) 131,000 35,300 (114,100)
Changes in assets and liabilities:
Accounts receivable.................... (379,694) (179,713) (324,418) (164,706) (32,823)
Prepaid expenses and other current
assets.............................. (7,075) (11,751) (45,031) (9,618) (134,834)
Other assets........................... -- (4,935) (40,394) 1,391 (18,837)
Accounts payable, trade................ 290,755 (301,090) 217,646 631,626 47,192
Employee related accrued expenses...... 196,858 136,210 1,280,241 424,470 (363,862)
Other accrued expenses................. 147,516 79,591 123,552 (81,042) (123,149)
Income taxes payable to Parent......... 137,127 365,515 1,766,329 371,351 649,102
Deferred revenue....................... 4,861 (153) 449,016 62,328 81,870
--------- ----------- ----------- ----------- ----------
Net cash provided by operating
activities........................ 831,237 962,752 7,681,903 2,220,264 1,096,861
--------- ----------- ----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Geotrac, Inc................. -- -- (6,750,000) -- --
Purchases of property and equipment........ (464,048) (1,011,807) (1,498,298) (240,979) (232,962)
--------- ----------- ----------- ----------- ----------
Net cash used in investing
activities........................ (464,048) (1,011,807) (8,248,298) (240,979) (232,962)
--------- ----------- ----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit........ 213,000 -- -- -- --
Proceeds from issuance of Preferred Stock
of Subsidiary............................ -- -- 6,750,000 -- --
Proceeds from the issuance of debt......... -- 1,054,000 2,815,000 -- --
Repayment of debt.......................... (122,000) (122,025) (315,500) (78,875) (751,424)
Cash dividends paid to Parent.............. -- (1,000,000) (3,500,000) -- --
Capital contribution from Parent........... 150,000 114,700 -- -- --
Net advances to affiliates................. (573,847) (34,886) (5,068,035) (1,900,410) (227,545)
--------- ----------- ----------- ----------- ----------
Net cash provided by (used in)
financing activities.............. (332,847) 11,789 681,465 (1,979,285) (978,969)
--------- ----------- ----------- ----------- ----------
INCREASE (DECREASE) IN CASH.................. 34,342 (37,266) 115,070 -- (115,070)
CASH, beginning of year...................... 2,924 37,266 -- -- 115,070
--------- ----------- ----------- ----------- ----------
CASH, end of year............................ $ 37,266 $ -- $ 115,070 $ -- $ --
========= =========== =========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for:
Interest................................. $ 71,493 $ 75,350 $ 149,345 $ 35,466 $ 83,190
========= =========== =========== =========== ==========
Income taxes............................. $ 50,000 $ 150,290 $ 214,743 $ -- $ --
========= =========== =========== =========== ==========
Non-cash financing activities:
Preferred Stock dividend accrual......... $ -- $ -- $ 229,315 $ -- $ 133,151
========= =========== =========== =========== ==========
Dividend declared to Parent.............. $ -- $ -- $ -- $ -- $1,100,000
========= =========== =========== =========== ==========
The accompanying notes are an integral part of these consolidated statements.
F-15
77
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS
Insurance Management Solutions Group, Inc. ("IMSG") is a holding company
that was incorporated in the State of Florida in December 1996 by its parent,
Bankers Insurance Group ("BIG" or the "Parent"), which contributed to IMSG two
of its wholly-owned operating subsidiaries, Insurance Management Solutions, Inc.
("IMS") and Bankers Hazard Determination Services, Inc. ("BHDS"), which were
previously formed in August 1991 and June 1988, respectively. IMSG, IMS and BHDS
are hereinafter collectively known as the "Company". In July 1997, the Company
acquired a 49% interest in Geotrac, Inc. and, in June 1998 acquired the
remaining 51% interest.
The Company operates in two major business segments: providing outsourcing
services to the property and casualty insurance industry with an emphasis on
flood insurance; and providing flood zone determinations primarily to insurance
companies and financial institutions. The Company's outsourcing services, which
are provided by IMS, include policy and claims administration (policy issuance,
billing and collection functions, claims adjusting and processing) and
information technology services. The Company's flood zone determination services
are provided by BHDS and Geotrac, Inc.
Prior to 1997, the Company's outsourcing services principally related to
information technology services provided to BIG and its other affiliates on a
cost reimbursement basis. Commencing in 1997, the Company also provided, on a
fee basis, policy and claims administration services, previously provided by BIG
and its other affiliates, related to flood and homeowners insurance lines
accounting for approximately 55% of total outsourcing revenues for 1997, and 51%
and 95% for the three months ended March 31, 1997 and 1998, respectively.
Starting in 1998, the automobile insurance line has also been added to these
services. During 1997, the Company also provided claims administration services
to its affiliates on all other insurance lines on a cost reimbursement basis
accounting for approximately 29% of total outsourcing revenues. In 1998, the
company receives a fee for claims administration on these insurance lines
similar to that for flood, homeowners and automobile lines. In addition, in
1998, third-party claims adjustment costs, such as outside appraisers, are
recognized by the Company. In 1997, these costs were paid and absorbed by the
Company's affiliates.
The Company is substantially dependent on the business of its affiliated
insurance companies under the common control of BIG as the Company derives a
substantial portion of its revenue from outsourcing services provided to these
affiliated companies and its Parent.
See Notes 2 and 12 for further organization and business information.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The formation of IMSG as described in Note 1, is reflected in the financial
statements retroactively on a historical cost basis as if the entities under
common control had been consolidated for all years presented. IMSG, IMS and BHDS
have historically maintained separate accounting records as their operations
have generally been on a stand-alone basis in regards to BIG and its other
affiliates.
The Company, under a management agreement with BIG, is charged a management
fee for common costs that are incurred by its Parent on behalf of all affiliated
companies. Management services include human resources, legal, corporate
planning and communications, cash management, certain executive management and
rent. The basis of allocation for the management services is employee head
counts and estimates of time incurred, which management believes to be a
reasonable basis of allocation.
In January 1998, the Board of Directors increased the amount of the
Company's authorized shares of Common Stock from 1,000,000 to 100,000,000 shares
and changed the Common Stock's par value from $1.00 to $.01 per share. Effective
May 8, 1998, the Company declared a stock dividend of 40,000 shares of Common
F-16
78
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Stock for each share of Common Stock then outstanding, resulting in an increase
in the number of outstanding shares of Common Stock from 500 to 20,000,000
shares. This recapitalization has been retroactively reflected in the financial
statements.
In May 1998, the Board of Directors declared a cash dividend payable to its
Parent in the amount of $1,100,000. This dividend has been reflected at March
31, 1998 in the accompanying consolidated balance sheet.
Principles of Consolidation
The consolidated financial statements include the accounts of Insurance
Management Solutions Group, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Prior to June 1998, the Company's investment in Geotrac, Inc. was
accounted for using the equity method since the Company owns less than 50% and
has a significant but not controlling influence (See Note 3).
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. There were no cash
equivalents at December 31, 1995, 1996 and 1997, and March 31, 1998.
The Company maintains a zero balance account arrangement with its Parent.
As a result of this funding arrangement, the Company has a negative cash balance
for financial reporting purposes representing checks that have been issued but
that have not yet been presented to the bank for payment. Such negative cash
balances have been reclassified to accounts payable in the accompanying
consolidated balance sheets.
Accounts Receivable, Trade and Concentration of Credit Risk
Accounts receivable, trade represents amounts due from BHDS' customers.
BHDS provides flood zone determination services to insurance companies and
financial institutions. Credit is granted to customers of BHDS based on
management's assessment of their credit worthiness. There was no allowance for
doubtful accounts related to accounts receivable, trade for all periods
presented in the accompanying consolidated financial statements.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are provided for using the
straight-line method over the assets' estimated service lives. Accelerated
methods are used for tax purposes.
F-17
79
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets
(including goodwill) in accordance with Statement of Financial Accounting
Standards No. 121, ("SFAS No. 121"), Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121 requires
long-lived assets to be reviewed for impairment whenever circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment is
recognized to the extent the sum of undiscounted estimated future cash flows
expected to result from the use of the asset is less than the carrying value.
Revenue Recognition and Deferred Revenue
Revenue generated from outsourcing and flood zone determination services
are recognized as services are provided.
In 1997, the Company's affiliated service arrangements, as they pertain to
policy administration, resulted in deferred revenue being recorded as the
related fees are billed and payable based on a percentage of the customers'
premiums written which is in advance of a portion of the administrative services
being performed by the Company. In 1998, the service arrangements were changed
so that fees related to policy administration services are billed based on a
percentage of written and earned premiums, which generally eliminates the need
for any deferral. The transition from the 1997 service arrangements to the 1998
service agreements resulted in the Company reclassifying on January 1, 1998
deferred revenue of $443,704 recorded at December 31, 1997 to due to affiliates.
In 1998, the affiliated service agreements as they pertain to claims
administration, resulted in deferred revenue being recorded as the related fees
are billed and payable based on a percentage of the customers' earned premiums
which is in advance of a portion of the total claims expense that will be
incurred by the Company. In 1997, deferred revenue related to claims
administration was not recorded, as the Company was paid, either on a fee or
cost reimbursement basis, as the claims and related expenses were incurred. The
Company, in 1998, estimates the deferred revenue amounts based on several
factors including actual historical claims expense and related development
factors. The transition from the 1997 to the 1998 service agreements resulted in
the Company recording, at January 1, 1998, deferred revenue of approximately
$2,138,000 along with a due from affiliates for the same amount, representing
the Company's estimated future cost of servicing claims associated with premiums
earned prior to December 31, 1997.
Under the affiliated claims service agreements, the payment of claim costs
associated with the litigation of the claims remains the customers'
responsibility. In addition, the agreements contain a catastrophe provision
under which the Company would be reimbursed for costs associated with
independent adjusters and appraisers when indemnity losses from a single event
exceed $2,000,000, subject to a cap of 5% of direct incurred losses from that
storm.
In connection with the Company's outsourcing and flood zone determination
services, the Company has recorded deferred revenues totaling $2,231,993 at
March 31, 1998, of which $2,138,000 represents amounts billed and due from its
affiliates. As such, for financial statement reporting purposes, the $2,138,000
amount has been netted against due from affiliates at March 31, 1998.
Income Taxes
The Company accounts for income taxes on the liability method, as provided
by SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates
F-18
80
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
which will be in effect when these differences reverse. Deferred tax expense is
the result of changes in deferred tax assets and liabilities. The Company's
results of operations are included in the consolidated federal and state income
tax returns of its Parent. As provided by SFAS No. 109 and in accordance with
the intercompany tax sharing/allocation agreement with its Parent and
affiliates, income taxes are determined by the amount that would have been due
and payable had the Company filed a separate income tax return. Income taxes
payable, in the accompanying consolidated balance sheets, represents amounts due
to the Company's Parent.
Net Income Per Common Share
Net income per common share, which represents both basic and diluted
earnings per share since no dilutive securities were outstanding for all periods
presented, is computed by dividing net income available to common shareholders
by the weighted average common shares outstanding.
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments, which include
cash, accounts receivable, due from affiliates, accounts payable, due to
affiliates and debt, approximate fair value due to the short maturity of those
instruments. The Company considers the fixed and variable rate debt instruments
to be representative of current market interest rates and, accordingly, the
recorded amounts approximate their present fair market value.
New Accounting Pronouncement Not Yet Adopted
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting of Comprehensive Income, which establishes standards of reporting and
displaying of comprehensive income and its components (revenues, expenses, gains
and losses) in the financial statements. SFAS No. 130 requires comprehensive
income to be reported with the same prominence as other items in the financial
statements. This statement is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
presented for comparative purposes is required. The Company does not anticipate
that adoption of SFAS No. 130 will have a material effect on the consolidated
financial statements.
Unaudited Financial Statements
The unaudited financial statements and the related notes thereto for March
31, 1997 and 1998 include all normal and recurring adjustments, which in the
opinion of management are necessary for a fair presentation and are prepared on
the same basis as the audited annual financial statements. The interim results
are not necessarily indicative of the results that may be expected for the full
year.
NOTE 3. INVESTMENT IN GEOTRAC, INC.
On July 31, 1997, the Company, through its subsidiary, BHDS, acquired a 49%
interest in YoSystems, Inc. ("YoSystems"). YoSystems concurrently acquired all
of the issued and outstanding shares of capital stock of SMS Geotrac, Inc. SMS
Geotrac, Inc. merged into YoSystems, with YoSystems becoming the surviving
entity, which then changed its name to Geotrac, Inc. The Company acquired its
49% interest in YoSystems for $6,750,000 in cash. YoSystems entered into a term
note for $8,750,000 to provide additional funds required to fund the total
purchase price of $15,000,000.
F-19
81
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. INVESTMENT IN GEOTRAC, INC. -- (CONTINUED)
The following table represents summarized financial information of Geotrac,
Inc. for the period August 1, 1997 to December 31, 1997 and the three-month
period ended March 31, 1998:
FOR THE PERIOD THREE
AUGUST 1, MONTHS
1997 TO ENDED
DECEMBER 31, MARCH 31,
1997 1998
-------------- -----------
(UNAUDITED)
Condensed Statements of Income:
Total revenues............................................ $ 6,336,025 $ 4,572,866
Operating income.......................................... 1,001,775 1,576,541
Net income................................................ 410,222 832,934
Condensed Balance Sheets:
Current assets............................................ 4,693,232 5,465,648
Noncurrent assets......................................... 13,943,450 13,646,753
Current liabilities....................................... 3,291,024 3,637,872
Non-current liabilities................................... 8,219,856 7,515,793
Shareholders' equity...................................... 7,125,802 7,958,736
The investment in Geotrac, Inc. includes unamortized goodwill of $3,442,500
recognized on August 1, 1997. Goodwill is being amortized on a straight-line
basis over its estimated economic useful life of 20 years. Accumulated
amortization amounted to $71,718 and $114,750 at December 31, 1997 and March 31,
1998, respectively.
In connection with the acquisition, the Company and Geotrac, Inc. entered
into a Cross-License Agreement in which the flood zone databases of each company
were made available to one another in exchange for specified license fees. In
addition to the use of each Company's database, Geotrac, Inc. is primarily
responsible for the development, modification and maintenance of the respective
databases. Total amounts incurred during 1997 and the three months ended March
31, 1998 for maintenance of the databases amounted to $129,056 and $74,736,
respectively. The Company incurred $125,627 and $77,437 for usage of Geotrac,
Inc.'s database for 1997 and the three months ended March 31, 1998,
respectively.
In June 1998, the Company, acquired the remaining 51% of the outstanding
shares of Geotrac, Inc.'s common stock for a total consideration of $7,994,250
consisting of:
shares of the Company's common stock valued at
$ per share, the estimated initial public offering
price..................................................... $5,766,181
Promissory note............................................. 1,500,000
Cash........................................................ 728,069
----------
$7,994,250
==========
This transaction, along with the July 1997 investment in Geotrac, Inc.
resulted in goodwill of approximately $16,000,000 being recognized on a
consolidated basis. Goodwill is being amortized using the straight-line method
over a 20 year period. Geotrac, Inc. merged into BHDS, with BHDS as the
surviving company, which subsequently changed its name to Geotrac, Inc. In
addition, the Cross-License Agreement with BHDS, referred to above, has been
terminated along with any amounts due to each other, which were not
insignificant.
F-20
82
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
LIFE ------------------------ MARCH 31,
(YEARS) 1996 1997 1998
------- ---------- ----------- -----------
(UNAUDITED)
Computer equipment and acquired
software............................... 3-5 $1,475,970 $ 2,864,348 $ 3,061,970
Office furniture and equipment........... 5 545,773 575,940 610,090
Leasehold improvements................... 5 31,673 31,673 31,673
Maps and map database.................... 5 107,633 194,954 194,954
---------- ----------- -----------
2,161,049 3,666,915 3,898,687
Less -- accumulated depreciation and
amortization........................... (714,673) (1,335,579) (1,564,278)
---------- ----------- -----------
$1,446,376 $ 2,331,336 $ 2,334,409
========== =========== ===========
Depreciation and amortization expense was $184,155, $309,188, and $611,954
in 1995, 1996 and 1997, respectively, and $116,133 and $229,889 for the three
months ended March 31, 1997 and 1998, respectively.
NOTE 5. NOTE PAYABLE
The Company has a revolving line of credit agreement with a bank that
provides for borrowings of up to $600,000 subject to 80% of eligible
receivables, as defined. Interest is payable monthly at the bank's prime rate
plus 1% (9.5% at December 31, 1997). The principal balance plus accrued interest
are due on demand. The note is collateralized by the eligible receivables.
NOTE 6. NOTE RECEIVABLE AND PAYABLE -- AFFILIATE
On March 31, 1998, the Company entered into a promissory note with an
affiliate that had previously advanced funds to the Company. This note has an
interest rate of 8.5%, with principal and accrued interest due in April 1999.
On April 1, 1998, the Company entered into a note receivable from an
affiliate for a portion of the due from affiliate balance at March 31, 1998
totaling $4.95 million. This note has an interest rate of 8.5% with principal
and accrued interest due to the Company in April 1999. At March 31, 1998, this
portion of the due from affiliate balance representing the $4.95 million has
been reflected in the financial statements as a non-current note receivable.
In May 1998, the Company entered into a sales and assignment agreement with
certain affiliated companies whereby certain assets were transferred and
assigned to the Company, effective April 1998, for use in its business. The
assets, consisting of telephone equipment and computer hardware and software,
were transferred at their net book value as of the date of transfer. The Company
paid consideration consisting of $325,075 in cash and entered into two
promissory notes amounting to $2,802,175. The notes require monthly installment
payments of $10,417 plus accrued interest and mature on April 1, 1999 and
December 2000. In addition, the Company assumed the existing leases relating to
various computer equipment.
F-21
83
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
-------- ---------- -----------
(UNAUDITED)
Note payable to bank, interest at a fixed rate of
8.19%, due in monthly principal and interest
installments of $66,965, with the final payment
due December 2000, collateralized by certain
fixed assets of the Company..................... $ -- $2,131,000 $1,972,162
Note payable to bank, interest at the lender's
base lending rate (8.5% at December 31, 1997),
due in monthly principal installments of
$16,854, plus accrued interest thereon, with the
final payment due December 2000, collateralized
by certain fixed assets of the Company and
guaranteed by the Company's Parent.............. 809,000 606,750 556,187
Promissory note to bank, interest at a fixed rate
of 8.19%, due at maturity on February 28, 1998,
collateralized by certain fixed assets of the
Company......................................... -- 500,000 --
Notes payable to banks, interest at both fixed
(8.19%) and at the lender's base lending rate
(8.5% at December 31, 1997), due in monthly
principal installments ranging from $1,000 to
$5,104, with the final payments due ranging from
December 1999 to 2000, collateralized by certain
fixed assets of the Company, with certain notes
guaranteed by the Company's Parent.............. 400,975 471,725 429,702
--------- ---------- ----------
1,209,975 3,709,475 2,958,051
Less current maturities........................... 315,500 1,522,822 1,037,404
--------- ---------- ----------
$ 894,475 $2,186,653 $1,920,647
========= ========== ==========
Certain of the Company's debt agreements contain cross-default provisions
whereby the Company's debt instruments could be in default if any of the
Company's affiliates are in default on debt instruments with the same financial
institution. In the opinion of management, all debt of the Company and of BIG
and its affiliates was in compliance with required debt covenants. The Company
anticipates it will repay all of its debt instruments containing cross-default
provisions from the proceeds received from the contemplated initial public
offering.
Aggregate maturities of long-term debt are as follows for the years ended
December 31:
1998........................................................ $1,522,822
1999........................................................ 1,083,819
2000........................................................ 1,102,834
----------
$3,709,475
==========
NOTE 8. PREFERRED STOCK OF SUBSIDIARY
In connection with the Company's purchase of a 49% interest in Geotrac,
Inc., BHDS issued non-cumulative, 8% Preferred Stock to a corporation owned by
the half-brother of a director of the Company. The
F-22
84
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. PREFERRED STOCK OF SUBSIDIARY -- (CONTINUED)
related party funded the Preferred Stock purchase by entering into a note
agreement with a bank. The Preferred Stock served as collateral on the bank note
and the Company acts as a guarantor. On May 8, 1998, IMSG repurchased the
outstanding Preferred Stock of BHDS in exchange for a note in the same amount.
The note is payable in its entirety on December 31, 1998 and accrues interest at
8.5%. Subsequent to May 8, 1998, the Preferred Stock of BHDS, currently held by
IMSG, was exchanged for 675,000 shares of 8 1/2% cumulative Preferred Stock of
BHDS. The non-cumulative 8% Preferred Stock was then retired. The new Preferred
Stock serves as collateral on the bank note held by the related party. Dividends
declared on the Preferred Stock for 1997 and the three months ended March 31,
1998 were $229,315 and $133,151, respectively.
NOTE 9. SHAREHOLDERS' EQUITY
Long Term Incentive Plan
The Long-Term Incentive Plan (the "Incentive Plan") has been adopted by the
Company's Board of Directors and is expected to be approved by the shareholders
of the Company prior to the consummation of the contemplated initial public
offering. A total of shares of Common Stock may be issued pursuant to the
Incentive Plan. The Incentive Plan provides for the grant of incentive or
nonqualified stock options to purchase shares of Common Stock. Upon the
completion of the contemplated initial public offering, the executive officers
of the Company will be granted options to purchase a total of shares of
Common Stock at the initial public offering price. The options expire on the
tenth anniversary of the date of grant. Options shall become exercisable over a
period of five years in equal amounts.
Non-Employee Directors' Stock Option Plan
The Non-Employee Directors' Stock Option Plan (the "Non-Employee Director
Plan") has been adopted by the Company's Board of Directors and is expected to
be approved by the shareholders of the Company prior to the consummation of the
contemplated initial public offering. The Non-Employee Director Plan provides
for the grant of nonqualified stock options to purchase up to shares of
Common Stock to members of the Board of Directors who are not employees of the
Company. Each non-employee director shall be granted options to purchase
shares of Common Stock as of the adjournment of each annual meeting of
shareholders of the Company. In addition, each non-employee director shall be
granted options to purchase an additional shares of Common Stock (
shares in the event the non-employee director is absent from, arrives late for,
or departs early from, such meeting) upon the adjournment of each regularly
scheduled quarterly meeting of the Board of Directors (other than following the
annual meeting of shareholders). All options granted will have an exercise price
equal to the fair market value of the Common Stock as of the date of grant, will
become exercisable on the date of grant, and will expire on the sixth
anniversary of the date of grant.
Non-Qualified Stock Option Plan
The Non-Qualified Stock Option Plan (the "Non-Qualified Plan") has been
adopted by the Company's Board of Directors and is expected to be approved by
the shareholders of the Company prior to the consummation of the contemplated
initial public offering. The Non-Qualified Plan provides for the grant of
non-qualified stock options to purchase up to shares of Common Stock.
Upon the completion of the contemplated initial public offering, options to
purchase shares of Common Stock at the initial public offering price will
be granted to certain executive officers of BIG. All of such options expire on
the tenth anniversary of the date of grant. Options shall become exercisable
over a period of five years in equal amounts.
F-23
85
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9. SHAREHOLDERS' EQUITY -- (CONTINUED)
Preferred Stock
The Company is authorized to issue 20,000,000 shares of Preferred Stock,
$.01 par value per share. The Board of Directors has the authority, without any
further vote or action by the Company's shareholders, to issue Preferred Stock
in one or more series and to fix the number of shares, designations, relative
rights (including voting rights), preferences, and limitations of those series
to the full extent now or hereafter permitted by Florida law. The Company has no
present intention to issue shares of Preferred Stock, although it may determine
to do so in the future.
NOTE 10. INCOME TAXES
The provision for income taxes is summarized as follows:
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- -------------------
1995 1996 1997 1997 1998
-------- -------- ---------- -------- --------
(UNAUDITED)
Current:
Federal.......................... $142,200 $441,600 $1,686,500 $403,600 $554,100
State............................ 24,400 70,200 294,700 74,000 94,900
-------- -------- ---------- -------- --------
166,600 511,800 1,981,200 477,600 649,000
-------- -------- ---------- -------- --------
Deferred:
Federal.......................... (3,600) (98,900) 112,400 29,500 (98,000)
State............................ (600) (16,900) 18,600 5,800 (16,100)
-------- -------- ---------- -------- --------
(4,200) (115,800) 131,000 35,300 (114,100)
-------- -------- ---------- -------- --------
$162,400 $396,000 $2,112,200 $512,900 $534,900
======== ======== ========== ======== ========
Reconciliation of the federal statutory income tax rate of 34% to the
effective income tax rate is as follows:
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- ---------- -------- ---------
(UNAUDITED)
Federal income taxes, at statutory
rates........................... $141,500 $344,400 $1,955,400 $457,600 $ 604,000
State taxes, net of federal
benefit......................... 15,700 35,200 206,800 48,900 64,500
Equity in earnings of Geotrac,
Inc............................. -- -- (68,300) -- (138,800)
Other, net........................ 5,200 16,400 18,300 6,400 5,200
-------- -------- ---------- -------- ---------
$162,400 $396,000 $2,112,200 $512,900 $ 534,900
======== ======== ========== ======== =========
F-24
86
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the corresponding amounts used for income tax reporting purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
Deferred tax assets
Non-deductible items, principally vacation pay...... $183,900 $172,400 $241,000
Deferred tax liability
Depreciation and fixed asset bases differences...... (55,200) (174,700) (101,200)
Other............................................... -- -- (28,000)
-------- -------- --------
Net deferred tax asset (liability).................... $128,700 $ (2,300) $111,800
======== ======== ========
NOTE 11. COMMITMENTS AND CONTINGENCIES
Risks and Uncertainties
The Company derives a substantial portion of its revenues from outsourcing
services provided to its principal shareholder, BIG. The Company has entered
into contracts with BIG pursuant to which it will continue to provide
administrative services to BIG (See Note 12). Any loss of or material decrease
in the business from BIG could have a material adverse effect on the business,
financial condition and results of operations of the Company. The Company's
future financial condition and results of operations will depend to a
significant extent upon the commercial success of BIG and its continued
willingness to utilize the Company's services. Any significant downturn in the
business of BIG or its commitment in utilizing the Company's services could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company's business is dependent upon various factors, such as general
economic conditions and weather patterns, that are beyond its control. For
example, the demand for flood zone determinations by lenders and their customers
is directly related to the affordability of mortgage financing and refinancing.
Current interest rates are relatively low and therefore conducive to a higher
volume of mortgage lending and flood zone determinations. An increase in
interest rates would have a negative impact on mortgage lending and consequently
also on the level of flood zone determinations requested. Fluctuations in
interest rates will likely produce fluctuations in the Company's earnings and
operating results. Likewise, natural disasters such as hurricanes, tornadoes and
floods, all of which are unpredictable, directly impact the demand for both the
Company's outsourcing and flood zone determination services.
Legal Proceedings
Bankers Insurance Company ("BIC"), the Company's principal customer and a
wholly-owned subsidiary of BIG, is currently subject to an investigation by the
Florida Department of Insurance (the "DOI") stemming from BIC's use of a private
investigator to gather information on a DOI employee. In a separate action,
certain officers and employees of BIC and the Company have been subpoenaed by
the Federal Emergency Management Agency ("FEMA") to produce documentation in
connection with FEMA's investigation of, among other things, certain cash
management practices. The management of BIC and the Company do not believe the
outcome of these investigations will have a material adverse effect on the
business, financial condition or results of operations of BIC or the Company.
Since the investigations are in the early stages, it is impossible at this time
to predict the ultimate outcome of these investigations.
F-25
87
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company is involved in various legal actions arising in the ordinary
course of business. Management cannot predict the outcome of these matters. It
is management's belief, after discussion with legal counsel, that the ultimate
resolution of these actions will not have a material adverse effect on the
Company's financial position, results of operations, or liquidity.
Tax Examination
The Company's ultimate parent, Bankers International Financial Corporation,
is currently undergoing an income tax examination by the Internal Revenue
Service related to the years 1995 and 1996; however, no assessment has been
levied. While it is not possible to determine with certainty the outcome of
these matters, in the opinion of management, the eventual resolution of the
examination will not have a material adverse effect on the Company's financial
position, results of operations, or liquidity.
Employment Agreements
The Company entered into employment agreements with certain members of its
executive management team, which will be effective on completion of the
contemplated initial public offering. The agreements provide for employment
terms of three years and shall continue indefinitely until terminated by either
party pursuant to the terms of the agreements. In the event an employment
agreement is terminated by the Company without cause, the employee shall be
entitled to earned, but unpaid benefits as well as a "Severance Payment" equal
to the employee's base salary for a period of twelve months, subject to
adjustment as defined. The agreements contain non-compete provisions, which
prevent a terminated employee from soliciting customers, prospective customers
or employees of the Company.
In connection with the acquisition of Geotrac, Inc., the Company entered
into an employment agreement with the President and Chief Executive Officer of
Geotrac, Inc. This agreement provides for an initial term of four years and
shall continue in effect thereafter until terminated by either party upon 90
days prior written notice. The agreement provides for an initial annual base
salary of $150,000 subject to annual review by Geotrac, Inc.'s Board of
Directors. In the event of Mr. White's death or disability, Geotrac, Inc.'s
obligations under the agreement will automatically terminate, except that Mr.
White shall be entitled to severance equal to his then current annual base
salary. The agreement further provides that, in the event of termination by
Geotrac, Inc. without cause (as defined therein) or by Mr. White for good reason
(as defined therein), or in the event the agreement is not renewed for any
reason other than death, disability or for cause, then Geotrac, Inc. shall pay
Mr. White at the rate of his annual base salary then in effect for the longer of
(i) the remainder of the term of the agreement and (ii) one year after such
termination date, subject to a credit of up to 75% of the base salary paid to
Mr. White by his new employer, if any.
NOTE 12. RELATED PARTY TRANSACTIONS
Service and Administrative Agreements
During 1995, 1996 and 1997, the Company provided information technology
services to affiliated entities based generally on actual cost incurred
(including selling, general and administrative expenses), which amounted to
$3,443,628, $4,787,772 and $3,236,255 of the outsourcing revenues for 1995, 1996
and 1997, respectively, and $863,375 for the three months ended March 31, 1997.
For the three months ended March 31, 1998, these charges are included in the fee
structure related to the affiliated service agreement discussed below.
In 1997, the Company charged a monthly fee for its policy and claims
administration services based on certain factors under the terms of the 1997
service agreements with BIG and other affiliated companies. For
F-26
88
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS -- (CONTINUED)
policy and claims administration, the Company charged a fee based on a
percentage of direct written premiums and a percentage of direct paid losses for
certain lines of business, as defined, respectively. The fee ranged from 8.5% to
9% for services rendered in connection with policy administration and .5% to 15%
for claims administration related to these policies. Also, in 1997 the Company
processed claims for BIG and its other affiliates related to those lines of
business not covered under the servicing agreement and provided other
miscellaneous services on a cost reimbursement basis. Amounts charged related to
this claims processing and other miscellaneous services amounted to $9,518,525
for 1997 and $2,379,632 for the three months ended March 31, 1997.
Effective January 1, 1998, the Company and BIG, along with its affiliates,
entered into a service agreement which replaced the previous arrangement. For
policy administration, the Company charges a fee, ranging from 8% to 10% of
direct written premiums for certain lines of business, as defined. In 1998, in
addition to policy processing services previously provided under the 1997
service agreements, the Company also provides policy processing related to its
affiliated companies' automobile lines of business. In addition, claims services
that were previously provided on a cost reimbursement basis are included in its
1998 affiliated servicing agreements. For claims administration, the Company
charges fees ranging from 7% to 12.50% of direct earned premiums, except for
flood related programs which are based on 1% of earned premiums and 1.5% of
incurred losses. Also, a service fee of 2% of direct earned premiums is charged
related to information technology services.
Under these service agreements, the Parent Company accounted for
$16,359,821 of total outsourcing revenue in 1997, and $3,521,648 and $8,221,734
for the three months ended March 31, 1997 and 1998, respectively.
The Company has historically been charged a monthly management fee under a
management agreement with BIG for common costs that are incurred by its Parent
and allocated to its affiliated companies. These common costs include human
resources, legal, corporate planning and communications, cash management,
certain executive management and rent. The basis of allocation for the
management services is employee head counts and estimates of time incurred,
which management believes to be a reasonable basis of allocation. Total
management fees in 1995, 1996, 1997 and the three months ended March 31, 1997
were $724,904, $1,053,546, $2,343,866 and $585,966, respectively. Effective
January 1, 1998, the Company is being charged for these services, exclusive of
rent, generally based on agreed upon quarterly amounts totaling $426,266 for the
three months ended March 31, 1998.
Prior to December 31, 1997, the Company was also charged for rental
expenses through the management services allocated from its Parent as discussed
above. Subsequent to this time, the Company entered into specific lease
agreements for its office space. The future minimum lease payments under these
non-cancelable operating leases are $1,150,535 and $1,384,180 for the years
ending December 31, 1998 and 1999, respectively. For financial statement
purposes, rent expense of $252,306 for the three months ended March 31, 1998 is
included in management services from Parent.
The Company leases certain employees, from time to time, that have been
trained in customer service and other areas of property and casualty insurance
from its affiliated companies. The Company has agreed to pay all direct and
indirect expenses in connection with these employees. These charges are included
in cost of outsourcing services and selling, general and administrative expenses
and amounted to $6,635,249 for 1997, and $374,947 and $1,242,823 for the three
months ended March 31, 1997 and 1998, respectively.
Effective January 1, 1998, the Company entered into a perpetual license
agreement with BIG and BIC pursuant to which the Company licensed its primary
operating systems from BIG and BIC in exchange for a
F-27
89
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS -- (CONTINUED)
nominal fee. The license agreement provides that the Company shall be solely
responsible for maintaining and upgrading the systems and shall have the
authority to license such systems to third parties.
Flood zone determination services performed for affiliated companies
amounted to $239,980, $414,209 and $1,028,358 for 1995, 1996 and 1997,
respectively, and $215,077 and $236,368 for the three months ended March 31,
1997 and 1998, respectively.
Intercompany Accounts
The Company's due from affiliates, including the note
receivable -- affiliate, generally resulted from the zero balance account
arrangement with BIG (See Note 2) whereby the Company's excess cash was swept
into BIG's operating cash account. The Company's due to affiliates, including
the note payable -- affiliate, generally resulted from the Company's affiliates
advancing service fees and paying certain expenses on behalf of the Company. The
Company's income tax payable to Parent represents the current income tax
liability owed to the Parent under the intercompany tax sharing/allocation
agreement.
At the time of the Company's contemplated initial public offering, the
Company will be owned approximately 20% by a Cayman Islands corporation. The
Cayman Islands corporation acquired its interest in the Company directly from
the Company's Parent. The Cayman Islands corporation is wholly owned by a
discretionary charitable trust. The sole trustee of this trust is a Cayman
Islands bank unaffiliated with BIG, the Company or their respective officers or
directors. BIG is indirectly owned by a separate Cayman Islands corporation
which is owned by a separate discretionary charitable trust. The sole trustee of
this trust is a Cayman Islands corporation unaffiliated with BIG, the Company or
their respective officers or directors. The declaration of each trust provides
that the same not-for-profit Cayman Islands corporation possesses the
discretionary power to (i) direct the trustee to appoint the trust fund to
another trust for the benefit of one or more of the beneficiaries of the trust
and (ii) remove the trustee and appoint one or more new trustees outside the
Cayman Islands. The Board of Directors of this entity includes certain executive
officers of BIG and the Company. The Cayman Islands corporation is selling a
portion of its interest in the Company in the offering, and a subsidiary of the
Cayman Island corporation has agreed to loan approximately $17.5 million to BIG
in exchange for a subordinated note. A portion of the funds to be received by
BIG will be used to satisfy the due from affiliates and note
receivable -- affiliate balances recorded by the Company. With the funds, the
Company will repay the entire due to affiliate, income taxes payable to Parent
and note payable -- affiliate balances at that time.
In the event that the Company's offering is not completed, the due to
affiliates (including income taxes payable to Parent) and due from affiliates,
which are without any specific terms and are non-interest bearing, will be
satisfied during the ordinary course of business.
This note should also be read in conjunction with the other notes to the
financial statements for additional related party transactions.
NOTE 13. EMPLOYEE BENEFIT PLANS
The Company's employees participate in its Parent company's 401(k) plan.
The Plan covers substantially all employees. Benefits vest based on the number
of years of service. To participate in the plan, employees must be at least 21
years old and have completed twelve months of service. The Company, at its
discretion, can make matching contributions based upon the participant's
deferral depending on the participant's annual salary up to a maximum of 6% of
compensation. The Company's expense related to this plan was approximately
$70,191, $121,390 and $466,096 in 1995, 1996 and 1997, respectively, and $98,595
and $159,602 for the three months ended March 31, 1997 and 1998, respectively.
F-28
90
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13. EMPLOYEE BENEFIT PLANS (CONTINUED)
In addition, the Company's employees participate in self-insured medical
and dental plans provided by the Parent. The medical program provides for
specific excess loss reinsurance for individual claims greater than $60,000 for
any one claimant and aggregate claims greater than $1,000,000. The Company
accrues the estimated liabilities for the ultimate costs of both reported claims
and incurred but not reported claims.
NOTE 14. SEGMENT INFORMATION
The Company primarily operates in two business segments within the United
States; providing policy and claims administration services and flood zone
determinations. No unaffiliated customer accounted for more than 10% of the
Company's total revenues for the periods presented. The following table provides
information about these reportable segments as required by SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information":
INTERCOMPANY
OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED
SERVICES DETERMINATIONS AND OTHER TOTALS
----------- -------------- ------------ ------------
1995
Operating revenues -- affiliated........... $ 3,516,704 $ 239,980 $ (73,076) $ 3,683,608
Operating revenues -- unaffiliated......... -- 4,886,946 -- 4,886,946
Operating income........................... (244,310) 732,073 -- 487,703
Interest expense........................... 17,527 53,966 -- 71,493
Depreciation and amortization.............. 92,597 91,558 -- 184,155
Identifiable assets........................ 613,022 2,036,315 -- 2,649,337
Equity in earnings of Geotrac, Inc......... -- -- -- --
1996
Operating revenues -- affiliated........... $ 4,819,786 $ 417,949 $ (35,754) $ 5,201,981
Operating revenues -- unaffiliated......... 337,458 7,291,031 -- 7,628,489
Operating income........................... (78,801) 1,167,115 -- 1,088,314
Interest expense........................... 11,901 63,449 -- 75,350
Depreciation and amortization.............. 171,683 137,505 -- 309,188
Identifiable assets........................ 1,508,426 1,932,816 -- 3,441,242
Equity in earnings of Geotrac, Inc......... -- -- -- --
1997
Operating revenues -- affiliated........... $30,374,066 $ 1,028,359 $(1,259,465) $30,142,960
Operating revenues -- unaffiliated......... 599,443 7,763,576 -- 8,363,019
Operating income........................... 3,290,830 2,408,676 -- 5,699,506
Interest expense........................... 69,781 79,564 -- 149,345
Depreciation and amortization.............. 404,830 278,842 -- 683,672
Identifiable assets........................ 8,178,483 11,353,222 -- 19,531,705
Equity in earnings of Geotrac, Inc......... -- 201,009 -- 201,009
MARCH 31, 1997 -- (UNAUDITED)
Operating revenues -- affiliated........... $ 6,983,198 $ 215,077 $ (218,543) $ 6,979,732
Operating revenues -- unaffiliated......... 91,702 1,732,116 -- 1,823,818
Operating income........................... 913,610 669,956 -- 1,381,397
Interest expense........................... 17,445 18,021 -- 35,466
Depreciation and amortization.............. 75,600 40,533 -- 116,133
Identifiable assets........................ 6,526,340 2,289,471 (77,844) 8,737,967
Equity in earnings of Geotrac, Inc......... -- -- -- --
F-29
91
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. SEGMENT INFORMATION -- (CONTINUED)
INTERCOMPANY
OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED
SERVICES DETERMINATIONS AND OTHER TOTALS
----------- -------------- ------------ ------------
MARCH 31, 1998 -- (UNAUDITED)
Operating revenues -- affiliated........... $8,802,652 $ 236,368 $ (308,864) $ 8,730,156
Operating revenues -- unaffiliated......... 161,231 2,054,552 -- 2,215,783
Operating income........................... 698,641 752,830 -- 1,451,471
Interest expense........................... 62,827 20,363 -- 83,190
Depreciation and amortization.............. 173,462 99,459 -- 272,921
Identifiable assets........................ 13,307,037 12,111,488 -- 25,418,525
Equity in earnings of Geotrac, Inc......... -- 408,138 -- 408,138
F-30
92
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Geotrac, Inc.
We have audited the accompanying balance sheets of Geotrac, Inc. (formerly
YoSystems, Inc.) as of December 31, 1996 and 1997, and the related statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Geotrac, Inc. as of December
31, 1996 and 1997 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
May 29, 1998
F-31
93
GEOTRAC, INC.
BALANCE SHEETS
DECEMBER 31,
---------------------- MARCH 31,
1996 1997 1998
-------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 138 $ 1,897,262 $ 2,073,279
Accounts receivable, net................................ -- 2,227,236 2,844,241
Prepaid expenses........................................ -- 278,734 236,128
Deferred tax assets..................................... -- 290,000 312,000
-------- ----------- -----------
Total current assets............................ 138 4,693,232 5,465,648
PROPERTY AND EQUIPMENT, net............................... -- 3,419,916 3,312,670
OTHER ASSETS
Goodwill, net........................................... -- 8,662,804 8,552,215
Customer contracts, net................................. -- 1,516,667 1,466,667
Deferred tax assets..................................... -- 25,000 8,000
Other................................................... -- 319,063 307,201
-------- ----------- -----------
Total assets.................................... $ 138 $18,636,682 $19,112,401
======== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of long-term debt....................... $ -- $ 1,250,000 $ 1,250,000
Current portion of capital lease obligations............ -- 288,952 288,952
Accounts payable........................................ -- 120,754 224,183
Accounts payable -- related party....................... 25,139 -- --
Income taxes payable.................................... -- 297,000 562,000
Deferred compensation................................... -- 705,000 705,000
Other current liabilities............................... -- 629,318 607,737
-------- ----------- -----------
Total current liabilities....................... 25,139 3,291,024 3,637,872
LONG-TERM DEBT............................................ -- 7,187,500 6,562,500
CAPITAL LEASE OBLIGATIONS................................. -- 557,356 493,293
DEFERRED REVENUE.......................................... -- 475,000 460,000
COMMITMENTS AND CONTINGENCIES............................. -- -- --
SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock, $.01 par value, 1,000 shares authorized;
490, 1,000 and 1,000 shares issued and outstanding at
December 31, 1996, 1997 and March 31, 1998,
respectively......................................... 5 10 10
Additional paid-in capital.............................. 5,995 6,715,570 6,715,570
Retained earnings (deficit)............................. (31,001) 410,222 1,243,156
-------- ----------- -----------
Total shareholders' equity (deficit)............ (25,001) 7,125,802 7,958,736
-------- ----------- -----------
Total liabilities and shareholders' equity
(deficit)..................................... $ 138 $18,636,682 $19,112,401
======== =========== ===========
The accompanying notes are an integral part of these statements.
F-32
94
GEOTRAC, INC.
STATEMENTS OF OPERATIONS
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------- ------------
1995 1996 1997 1998
-------- -------- ---------- ------------
(UNAUDITED)
REVENUES
Flood zone determination services............... $ -- $ -- $6,242,815 $4,463,616
Other revenues.................................. -- -- 93,210 109,250
-------- -------- ---------- ----------
Total revenues.......................... -- -- 6,336,025 4,572,866
-------- -------- ---------- ----------
EXPENSES
Cost of revenues................................ -- -- 2,678,557 1,874,263
Selling, general and administrative expense..... 9,755 29,841 1,319,434 761,866
Deferred compensation (non-recurring item)...... -- -- 732,795
Depreciation and amortization................... -- -- 594,045 360,196
-------- -------- ---------- ----------
Total expenses.......................... 9,755 29,841 5,324,831 2,996,325
-------- -------- ---------- ----------
OPERATING INCOME (LOSS)........................... (9,755) (29,841) 1,011,194 1,576,541
OTHER INCOME (non-recurring item)................. 932,222 -- 1,700,000 --
INTEREST EXPENSE.................................. -- -- (338,391) (189,607)
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES... 922,467 (29,841) 2,372,803 1,386,934
PROVISION FOR INCOME TAXES........................ -- -- 272,000 554,000
-------- -------- ---------- ----------
NET INCOME (LOSS)................................. $922,467 $(29,841) $2,100,803 $ 832,934
======== ======== ========== ==========
The accompanying notes are an integral part of these statements.
F-33
95
GEOTRAC, INC.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ ---------- ----------- -----------
Balance at January 1, 1995....................... $ 5 $ 5,995 $ 78,744 $ 84,744
Dividend paid to shareholder................... -- -- (1,002,371) (1,002,371)
Net income..................................... -- -- 922,467 922,467
--- ---------- ----------- -----------
Balance at December 31, 1995..................... 5 5,995 (1,160) 4,840
Net loss....................................... -- -- (29,841) (29,841)
--- ---------- ----------- -----------
Balance at December 31, 1996..................... 5 5,995 (31,001) (25,001)
Dividend paid to S Corporation shareholder..... -- -- (1,700,000) (1,700,000)
Sale of Common Stock........................... 5 6,749,995 -- 6,750,000
Recapitalization of Company for change from S
Corporation to C Corporation................ (40,420) 40,420 --
Net income..................................... -- -- 2,100,803 2,100,803
--- ---------- ----------- -----------
Balance at December 31, 1997..................... 10 6,715,570 410,222 7,125,802
Net income (unaudited)......................... -- -- 832,934 832,934
--- ---------- ----------- -----------
Balance at March 31, 1998 (unaudited)............ $10 $6,715,570 $ 1,243,156 $ 7,958,736
=== ========== =========== ===========
The accompanying notes are an integral part of this statement.
F-34
96
GEOTRAC, INC.
STATEMENTS OF CASH FLOWS
THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------ MARCH 31,
1995 1996 1997 1998
----------- -------- ----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................ $ 922,467 $(29,841) $ 2,100,803 $ 832,934
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............. -- -- 594,045 360,196
Deferred federal income tax (credit)
expense................................. -- -- (315,000) (5,000)
Changes in assets and liabilities:
Accounts receivable..................... 84,298 -- 8,284 (617,005)
Prepaid expenses and other assets....... -- -- (73,945) 42,431
Accounts payable and other
liabilities.......................... -- 25,139 768,058 81,848
Income taxes payable.................... -- -- 297,000 265,000
Deferred revenue........................ -- -- (25,000) (15,000)
----------- -------- ----------- ----------
Net cash provided by (used in)
operating activities............... 1,006,765 (4,702) 3,354,245 945,404
----------- -------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.......... -- -- (153,371) (80,324)
Acquisition of business, net of cash
acquired.................................. -- -- (6,163,057) --
----------- -------- ----------- ----------
Net cash used in investing
activities......................... -- -- (6,316,428) (80,324)
----------- -------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of note payable from shareholder..... -- -- (200,000) --
Proceeds from note payable................... -- -- 447,800 --
Payments on note payable..................... -- -- (312,500) (625,000)
Payments on capital lease obligations........ -- -- (125,993) (64,063)
Dividend paid S corporation shareholder...... (1,002,371) -- (1,700,000) --
Sale of common stock......................... -- -- 6,750,000 --
----------- -------- ----------- ----------
Net cash provided by (used in)
financing activities............... (1,002,371) -- 4,859,307 (689,063)
----------- -------- ----------- ----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. 4,394 (4,702) 1,897,124 176,017
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 446 4,840 138 1,897,262
----------- -------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period....... $ 4,840 $ 138 $ 1,897,262 $2,073,279
=========== ======== =========== ==========
SUPPLEMENT DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid for interest....................... $ -- $ -- $ 155,110 $ 372,888
=========== ======== =========== ==========
Cash paid for income taxes................... $ -- $ -- $ 290,000 $ 294,000
=========== ======== =========== ==========
F-35
97
GEOTRAC, INC.
STATEMENTS OF CASH FLOWS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1997, the Company financed $8,302,200 of
the acquisition of SMS Geotrac, Inc. ($8,250,000) and deferred financing costs
($52,200).
During the year ended December 31, 1997, the Company acquired $25,398 in
equipment under a capital lease.
Acquisition of Business Net of Cash Acquired:
YEAR ENDED
DECEMBER 31,
1997
------------
Fair value of assets acquired............................... $17,308,778
Liabilities assumed......................................... (2,308,778)
Debt issued................................................. (8,250,000)
Cash acquired............................................... (586,943)
-----------
$ 6,163,057
===========
The accompanying notes are an integral part of these statements.
F-36
98
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Geotrac, Inc. (the "Company"), formerly YoSystems, Inc., is a provider of
flood zone determination services for financial services companies and
individuals located throughout the United States.
On July 31, 1997, the Company acquired the outstanding stock of SMS
Geotrac, Inc., a wholly-owned subsidiary of Strategic Mortgage Services, Inc.
(SMS), an unrelated company, for $15,000,000. Prior to the acquisition, the
Company had limited activity and was an S corporation for federal income tax
purposes. The Company's principal activity prior to July 31, 1997 was to receive
contingent earnout payments from the sale of its operating assets during 1994
and to distribute any payments received to its shareholder.
Simultaneous with the acquisition of SMS Geotrac, Inc., the Company sold
49% of its outstanding shares to Bankers Hazard Determination Services, Inc.
(BHDS), a subsidiary of Insurance Management Solutions Group, Inc. (IMSG), for
$6,750,000. Such proceeds of the stock sale together with the proceeds of
$8,250,000 from a bank borrowing were used to acquire SMS Geotrac, Inc.
Subsequent to the acquisition, the Company changed its name from YoSystems, Inc.
to Geotrac, Inc. As of July 31, 1997, the Company became a C corporation for
federal income tax purposes.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit
The Company provides flood zone determination services primarily to
insurance companies and financial institutions throughout the United States.
Credit is extended to customers (primarily financial services companies) based
on management's assessment of their credit worthiness. Customer deposits are
required in certain instances.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is provided for using the straight
line method over the estimated useful life of the assets.
Capitalized costs include the cost of purchasing maps as well as the direct
labor cost of converting the maps to digitized computer files. The Company
capitalizes the costs of acquiring and computerizing maps that are used as a
basis for making flood zone determinations. These capitalized costs are
amortized on a straight-line basis over a period of five years.
F-37
99
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Impairment of Long-Lived Assets
The Company evaluates the recoverability of its long-lived assets and
intangibles (including goodwill) held whenever adverse events or changes in
business climate indicate that the expected undiscounted future cash flows from
the related asset may be less than previously anticipated. If the net book value
of the related asset exceeds the undiscounted future cash flows of the asset,
the carrying amount would be reduced to the present value of its expected future
cash flows and an impairment loss would be recognized. As of December 31, 1997
and March 31, 1998 management does not believe that an impairment reserve is
required.
Goodwill
Goodwill of $8,847,119 related to the acquisition of SMS Geotrac, Inc., is
being amortized using the straight-line method over twenty years. Accumulated
amortization at December 31, 1997 and March 31, 1998 was $184,315 and $294,904,
respectively.
Customer Contracts
In connection with the acquisition of SMS Geotrac, Inc., the Company
estimated the fair value of its customer contracts and allocated $1,600,000 of
the purchase price to such contracts. Customer contracts are being amortized
using the straight-line method over eight years. Accumulated amortization of
December 31, 1997 and March 31, 1998 was $83,333 and $133,333, respectively.
Revenues
Revenue earned on flood zone determination services is recognized when the
determination is performed.
The Company provides life of loan monitoring of flood zone determinations
whereby the Company notifies its customers of changes in previously issued flood
zone determinations. The Company estimates the revenues associated with this
future obligation to monitor changes and notify customers and defers and
amortizes these amounts using the straight-line method over the life of the
loan, approximately 8 years.
Income Taxes
For the year ended December 31, 1996 and through July 31, 1997 the Company
was an S Corporation for federal income tax purposes. Accordingly, federal
income taxes on net earnings of the Company were payable by the shareholder.
Beginning August 1, 1997, the Company accounts for income taxes on the
asset and liability method. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities as measured by the enacted tax rates which will be in effect
when these differences reverse. Deferred tax expense is the result of changes in
deferred tax assets and liabilities. At the date of the termination of the S
Corporation election, there were no deferred tax assets or liabilities created.
Deferred Financing Costs
The Company has deferred financing costs of approximately $337,000, as it
relates to its bank borrowings which are being amortized using the straight line
method (approximates the effective yield method) over the term of the loan (see
Note 5).
F-38
100
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The carrying amount of the Company's financial instruments at December 31,
1997, and March 31, 1998, which includes cash, accounts receivable, accounts
payable and debt, approximates fair value due to the short maturity of those
instruments. The Company considers the fixed rate and variable rate financial
instruments to be representative of current market interest rates and,
accordingly, the recorded amounts approximate their present fair market value.
Unaudited Financial Statements
The unaudited financial statements and the related notes thereto for March
31, 1998 include all normal and recurring adjustments, which in the opinion of
management are necessary for a fair presentation and are prepared on the same
basis as audited annual statements. The interim results are not necessarily
indicative of the results that may be expected for the full year.
Segments and Related Information
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement also establishes standards for
related disclosures about products and services geographic areas, and major
customers. This statement requires the reporting of financial and descriptive
information about an enterprise's reportable operating segments. The Company
only has one operating segment and one principal product or service (See Note
1). All the Company's operations are located within the United States and no
individual customer represents more than 10% of total revenues for all periods
presented herein.
New Accounting Pronouncement Not Yet Adopted
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income' ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expense, gains and losses) in
a full set of financial statements as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Earlier application is permitted.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company believes that adoption of SFAS 130
will have no effect on the financial statements.
NOTE 3. ACQUISITION OF SMS GEOTRAC, INC.
On July 31, 1997 the Company acquired all of the outstanding common stock
of SMS Geotrac, Inc. (Note 1) for a purchase cost of $15,000,000 which was
funded as follows:
Cash contributed by BHDS.................................... $ 6,750,000
Bank borrowing.............................................. 8,750,000
Excess cash not required for acquisition.................... (500,000)
-----------
$15,000,000
===========
F-39
101
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. ACQUISITION OF SMS GEOTRAC, INC. -- (CONTINUED)
The acquisition has been accounted for as a purchase, and accordingly the
net assets acquired on July 31, 1997 were recorded at their estimated fair value
as follows:
Current assets.............................................. $ 3,026,152
Property and equipment...................................... 3,547,454
Excess of cost over assets acquired......................... 8,847,119
Customer contracts.......................................... 1,600,000
Other assets................................................ 288,053
Liabilities assumed......................................... (2,308,778)
-----------
$15,000,000
===========
In addition, BHDS and the Company entered into a cross licensing agreement;
whereby, the Company is to receive a total of $900,000 for the use of its
database of digitized maps, for the period from the date of acquisition through
June 2000. Further, BHDS will reimburse the Company for fifty percent of its
cost to maintain the database as of December 31, 1997, approximately $250,000
has been recorded under this agreement.
The following unaudited proforma consolidated results of operations for the
year ended December 31, 1997 is presented as if the acquisition of SMS Geotrac,
Inc. has been made on January 1, 1996. The unaudited proforma information is not
necessarily indicative of either the results of operations that would have
occurred had the purchase been made at January 1, 1996 or the future results of
the consolidated operations:
1996 1997
----------- -----------
(UNAUDITED)
Revenues.................................................... $13,374,610 $14,062,666
Net earnings................................................ $ 555,676 $ 2,489,623
The following table distinguishes the condensed historical results of
operations for the year ended December 31, 1997 by the period before and after
the acquisition of SMS Geotrac, Inc.
AUGUST 1,
JANUARY 1, 1997
1997 THROUGH
THROUGH DECEMBER 31,
JULY 31, 1997 1997 TOTAL
------------- ------------ ----------
Revenues.......................................... $ -- $6,336,025 $6,336,025
Operating income (loss)........................... (9,419) 1,001,775 1,011,194
Other income (expense)............................ 1,700,000 (338,391) 1,361,069
---------- ---------- ----------
Net income.............................. $1,690,581 $ 410,222 $2,100,803
========== ========== ==========
F-40
102
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
LIFE DECEMBER 31, MARCH 31,
YEARS 1997 1998
------ ------------ ----------
Computer equipment..................................... 3-5 $1,343,736 $1,364,419
Furniture and fixtures................................. 7 498,002 500,567
Transportation equipment............................... 5 28,908 28,908
Maps and map database.................................. 5 1,855,554 1,912,930
---------- ----------
3,726,200 3,806,824
Less accumulated depreciation and amortization......... (306,284) (494,154)
---------- ----------
$3,419,916 $3,312,670
========== ==========
Depreciation and amortization expense for the year ended December 31, 1997
and the three month period ended March 31, 1998 were $306,284 and $187,870,
respectively.
NOTE 5. LONG-TERM DEBT
In connection with the purchase of SMS Geotrac, Inc., the Company borrowed
$8,750,000 from a bank. The note is payable in quarterly installments of
$312,500 plus interest. Interest is charged, at the Company's option, at 1) the
current prime rate; 2) a seven year fixed rate; 3) a certain percentage over the
LIBOR rate based upon a formula; or 4) a combination of the above rates. In
addition to the quarterly payments, annual prepayments may be required in an
amount equal to fifty percent of excess cash flow, as defined in the loan
agreement. The agreement contains covenants that require the Company to maintain
certain financial ratios (e.g., stockholders' equity of at least $6,250,000
through June 30, 1998 increasing by 50% of net income thereafter), limits the
dollar value of capital expenditures and restricts the payment of dividends to
50% of excess cash flows (as defined). The note is collateralized by
substantially all the assets of the Company. The outstanding balance (and prime
interest rate) at December 31, 1997 and March 31, 1998 was $8,437,500 (8.5%) and
$7,812,500 (8.5%), respectively.
Scheduled maturities of the note payable to bank at December 31, 1997 are
as follows:
1998........................................................ $1,250,000
1999........................................................ 1,250,000
2000........................................................ 1,250,000
2001........................................................ 1,250,000
2002........................................................ 1,250,000
Thereafter.................................................. 2,187,500
----------
$8,437,500
==========
NOTE 6. OTHER INCOME (NON-RECURRING ITEM)
During 1996 and on July 30, 1997 the Company received contingent earn-out
payments of $932,222 and $1,700,000 (final payment), respectively associated
with the sale of its operating assets during 1994. These amounts are classified
as other income and a non-recurring item.
F-41
103
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment under operating leases with
unexpired terms ranging from a month-to-month basis to seven years. Rent expense
under all operating leases was approximately $135,000 and $80,000 for the year
ended December 31, 1997 and the three month period ended March 31, 1998,
respectively. The Company is currently leasing one of its operating facilities
from its 51 percent shareholder. This lease requires monthly rental payments of
$8,717 through August 1998.
The future minimum lease payments under these operating lease agreements
are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998........................................................ $416,161
1999........................................................ 371,274
2000........................................................ 255,766
2001........................................................ 216,672
2002........................................................ 198,616
----------
$1,458,489
==========
Capital Leases
The Company has capital lease agreements for computer equipment and
furniture and fixtures. At December 31, 1997 and March 31, 1998 property and
equipment includes $695,623 of assets recorded under capital leases and
accumulated depreciation of $57,543 and $92,326, respectively.
The future minimum lease payments under these capital lease agreements are
as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998........................................................ $343,762
1999........................................................ 323,763
2000........................................................ 241,835
2001........................................................ 38,099
--------
Total............................................. 947,459
Less amount representing interest........................... 101,151
--------
Present value of minimum lease payments..................... 846,308
Less amount representing current portion.................... 288,952
--------
Long-term portion......................................... $557,356
========
Deferred Compensation
On September 11, 1997 the Company's Board of Directors, recognizing SMS
Geotrac, Inc's president's nonbinding commitment which originated prior to the
acquisition of SMS Geotrac, approved and granted bonuses to certain current and
former employees of SMS Geotrac. Such bonuses were principally related to prior
services rendered by these employees and resulted in additional compensation of
$732,795 which is separately disclosed in the statement of operations as
deferred compensation (a non-recurring item) of which approximately $362,000 and
371,000 relates to cost of revenues and selling, general and administrative
expenses, respectively. These amounts are to be paid to the individuals on or
before December 31, 1998.
Common Stock Awards
Prior to and at the time of the acquisition of SMS Geotrac, the president
of SMS Geotrac also had a nonbinding commitment to grant to certain former and
current employees options to purchase shares of Geotrac, Inc. (formerly
YoSystems) common stock held by the president and his wife, for prior employee
F-42
104
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
services rendered. On May 12, 1998, the president awarded 46.45 shares of his
and his wife's common stock to these individuals. In conjunction with the
agreement and plan of merger with IMSG, which is expected to close by June 26,
1998, the Company is to acquire the common stock held by these individuals for
approximately $728,069. On May 12, 1998, the Company recorded additional
compensation expense (non-recurring item) of $728,069 and an increase to
contributed capital of $728,069.
Risks and Uncertainties
The nature of the Company's business is such that it is dependent upon
various factors such as general economic conditions and weather patterns that
are beyond its control. The demand for flood zone determinations by lenders and
their customers is directly related to the affordability of mortgage financing
and refinancing. Current interest rates are relatively low and therefore
conducive to a higher volume of mortgage lending and flood zone determinations.
An increase in interest rates would have a negative impact on mortgage lending
and consequently on the level of flood zone determinations performed.
Fluctuations in interest rates will likely produce fluctuations in the Company's
operating results. Likewise, natural disasters such as hurricanes, tornadoes,
and floods, all or which are unpredictable, directly impact the demand for the
Company's flood zone determination business.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following components:
THREE
YEAR MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------- ----------
Federal:
Current................................................... $ 461,000 $434,000
Deferred (benefit)........................................ (249,000) (5,000)
--------- --------
212,000 429,000
--------- --------
State:
Current................................................... 126,000 125,000
Deferred (benefit)........................................ (66,000) --
--------- --------
60,000 125,000
--------- --------
Total............................................. $ 272,000 $554,000
========= ========
A reconciliation of the federal statutory income tax rate to the Company's
effective income tax rate is as follows:
THREE
YEAR MONTHS
ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------- ----------
Federal income taxes, at statutory rates.................... $ 807,000 $472,000
S corporation earnings not subject to tax................... (575,000) --
State taxes, net............................................ 40,000 82,000
--------- --------
$ 272,000 $554,000
========= ========
F-43
105
GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. INCOME TAXES -- (CONTINUED)
Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the corresponding amounts used for income tax purposes.
Significant components of the Company's deferred tax assets are as follows:
DECEMBER 31, MARCH 31,
1997 1998
------------ ---------
Current deferred tax assets (liabilities):
Vacation accrual.......................................... $(18,000) $ (9,000)
Deferred compensation..................................... 303,000 303,000
Allowance for doubtful accounts........................... 5,000 18,000
-------- --------
Net current deferred tax asset............................ $290,000 $312,000
======== ========
Long-term deferred tax asset:
Depreciation and amortization............................. $ 25,000 $ 8,000
======== ========
NOTE 9. EMPLOYEE BENEFIT PLAN
From August 1, 1997 through December 31, 1997, the Company participated in
a 401(k) plan established by the former Parent of SMS Geotrac, Inc. Eligible
full-time employees of the Company made voluntary contributions to the plan. No
Company contributions were made to the plan. Effective January 1, 1998 the
Company established its own 401(k) plan. Any contributions to the new plan by
the Company are discretionary.
NOTE 10. SUBSEQUENT EVENT
On May 12, 1998, the Company, its shareholders (including BHDS), IMSG and
IMSG's parent, Bankers Insurance Group, Inc., executed a definitive agreement
whereby all the shares of common stock held by the Company's president, his wife
and by certain employees representing 51% of the outstanding shares, will be
acquired by IMSG and BHDS for total consideration of $7,994,250 consisting of:
Shares of IMSG Common Stock................................. $5,766,181
Promissory note............................................. 1,500,000
Cash........................................................ 728,069
----------
$7,994,250
==========
Upon the completion of the transaction, the Company will merge into BHDS,
with BHDS being the surviving corporation. The cross-license agreement with BHDS
(See Note 3) will be terminated, along with any amounts due to or from which are
expected to be insignificant.
F-44
106
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
SMS Geotrac, Inc.
We have audited the accompanying statements of income, shareholder's equity
and cash flows of SMS Geotrac, Inc. for each of the two years in the period
ended June 30, 1997 and the one month period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations its and cash flows of
SMS Geotrac, Inc. for each of the two years in the period ended June 30, 1997
and the one month period ended July 31, 1997, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Tampa, Florida
May 29, 1998
F-45
107
SMS GEOTRAC, INC.
STATEMENTS OF INCOME
ONE MONTH
YEAR ENDED JUNE 30, ENDED
------------------------- JULY 31,
1996 1997 1997
----------- ----------- ----------
REVENUES
Flood zone determination services...................... $12,286,525 $12,313,735 $1,197,314
Other revenues......................................... 203,301 207,772 12,365
----------- ----------- ----------
Total revenues................................. 12,489,826 12,521,507 1,209,679
----------- ----------- ----------
EXPENSES
Cost of revenues....................................... 6,219,142 5,913,800 529,597
Selling, general and administrative expense............ 3,079,377 2,839,433 227,286
Depreciation and amortization.......................... 688,678 1,330,876 103,560
----------- ----------- ----------
Total expenses................................. 9,987,197 10,084,109 860,443
----------- ----------- ----------
OPERATING INCOME......................................... 2,502,629 2,437,398 349,236
INTEREST EXPENSE......................................... (81,495) (78,850) (8,215)
----------- ----------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 2,421,134 2,358,548 341,021
PROVISION FOR INCOME TAXES............................... 1,046,900 1,079,100 148,000
----------- ----------- ----------
NET INCOME............................................... $ 1,374,234 $ 1,279,448 $ 193,021
=========== =========== ==========
The accompanying notes are an integral part of these statements.
F-46
108
SMS GEOTRAC, INC.
STATEMENT OF SHAREHOLDER'S EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- ----------
Balance at July 1, 1996............................ $1 $1,464,047 $ 326,215 $1,790,263
Capital contribution from parent................. -- 932,222 -- 932,222
Net income....................................... -- -- 1,374,234 1,374,234
-- ---------- ---------- ----------
Balance at June 30, 1996........................... 1 2,396,269 1,700,449 4,096,719
Capital contributions from parent................ -- 2,111,140 -- 2,111,140
Net income....................................... -- -- 1,279,448 1,279,448
-- ---------- ---------- ----------
Balance at June 30, 1997........................... 1 4,507,409 2,979,897 7,487,307
Capital contribution from parent................. -- 1,700,000 -- 1,700,000
Net income....................................... -- -- 193,021 193,021
-- ---------- ---------- ----------
Balance at July 31, 1997........................... $1 $6,207,409 $3,172,918 $9,380,328
== ========== ========== ==========
The accompanying notes are an integral part of this statement.
F-47
109
SMS GEOTRAC, INC.
STATEMENTS OF CASH FLOWS
ONE MONTH
YEAR ENDED JUNE 30, ENDED
------------------------- JULY 31,
1996 1997 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 1,374,234 $ 1,279,448 $ 193,021
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 688,678 1,330,876 103,560
Deferred federal income tax (credit) expense..... (240,400) 53,100 8,000
Income taxes due to Parent....................... 1,304,440 1,106,539 139,988
Gain on sale of property and equipment........... (1,252) -- --
Provision for bad debts.......................... 385,908 -- --
Changes in assets and liabilities:
Accounts receivable............................ (1,204,784) 517,209 49,514
Prepaid expenses and other assets.............. (99,933) (38,993) (38,223)
Accounts payable and other liabilities......... 241,530 (459,510) (11,793)
Deferred revenue............................... 231,261 157,880 (1,490)
----------- ----------- -----------
Net cash provided by operating activities... 2,679,682 3,946,549 442,577
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment deposit returned............. -- -- 130,670
Purchases of property and equipment................. (1,679,980) (1,457,719) (60,941)
Proceeds from disposal of property and equipment.... 12,400 -- --
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................ (1,667,580) (1,457,719) 69,729
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advance from officer................................ -- -- 200,000
Advance to related party............................ -- -- (796,597)
Net repayments on revolving line of credit.......... (283,884) -- --
Repayment of capital lease obligations.............. (146,788) (291,219) (22,433)
Advances to parent.................................. -- (905,780) (1,850,000)
Capital contribution from parent.................... -- 500,000 --
----------- ----------- -----------
Net cash used in financing activities....... (430,672) (696,999) (2,469,030)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................................... 581,430 1,791,831 (1,956,724)
CASH AND CASH EQUIVALENTS, beginning of period........ 170,406 751,836 2,543,667
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period.............. $ 751,836 $ 2,543,667 $ 586,943
=========== =========== ===========
SUPPLEMENT DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid for interest.............................. $ 81,495 $ 78,850 $ 8,215
=========== =========== ===========
Supplemental disclosures of non-cash investing and financing activities:
During the year ended June 30, 1996 and on July 31, 1997, the Company's
parent made a payment of $932,222 and $1,700,000 to the Company's former owner
in conjunction with the August 1, 1994 purchase of the Company. The amounts were
recorded as an increase to goodwill and an additional capital contribution to
the Company.
During the year ended June 30, 1997, the Company and its parent agreed to
treat $1,611,140 of intercompany obligations as a capital contribution to the
Company.
During the year ended June 30, 1997, the Company entered into capital lease
agreements relating to equipment with a cost of $427,453.
The accompanying notes are an integral part of these statements.
F-48
110
SMS GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND ORGANIZATION
SMS Geotrac, Inc. (the "Company"), headquartered in Norwalk, Ohio, is
principally a provider of flood zone determination services for insurance
companies and financial institutions located throughout the United States. The
Company is a wholly-owned subsidiary of Strategic Mortgage Services, Inc.
(Parent).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit
The Company provides professional flood zone determination services for
financial services companies and individuals throughout the United States.
Credit is extended to customers (primarily financed services companies) based on
management's assessment of their credit worthiness. Customer deposits are
required in certain instances.
Depreciation and Amortization of Property and Equipment
Depreciation and amortization is computed using accelerated methods for
financial reporting and federal income tax purposes, over the estimated useful
lives of the assets which range from 3-5 years for computer equipment and 5-7
years for furniture and fixtures, transportation equipment and maps.
Depreciation and amortization for the years ended June 30, 1996 and 1997 were
$594,797 and $1,226,820, respectively and $94,889 for the one month period ended
July 31, 1997.
Goodwill
Goodwill is being amortized using the straight-line method over fifteen
years. Amortization for the years ended June 30, 1996 and 1997 was $93,881 and
$104,056, respectively; and $8,671 for the one month period ended July 31, 1997.
Revenues
Revenue earned on flood zone determination services is recognized when the
determination is performed. For an additional fee, the Company provides life of
loan monitoring of flood zone determinations whereby the Company notifies its
customers of changes in previously issued flood zone determinations. The
estimated revenues associated with this future obligation to monitor changes and
notify customers are deferred and amortized using the straight-line method over
the expected life of the loan, approximately 7 years.
Income Taxes
Income taxes are accounted for on the asset and liability method. Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as
F-49
111
SMS GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in deferred tax assets
and liabilities.
New Pronouncements Not Yet Adopted
In June 1997, the FASB issued SFAS No. 130, "Reporting of Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and display of
comprehensive income and its components (revenues, expense, gains and losses) in
a full set of financial statements as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. Earlier application is permitted.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company does not anticipate that adoption
of SFAS 130 will have material effect on the financial statements.
Segments and Related Information
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. This statement also establishes standards for
related disclosures about products and services geographic areas, and major
customers. This statement requires the reporting of financial and descriptive
information about an enterprise's reportable operating segments. The Company
only has one operating segment and one principal product or service (See Note
1). All the Company's operations are located within the United States and no
individual customer represents more than 10% of total revenues for all periods
presented herein.
NOTE 3. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and equipment under operating leases with
unexpired terms ranging from a month to month basis to seven years. Rent expense
under all operating leases was approximately $296,000 and $314,000 for the years
ended June 30, 1996 and 1997, respectively and $27,000 for the one month period
ended July 31, 1997. The Company leases one of its operating facilities from a
Company controlled by the President of the Company. This lease requires monthly
rental payments of $8,717 through August 1998.
The future minimum lease payments under these operating lease agreements
are as follows:
YEAR ENDED JUNE 30,
- -------------------
1998........................................................ $ 419,400
1999........................................................ 410,159
2000........................................................ 316,359
2001........................................................ 291,600
2002........................................................ 219,399
Thereafter.................................................. 90,280
----------
$1,747,197
==========
F-50
112
SMS GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Capital Leases
The Company has capital lease agreements for computer equipment and
furniture and fixtures. The future minimum lease payments under these capital
lease agreements are as follows:
YEAR ENDED JUNE 30,
- -------------------
1998........................................................ $ 356,670
1999........................................................ 316,670
2000........................................................ 316,670
2001........................................................ 105,460
2002........................................................ 4,412
----------
Total............................................. 1,099,882
Less amount representing interest........................... 130,546
----------
Present value of minimum lease payments..................... 969,336
Less amount representing current portion.................... 304,950
----------
Long-term portion........................................... $ 664,386
==========
Risks and Uncertainties
The nature of the Company's business is such that it is dependent upon
various factors such as general economic conditions and weather patterns that
are beyond its control. The demand for flood zone determinations by lenders and
their customers is directly related to the affordability of mortgage financing
and refinancing. Current interest rates are relatively low and therefore
conducive to a higher volume of mortgage lending and flood zone determinations.
An increase in interest rates would have a negative impact on mortgage lending
and consequently on the level of flood zone determinations performed.
Fluctuations in interest rates will likely produce fluctuations in the Company's
operating results. Likewise, natural disasters such as hurricanes, tornadoes,
and floods, all or which are unpredictable, directly impact the demand for the
Company's flood zone determination business.
NOTE 4. INCOME TAXES
The Company's results of operations are included in the consolidated
federal income tax return of its Parent. Income taxes are determined and
recorded in the amount that would have been due and payable had the Company
filed a separate income tax return on an accrual basis. Federal and state income
taxes payable is included in the amount due to Parent. The provision for income
taxes consists of the following components:
ONE MONTH
YEAR ENDED JUNE 30, ENDED
----------------------- JULY 31,
1996 1997 1997
---------- ---------- ---------
Federal:
Current.......................................... $1,016,500 $ 793,000 $111,000
Deferred......................................... (164,700) 37,100 6,000
---------- ---------- --------
851,800 830,100 117,000
---------- ---------- --------
State:
Current.......................................... 270,800 233,000 29,000
Deferred......................................... (75,700) 16,000 2,000
---------- ---------- --------
195,100 249,000 31,000
---------- ---------- --------
Totals................................... $1,046,900 $1,079,100 $148,000
========== ========== ========
F-51
113
SMS GEOTRAC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. INCOME TAXES -- (CONTINUED)
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
ONE MONTH
YEAR ENDED JUNE 30, ENDED
----------------------- JULY 31,
1996 1997 1997
---------- ---------- ---------
Federal income taxes, at statutory rates........... $ 823,000 $ 802,000 $116,000
State taxes........................................ 195,100 249,000 31,000
Other.............................................. 28,800 28,000 1,000
---------- ---------- --------
$1,046,900 $1,079,000 $148,000
========== ========== ========
NOTE 5. EMPLOYEE BENEFIT PLAN
The Company participates in a 401(k) plan established by its Parent.
Eligible full-time employees of the Company may make voluntary contributions to
the plan. Matching Company contributions to the plan may be made at the
discretion of the Board of Directors. No Company contributions were made during
the years ended June 30, 1996 and 1997 or for the one month ended July 31, 1997.
NOTE 6. RELATED PARTY TRANSACTIONS
During the year ended June 30, 1996 and on July 30, 1997, the Company's
parent made a payment of $932,222 and $1,700,000 to the Company's former owner
(a company controlled by the President of the Company) in conjunction with the
August 1, 1994 purchase of the Company. The amounts were recorded as an increase
to goodwill and an additional capital contribution to the Company.
During the year ended June 30, 1997, the Company and its Parent agreed to
treat all outstanding amounts owed to the Parent, $1,611,140, as an additional
capital contribution. In addition, the Parent contributed $500,000 to the
Company.
During the one month period ended July 31, 1997, the Company advanced
$796,596 to YoSystems, Inc, a company owned by the Company's President.
NOTE 7. SUBSEQUENT EVENT
On July 31, 1997 all of the outstanding stock of the Company was acquired
by YoSystems, Inc., which is owned by the Company's President, for $15 million.
Concurrent with the acquisition of the Company, YoSystems, Inc. sold 49% of its
common stock to Bankers Hazard Determination Services, Inc.
F-52
114
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 1
Risk Factors.......................... 5
Geotrac Acquisition................... 11
Use of Proceeds....................... 11
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Consolidated Financial Data
of the Company...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Company........ 17
Selected Consolidated Financial Data
of Geotrac.......................... 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of Geotrac............ 24
Business.............................. 28
Management............................ 40
Principal and Selling Shareholders.... 46
Certain Transactions.................. 46
Description of Capital Stock.......... 50
Shares Eligible for Future Sale....... 52
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Available Information................. 56
Index to Financial Statements......... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
SHARES
[IMSG LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES & ASSOCIATES, INC.
LEHMAN BROTHERS
FURMAN SELZ
, 1998
======================================================
115
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission filing fee............... $23,600
NASD filing fee............................................. 8,500
Nasdaq listing fee..........................................
Transfer agent expenses and fees............................
Printing and engraving......................................
Accountants' fees and expenses..............................
Consultants' fees and expenses..............................
Legal fees and expenses.....................................
Miscellaneous...............................................
-------
Total............................................. $
=======
- ---------------
* All of the above fees, costs and expenses above will be paid by the Company.
Other than the SEC filing fee and NASD filing fee, all fees and expenses are
estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act (the "Florida Act") permits a Florida
corporation to indemnify a present or former director or officer of the
corporation (and certain other persons serving at the request of the corporation
in related capacities) for liabilities, including legal expenses, arising by
reason of service in such capacity if such person shall have acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and in any criminal proceeding if such person had
no reasonable cause to believe his conduct was unlawful. However, in the case of
actions brought by or in the right of the corporation, no indemnification may be
made with respect to any matter as to which such director or officer shall have
been adjudged liable, except in certain limited circumstances.
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws provide that the Company shall indemnify directors and
executive officers to the fullest extent now or hereafter permitted by the
Florida Act. In addition, the Company may enter into Indemnification Agreements
with its directors and executive officers in which the Registrant has agreed to
indemnify such persons to the fullest extent now or hereafter permitted by the
Florida Act.
The indemnification provided by the Florida Business Corporation Act and
the Company's Amended and Restated Bylaws is not exclusive of any other rights
to which a director or officer may be entitled. The general effect of the
foregoing provisions may be to reduce the circumstances which an officer or
director may be required to bear the economic burden of the foregoing
liabilities and expense.
The Company may obtain a liability insurance policy for its directors and
officers as permitted by the Florida Act, which policy may extend to, among
other things, liability arising under the Securities Act of 1933, as amended
(the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company is a holding company that was incorporated in the State of
Florida on December 26, 1996 by its parent, Bankers Insurance Group, Inc.
("BIG"). On or about December 30, 1996, BIG contributed two of its wholly-owned
operating subsidiaries, Insurance Management Solutions, Inc. and Bankers Hazard
Determination Services, Inc., in exchange for 500 shares of the Company's Common
Stock. The issuance of shares of the Company's Common Stock pursuant to this
transaction is claimed to be exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
II-1
116
Effective May 8, 1998, the Company declared a stock dividend of 40,000
shares of Common Stock for each share of Common Stock then outstanding,
resulting in an increase in the outstanding capital stock of the Company to
20,000,000 shares of Common Stock.
On July 31, 1997, the Company acquired a 49% equity interest in Geotrac,
Inc., an Ohio corporation ("Old Geotrac"), for $6.75 million in cash. On June
, 1998, the Company acquired the remaining 51% equity interest in Old Geotrac
in exchange for (i) shares of Common Stock (assuming an initial public
offering price of $ per share), (ii) a promissory note in the principal
amount of $1.5 million, and (iii) cash in the amount of $723,069. The
transaction was effected pursuant to the merger of Old Geotrac into a
wholly-owned subsidiary of the Company, with the surviving entity being known as
"Geotrac, Inc." The issuance of shares of the Company's Common Stock pursuant to
this merger is claimed to be exempt from registration under the Securities Act
pursuant to Section 4(2) thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
1.1 -- Proposed Form of Underwriting Agreement.*
3.1 -- Amended and Restated Articles of Incorporation of Insurance
Management Solutions Group, Inc.
3.2 -- Amended and Restated Bylaws of Insurance Management
Solutions Group, Inc.
4.1 -- Specimen certificate for the Common Stock of Insurance
Management Solutions Group, Inc.*
5.1 -- Opinion of Foley & Lardner.*
10.1 -- Form of Employment Agreement between certain executive
officers and Insurance Management Solutions Group, Inc.
10.2 -- Insurance Management Solutions Group, Inc. Long Term
Incentive Plan.
10.3 -- Insurance Management Solutions Group, Inc. Non-Employee
Directors' Stock Option Plan.
10.4 -- Snell Arcade Building Lease, dated May 15, 1996, between
Snell Arcade Limited Company and Bankers Insurance Group,
Inc., as revised and assigned to Insurance Management
Solutions Group, Inc., effective January 1, 1998.
10.5 -- Bankers Building -- 5th Street North Lease Agreement, dated
January 1, 1997, between Bankers Insurance Group, Inc. and
Insurance Management Solutions Group, Inc.
10.6 -- Bankers Financial Center Lease Agreement, dated January 1,
1997, between Bankers Insurance Company and Insurance
Management Solutions Group, Inc.
10.7 -- Lease, dated September 2, 1994, between DanYo LLC (as
successor to Sandan) and SMS Geotrac, Inc.
10.8 -- Indenture of Lease, dated September 23, 1994, between
Southview Business Center, Ltd., an Ohio limited
partnership, and SMS Geotrac, Inc., including Addendum I,
dated March 20, 1995, and Addendum II, dated December 8,
1995.
10.9 -- Master Equipment Lease Agreement, dated May 11, 1995, and
executed on May 15, 1995, between National City Leasing
Corporation and SMS Geotrac, Inc.
10.10 -- Term Lease Master Agreement, dated June 30, 1995, between
IBM Credit Corporation and SMS Geotrac, Inc.
10.11 -- Employee Leasing Agreement, dated May 19, 1998, between
Bankers Insurance Company and Insurance Management Solutions
Group, Inc.
10.12 -- Administration Services Agreement, dated January 1, 1998,
between Bankers Insurance Group, Inc. and Insurance
Management Solutions Group, Inc.
II-2
117
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.13 -- Service Agreement, dated January 1, 1998, between Insurance
Management Solutions, Inc. and Bankers Insurance Company.
10.14 -- Service Agreement dated January 1, 1998 between Insurance
Management Solutions, Inc. and Bankers Security Insurance
Company.
10.15 -- Service Agreement dated January 1, 1998 between Insurance
Management Solutions, Inc. and First Community Insurance
Company.
10.16 -- Vendor Flood Insurance Agreement, dated January 1, 1996,
between Insurance Management Solutions, Inc. (as successor
to Insurance Management Information Services, Inc.) and
Mobile USA Insurance Company, Inc.
10.17 -- Vendor Flood Insurance Agreement, dated November 10, 1995,
between AAA Auto Club South Insurance Company and Insurance
Management Information Services, Inc.
10.18 -- Flood Insurance Program Services Agreement by and among
Insurance Management Information Services, Inc., American
Alternative Insurance Corporation, and Corporate Insurance
Agency Services.
10.19 -- Loan and Security Agreement, dated July 31, 1997, between
Huntington National Bank, YoSystems, Inc. and SMS Geotrac,
Inc.
10.20 -- Pledge and Security Agreement, dated May 8, 1998, by
Insurance Management Solutions Group, Inc. in favor of
SouthTrust Bank, N.A.
10.21 -- Agreement and Plan of Merger, dated May 12, 1998, by and
among Geotrac, Inc., Insurance Management Solutions, Inc.,
Daniel J. and Sandra White, Bankers Insurance Group, Inc.
and Bankers Hazard Determination Services, Inc.
10.22 -- Employment Agreement, dated , 1998, between
Geotrac, Inc. and Daniel J. White.
10.23 -- Term Lease Master Agreement, dated August 6, 1996, between
IBM Credit Corporation and Bankers Insurance Company,
assigned by Bankers Insurance Company to Insurance
Management Solutions, Inc., effective April 1, 1998,
pursuant to Sales and Assignment Agreement, dated May 6,
1998.
10.24 -- Sales and Assignment Agreement, dated May 6, 1998, by and
between Insurance Management Solutions Group, Inc.,
Insurance Management Solutions, Inc., Bankers Insurance
Group, Inc., Bankers Insurance Services, Inc., Bankers Life
Insurance Company, Southern Rental & Leasing Corporation,
Bankers Insurance Company, and Bankers Security Insurance
Company.
10.25 -- Software Maintenance and Enhancement Agreement, dated
January 7, 1997 between Systems Integration and Imaging
Technologies Incorporated and Insurance Management
Information Services, Inc.
10.26 -- Corporate Governance Agreement, dated , 1998,
between Geotrac, Inc., Daniel J. White and Insurance
Management Solutions Group, Inc.
10.27 -- Tax Indemnity Agreement dated , 1998 between
Bankers Insurance Group, Inc., Insurance Management
Solutions Group, Inc. and Daniel J. and Sandra White.
10.28 -- Flood Insurance Agreement, dated January 6, 1998, between
First Community Insurance Company and Keystone Insurance
Company.
10.29 -- Marketing Agreement, dated November 14, 1997, between First
Community Insurance Company and Nobel Insurance Company.
10.30 -- Flood Insurance Agreement, dated February 11, 1998, between
First Community Insurance Company and Horace Mann Insurance
Company.
10.31 -- Promissory Note dated April 1, 1998, from Insurance
Management Solutions, Inc. to Bankers Insurance Company in
the principal amount of $2,353,424.42.
II-3
118
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.32 -- Promissory Note dated April 1, 1998, from Insurance
Management Solutions, Inc. to Southern Rental & Leasing
Corporation in the principal amount of $448,749.95.
10.33 -- Promissory Note dated May 8, 1998, from Insurance Management
Solutions Group, Inc. to Heritage Hotel Holding Company in
the principal amount of $6,750,000, as amended.
10.34 -- Note dated December 30, 1994, from Insurance Management
Solutions, Inc. (as successor to Bankers Data Center, Inc.)
to First of America Bank -- Florida F.S.B. in the principal
amount of $200,000.
10.35 -- Loan Agreement dated December 30, 1994, between First of
America Bank -- Florida F.S.B., Geotrac, Inc. (as successor
to National Flood Certification Services, Inc.), Southern
Rental & Leasing Corporation, Insurance Management
Solutions, Inc. (as successor to Bankers Data Center, Inc.)
and Bankers Insurance Group, Inc.
10.36 -- Security Agreement dated December 30, 1994, by Insurance
Management Solutions, Inc. (as successor to Bankers Data
Center, Inc.) in favor of First of America Bank -- Florida
F.S.B.
10.37 -- Note dated December 30, 1994, from Geotrac, Inc. (as
successor to National Flood Certification Services, Inc.) to
First of America Bank -- Florida F.S.B. in the principal
amount of $60,000.
10.38 -- Security Agreement dated December 30, 1994, by Geotrac, Inc.
(as successor to National Flood Certification Services,
Inc.) in favor of First of America Bank -- Florida F.S.B.
10.39 -- Note dated December 30, 1996, from Geotrac, Inc. (as
successor to Bankers Hazard Determination Services, Inc.) to
First of America Bank -- Florida F.S.B. in the principal
amount of $245,000.
10.40 -- Note dated December 30, 1996, from Insurance Management
Solutions, Inc. (as successor to Insurance Management
Information Services, Inc.) to First of American
Bank -- Florida FSB in the principal amount of $809,000.
10.41 -- Loan Agreement dated December 30, 1996, between First of
America Bank -- Florida F.S.B., Geotrac, Inc. (as successor
to Bankers Hazard Determination Services, Inc.), Bankers
Insurance Group, Inc., Bankers Risk Management Services,
Inc., Bankers Underwriters, Inc., Insurance Management
Solutions, Inc. (as successor to Insurance Management
Information Services, Inc.), Southern Rental & Leasing
Corporation, Bankers Financial Corporation and Bankers
International Financial Corporation.
10.42 -- Security Agreement dated December 30, 1996, by Geotrac, Inc.
(as successor to Bankers Hazard Determination Services
Inc.), in favor of First of America Bank -- Florida F.S.B.
securing $245,000 loan.
10.43 -- Security Agreement dated December 30, 1996, by Insurance
Management Solutions, Inc. (as successor to Insurance
Management Information Services, Inc.) in favor of First of
America Bank -- Florida F.S.B. securing $809,000 loan.
10.44 -- Installment Note dated December 30, 1997, from Geotrac, Inc.
(as successor to Bankers Hazard Determination Services,
Inc.) to SouthTrust Bank, N.A. in the principal amount of
$184,000.
10.45 -- Cross-Collateralization and Cross-Default Agreement dated
December 30, 1997, in favor of SouthTrust Bank, N.A. by
Bankers Financial Corporation, Bankers Insurance Group,
Inc., Insurance Management Solutions, Inc. and Geotrac, Inc.
(as successor to Bankers Hazard Determination Services,
Inc.).
10.46 -- Security Agreement dated December 30, 1997, between Geotrac,
Inc. (as successor to Bankers Hazard Determination Services,
Inc.), and SouthTrust Bank, N.A.
10.47 -- Revolving Line of Credit Note dated December 27, 1993, from
Geotrac, Inc. (as successor to National Flood Certification
Services, Inc.) to Marine Bank, in the amount of $600,000.
10.48 -- Security Agreement dated December 27, 1993, between Geotrac,
Inc. (as successor to National Flood Certification Services,
Inc.) and Marine Bank.
II-4
119
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.49 -- Installment Note dated December, 1997, from Insurance
Management Solutions, Inc. to SouthTrust Bank, N.A. in the
principal amount of $2,131,000.
10.50 -- Promissory Note dated December 30, 1997, from Insurance
Management Solutions, Inc. to SouthTrust Bank, N.A. in the
principal amount of $500,000.
10.51 -- Security Agreement dated December 30, 1997, between
Insurance Management Solutions Group, Inc. and SouthTrust
Bank, N.A.
10.52 -- Flood Compliance Service Agreement dated November 1, 1996,
between Geotrac, Inc. (as successor to SMS Geotrac) and
Mortgage Corporation of America.
10.53 -- Flood Compliance Service Agreement dated March 1, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
CitFed Mortgage Corporation of America.
10.54 -- Flood Compliance Service Agreement dated March 1, 1998,
between Geotrac, Inc. (as successor to SMS Geotrac), ABN
AMRO North American and certain of its affiliates.
10.55 -- Flood Compliance Service Agreement dated April 12, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
Third Federal Savings.
10.56 -- Flood Compliance Service Agreement dated April 9, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
MidAm, Inc.
10.57 -- Flood Compliance Service Agreement dated December 28, 1995,
between Geotrac, Inc. and Crestar Bank.
10.58 -- Flood Compliance Service Agreement dated April 1, 1996,
between Geotrac, Inc. (as successor to SMS Geotrac) and
ReliaStar Mortgage Corporation.
10.59 -- Flood Zone Determination Agreement dated March 25, 1993,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and AIG Consultants, Inc.
10.60 -- Flood Zone Determination Agreement dated December 28, 1995,
between Geotrac, Inc. (as successor to Bankers Hazard
Determination Services, Inc.) and SouthTrust Corporation, as
amended on June 3, 1997.
10.61 -- Flood Zone Determination Agreement dated July 14, 1994,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and SunBank, N.A.
10.62 -- Flood Zone Determination Agreement dated November 8, 1993,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and Royal Indemnity Company.
10.63 -- Flood Insurance Agreement, dated February 17, 1995, between
First Community Insurance Company and Armed Forces Insurance
Exchange, as amended.
10.64 -- Flood Insurance Agreement, dated November 17, 1995, between
First Community Insurance Company and Amica Mutual Insurance
Company, as amended.
10.65 -- Non-Qualified Stock Option Plan.
10.66 -- Funding Agreement, dated June 19, 1998, by and between
Bankers Insurance Group, Inc. and Insurance Management
Solutions Group, Inc.
10.67 -- Assignment of Registered Service Mark ("Floodwriter"), dated
May 7, 1998, from Bankers Insurance Company to Insurance
Management Solutions, Inc.
10.68 -- Assignment of Registered Service Mark ("Undercurrents"),
dated May 7, 1998, from Bankers Insurance Company to
Insurance Management Solutions, Inc.
10.69 -- Registration Rights Agreement, dated , 1998,
between Information Management Solutions Group, Inc. and
Daniel J. and Sandra White
10.70 -- Software License Agreement, effective January 1, 1998,
between Insurance Management Solutions, Inc., Bankers
Insurance Group, Inc. and Bankers Insurance Company.*
21.1 -- List of subsidiaries of Insurance Management Solutions
Group, Inc.
II-5
120
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
23.1 -- Consent of Foley & Lardner (included in Exhibit (5.1)).
23.2 -- Consent of Grant Thornton LLP.
23.3 -- Consent of Grant Thornton LLP.
23.4 -- Consent of Grant Thornton LLP.
24.1 -- Power of Attorney relating to subsequent amendments
(included on the signature page of this Registration
Statement).
27.1 -- Financial Data Schedule (filed for SEC purposes only).
27.2 -- Financial Data Schedule (filed for SEC purposes only).
27.3 -- Financial Data Schedule (filed for SEC purposes only).
27.4 -- Financial Data Schedule (filed for SEC purposes only).
27.5 -- Financial Data Schedule (filed for SEC purposes only).
27.6 -- Financial Data Schedule (filed for SEC purposes only).
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of St. Petersburg, and State
of Florida, on this 25th day of June, 1998.
INSURANCE MANAGEMENT SOLUTIONS GROUP,
INC.
By: /s/ DAVID K. MEEHAN
------------------------------------
David K. Meehan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints David K. Meehan, Jeffrey S. Bragg and Kelly K. King,
and each of them individually, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, (as well
as any registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933) and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID K. MEEHAN Chairman of the Board, Chief June 25, 1998
- ----------------------------------------------------- Executive Officer and Director
David K. Meehan (Principal Executive Officer)
/s/ KELLY K. KING Vice President, Chief Financial June 25, 1998
- ----------------------------------------------------- Officer and Treasurer
Kelly K. King
/s/ JEFFREY S. BRAGG Director June 25, 1998
- -----------------------------------------------------
Jeffrey S. Bragg
/s/ ROBERT M. MENKE Director June 25, 1998
- -----------------------------------------------------
Robert M. Menke
/s/ ROBERT G. MENKE Director June 25, 1998
- -----------------------------------------------------
Robert G. Menke
/s/ JOHN A. GRANT, JR. Director June 25, 1998
- -----------------------------------------------------
John A. Grant, Jr.
II-7
122
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM D. HUSSEY Director June 25, 1998
- -----------------------------------------------------
William D. Hussey
/s/ E. RAY SOLOMON Director June 25, 1998
- -----------------------------------------------------
E. Ray Solomon
/s/ DANIEL J. WHITE Director June 25, 1998
- -----------------------------------------------------
Daniel J. White
II-8
123
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
1.1 -- Proposed Form of Underwriting Agreement.*
3.1 -- Amended and Restated Articles of Incorporation of Insurance
Management Solutions Group, Inc.
3.2 -- Amended and Restated Bylaws of Insurance Management
Solutions Group, Inc.
4.1 -- Specimen certificate for the Common Stock of Insurance
Management Solutions Group, Inc.*
5.1 -- Opinion of Foley & Lardner.*
10.1 -- Form of Employment Agreement between certain executive
officers and Insurance Management Solutions Group, Inc.
10.2 -- Insurance Management Solutions Group, Inc. Long Term
Incentive Plan.
10.3 -- Insurance Management Solutions Group, Inc. Non-Employee
Directors' Stock Option Plan.
10.4 -- Snell Arcade Building Lease, dated May 15, 1996, between
Snell Arcade Limited Company and Bankers Insurance Group,
Inc., as revised and assigned to Insurance Management
Solutions Group, Inc., effective January 1, 1998.
10.5 -- Bankers Building -- 5th Street North Lease Agreement, dated
January 1, 1997, between Bankers Insurance Group, Inc. and
Insurance Management Solutions Group, Inc.
10.6 -- Bankers Financial Center Lease Agreement, dated January 1,
1997, between Bankers Insurance Company and Insurance
Management Solutions Group, Inc.
10.7 -- Lease, dated September 2, 1994, between DanYo LLC (as
successor to Sandan) and SMS Geotrac, Inc.
10.8 -- Indenture of Lease, dated September 23, 1994, between
Southview Business Center, Ltd., an Ohio limited
partnership, and SMS Geotrac, Inc., including Addendum I,
dated March 20, 1995, and Addendum II, dated December 8,
1995.
10.9 -- Master Equipment Lease Agreement, dated May 11, 1995 and
executed on May 15, 1995, between National City Leasing
Corporation and SMS Geotrac, Inc.
10.10 -- Term Lease Master Agreement, dated June 30, 1995, between
IBM Credit Corporation and SMS Geotrac, Inc.
10.11 -- Employee Leasing Agreement, dated May 19, 1998, between
Bankers Insurance Company and Insurance Management Solutions
Group, Inc.
10.12 -- Administration Services Agreement, dated January 1, 1998,
between Bankers Insurance Group, Inc. and Insurance
Management Solutions Group, Inc.
10.13 -- Service Agreement, dated January 1, 1998, between Insurance
Management Solutions, Inc. and Bankers Insurance Company.
10.14 -- Service Agreement dated January 1, 1998 between Insurance
Management Solutions, Inc. and Bankers Security Insurance
Company.
10.15 -- Service Agreement dated January 1, 1998 between Insurance
Management Solutions, Inc. and First Community Insurance
Company.
10.16 -- Vendor Flood Insurance Agreement, dated January 1, 1996,
between Insurance Management Solutions, Inc. (as successor
to Insurance Management Information Services, Inc.) and
Mobile USA Insurance Company, Inc.
10.17 -- Vendor Flood Insurance Agreement, dated November 10, 1995,
between AAA Auto Club South Insurance Company and Insurance
Management Services, Inc.
10.18 -- Flood Insurance Program Services Agreement by and among
Insurance Management Services, Inc., American Alternative
Insurance Corporation, and Corporate Insurance Company
Services.
10.19 -- Loan and Security Agreement, dated July 31, 1997, between
Huntington National Bank, YoSystems, Inc. and SMS Geotrac,
Inc.
124
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.20 -- Pledge and Security Agreement, dated May 8, 1998, by
Insurance Management Solutions Group, Inc. in favor of
SouthTrust Bank, N.A.
10.21 -- Agreement and Plan of Merger, dated May 12, 1998, by and
among Geotrac, Inc., Insurance Management Solutions, Inc.,
Daniel J. and Sandra White, Bankers Insurance Group, Inc.
and Bankers Hazard Determination Services, Inc.
10.22 -- Employment Agreement, dated , 1998, between
Geotrac, Inc. and Daniel J. White.
10.23 -- Term Lease Master Agreement, dated August 6, 1996, between
IBM Credit Corporation and Bankers Insurance Company,
assigned by Bankers Insurance Company to Insurance
Management Solutions, Inc., effective April 1, 1998,
pursuant to Sales and Assignment Agreement, dated May 6,
1998.
10.24 -- Sales and Assignment Agreement, dated May 6, 1998, by and
between Insurance Management Solutions Group, Inc.,
Insurance Management Solutions, Inc., Bankers Insurance
Group, Inc., Bankers Insurance Services, Inc., Bankers Life
Insurance Company, Southern Rental & Leasing Corporation,
Bankers Insurance Company, and Bankers Security Insurance
Company.
10.25 -- Software Maintenance and Enhancement Agreement, dated
January 7, 1997 between Systems Integration and Imaging
Technologies Incorporated and Insurance Management
Information Services, Inc.
10.26 -- Corporate Governance Agreement, dated , 1998,
between Geotrac, Inc., Daniel J. White and Insurance
Management Solutions Group, Inc.
10.27 -- Tax Indemnity Agreement dated , 1998 between
Bankers Insurance Group, Inc., Insurance Management
Solutions Group, Inc. and Daniel J. and Sandra White.
10.28 -- Flood Insurance Agreement, dated January 6, 1998, between
First Community Insurance Company and Keystone Insurance
Company.
10.29 -- Marketing Agreement, dated November 14, 1997, between First
Community Insurance Company and Nobel Insurance Company.
10.30 -- Flood Insurance Agreement, dated February 11, 1998, between
First Community Insurance Company and Horace Mann Insurance
Company.
10.31 -- Promissory Note dated April 1, 1998, from Insurance
Management Solutions, Inc. to Bankers Insurance Company in
the principal amount of $2,353,424.42.
10.32 -- Promissory Note dated April 1, 1998, from Insurance
Management Solutions, Inc. to Southern Rental & Leasing
Corporation in the principal amount of $448,749.95.
10.33 -- Promissory Note dated May 8, 1998, from Insurance Management
Solutions Group, Inc. to Heritage Hotel Holding Company in
the principal amount of $6,750,000, as amended.
10.34 -- Note dated December 30, 1994, from Insurance Management
Solutions, Inc. (as successor to Bankers Data Center, Inc.)
to First of America Bank -- Florida F.S.B. in the principal
amount of $200,000.
10.35 -- Loan Agreement dated December 30, 1994, between First of
America Bank -- Florida F.S.B., Geotrac, Inc. (as successor
to National Flood Certification Services, Inc.), Southern
Rental & Leasing Corporation, Insurance Management
Solutions, Inc. (as successor to Bankers Data Center, Inc.)
and Banker Insurance Group, Inc.
10.36 -- Security Agreement dated December 30, 1994, by Insurance
Management Solutions, Inc. (as successor to Bankers Data
Center, Inc.) in favor of First of America Bank -- Florida
F.S.B.
10.37 -- Note dated December 30, 1994, from Geotrac, Inc. (as
successor to National Flood Certification Services, Inc.) to
First of America Bank -- Florida F.S.B. in the principal
amount of $60,000.
10.38 -- Security Agreement dated December 30, 1994, by Geotrac, Inc.
(as successor to National Flood Certification Services,
Inc.) in favor of First of America Bank -- Florida F.S.B.
125
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.39 -- Note dated December 30, 1996, from Geotrac, Inc. (as
successor to Bankers Hazard Determination Services, Inc.) to
First of America Bank -- Florida F.S.B. in the principal
amount of $245,000.
10.40 -- Note dated December 30, 1996, from Insurance Management
Solutions, Inc. (as successor to Insurance Management
Information Services, Inc.) to First of American
Bank -- Florida FSB in the principal amount of $809,000.
10.41 -- Loan Agreement dated December 30, 1996, between First of
America Bank -- Florida F.S.B., Geotrac, Inc. (as successor
to Bankers Hazard Determination Services, Inc.), Bankers
Insurance Group, Inc., Bankers Risk Management Services,
Inc., Bankers Underwriters, Inc., Insurance Management
Solutions, Inc. (as successor to Insurance Management
Information Services, Inc.), Southern Rental & Leasing
Corporation, Bankers Financial Corporation and Bankers
International Financial Corporation.
10.42 -- Security Agreement dated December 30, 1996, by Geotrac, Inc.
(as successor to Bankers Hazard Determination Services,
Inc.) in favor of First of America Bank -- Florida F.S.B.
securing $245,000 loan.
10.43 -- Security Agreement dated December 30, 1996, by Insurance
Management Solutions, Inc. (as successor to Insurance
Management Information Services, Inc.) in favor of First of
America Bank -- Florida F.S.B. securing $809,000 loan.
10.44 -- Installment Note dated December 30, 1997, from Geotrac, Inc.
(as successor to Bankers Hazard Determination Services,
Inc.) to SouthTrust Bank, N.A. in the principal amount of
$184,000.
10.45 -- Cross-Collateralization and Cross-Default Agreement dated
December 30, 1997, in favor of SouthTrust Bank, N.A. by
Bankers Financial Corporation, Bankers Insurance Group,
Inc., Insurance Management Solutions, Inc. and Geotrac, Inc.
(as successor to Bankers Hazard Determination Services,
Inc.).
10.46 -- Security Agreement dated December 30, 1997, between Geotrac,
Inc. (as successor to Bankers Hazard Determination Services,
Inc.), and SouthTrust Bank, N.A.
10.47 -- Revolving Line of Credit Note dated December 27, 1993, from
Geotrac, Inc. (as successor to National Flood Certification
Services, Inc.) to Marine Bank, in the amount of $600,000.
10.48 -- Security Agreement dated December 27, 1993, between Geotrac,
Inc. (as successor to National Flood Certification Services,
Inc.) and Marine Bank.
10.49 -- Installment Note dated December, 1997, from Insurance
Management Solutions, Inc. to SouthTrust Bank, N.A. in the
principal amount of $2,131,000.
10.50 -- Promissory Note dated December 30, 1997, from Insurance
Management Solutions, Inc. to SouthTrust Bank, N.A. in the
principal amount of $500,000.
10.51 -- Security Agreement dated December 30, 1997, between
Insurance Management Solutions Group, Inc. and SouthTrust
Bank, N.A.
10.52 -- Flood Compliance Service Agreement dated November 1, 1996,
between Geotrac, Inc. (as successor to SMS Geotrac) and
Mortgage Corporation of America.
10.53 -- Flood Compliance Service Agreement dated March 1, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
CitFed Mortgage Corporation of America.
10.54 -- Flood Compliance Service Agreement dated March 1, 1998,
between Geotrac, Inc. (as successor to SMS Geotrac), ABN
AMRO North American and certain of its affiliates.
10.55 -- Flood Compliance Service Agreement dated April 12, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
Third Federal Savings.
10.56 -- Flood Compliance Service Agreement dated April 9, 1997,
between Geotrac, Inc. (as successor to SMS Geotrac) and
MidAm, Inc.
10.57 -- Flood Compliance Service Agreement dated December 28, 1995,
between Geotrac, Inc. and Crestar Bank.
126
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
10.58 -- Flood Compliance Service Agreement dated April 1, 1996,
between Geotrac, Inc. (as successor to SMS Geotrac) and
ReliaStar Mortgage Corporation.
10.59 -- Flood Zone Determination Agreement dated March 25, 1993,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and AIG Consultants, Inc.
10.60 -- Flood Zone Determination Agreement dated December 28, 1995,
between Geotrac, Inc. (as successor to Bankers Hazard
Determination Services, Inc.) and SouthTrust Corporation, as
amended on June 3, 1997.
10.61 -- Flood Zone Determination Agreement dated July 14, 1994,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and SunBank, N.A.
10.62 -- Flood Zone Determination Agreement dated November 8, 1993,
between Geotrac, Inc. (as successor to National Flood
Certification Services, Inc.) and Royal Indemnity Company.
10.63 -- Flood Insurance Agreement, dated February 17, 1995, between
First Community Insurance Company and Armed Forces Insurance
Exchange, as amended.
10.64 -- Flood Insurance Agreement, dated November 17, 1995, between
First Community Insurance Company and Amica Mutual Insurance
Company.
10.65 -- Non-Qualified Stock Option Plan.
10.66 -- Funding Agreement, dated June 19, 1998, by and between
Bankers Insurance Group, Inc. and Insurance Management
Solutions Group, Inc.
10.67 -- Assignment of Registered Service Mark ("Floodwriter"), dated
May 7, 1998, from Bankers Insurance Company to Insurance
Management Solutions, Inc.
10.68 -- Assignment of Registered Service Mark ("Undercurrents"),
dated May 7, 1998, from Bankers Insurance Company to
Insurance Management Solutions, Inc.
10.69 -- Registration Rights Agreement, dated , 1998,
between Information Management Solutions Group, Inc. and
Daniel J. and Sandra White
10.70 -- Software License Agreement, effective January 1, 1998,
between Insurance Management Solutions, Inc., Bankers
Insurance Group, Inc. and Bankers Insurance Company.*
21.1 -- List of subsidiaries of Insurance Management Solutions
Group, Inc.
23.1 -- Consent of Foley & Lardner (included in Exhibit (5.1)).
23.2 -- Consent of Grant Thornton LLP.
23.3 -- Consent of Grant Thornton LLP.
23.4 -- Consent of Grant Thornton LLP.
24.1 -- Power of Attorney relating to subsequent amendments
(included on the signature page of this Registration
Statement).
27.1 -- Financial Data Schedule (filed for SEC purposes only.)
27.2 -- Financial Data Schedule (filed for SEC purposes only).
27.3 -- Financial Data Schedule (filed for SEC purposes only).
27.4 -- Financial Data Schedule (filed for SEC purposes only).
27.5 -- Financial Data Schedule (filed for SEC purposes only).
27.6 -- Financial Data Schedule (filed for SEC purposes only).
- ---------------
* To be filed by amendment.