-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Khhm6jNu5B6BzFAdUrZlBXR4B5IQK4+llaZR05ipMCOSt13Q2mkkPkMHr9MLwoR+ ZID2Z6OVX8mGrvq+QB22tw== 0000950144-00-004250.txt : 20000331 0000950144-00-004250.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950144-00-004250 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSURANCE MANAGEMENT SOLUTIONS GROUP INC CENTRAL INDEX KEY: 0001063167 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 593422536 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-25273 FILM NUMBER: 587580 BUSINESS ADDRESS: STREET 1: 360 CENTRAL AVENUE CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 7278032040 MAIL ADDRESS: STREET 1: 360 CENTRAL AVENUE CITY: ST PETERSBURG STATE: FL ZIP: 33701 10-K405 1 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 000-25273 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-3422536 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 360 CENTRAL AVENUE 33701 ST. PETERSBURG, FLORIDA (Zip Code) (Address of registrant's principal executive offices)
(Registrant's telephone number, including area code): (727) 803-2040 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE Title of Each Class Indicate by check mark whether this registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] As of February 25, 2000, there were outstanding 12,800,261 shares of Common Stock. The aggregate market value of the Common Stock held by non-affiliates of the registrant based on the last sale price reported on the Nasdaq National Market as of February 25, 2000 was $31.3 million. DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENT FORM 10-K REFERENCE PROXY STATEMENT, DATED ON OR ABOUT APRIL 19, 2000..........PART III, ITEMS 10-13 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 16 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 17 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 18 Item 6. Selected Financial Data..................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 26 Item 8. Financial Statements and Supplementary Data................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 26 PART III Item 10. Directors and Executive Officers of the Registrant.......... 27 Item 11. Executive Compensation...................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 27 Item 13. Certain Relationships and Related Transactions.............. 27 PART IV Exhibits, Financial Statement Schedules and Reports on Form Item 14. 8-K......................................................... 27
The statements contained in this report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding the Company's expectations, hopes, beliefs, intentions, or strategies regarding the future. Forward-looking statements include statements regarding, among other things: (i) the potential loss of material customers; (ii) the failure to properly manage growth and successfully integrate acquired businesses; (iii) the Company's financing plans; (iv) trends affecting the Company's financial condition or results of operations; (v) the Company's growth and operating strategies; (vi) the ability to attract and retain qualified sales, information services and management personnel; (vii) the impact of competition from new and existing competitors; (viii) the financial condition of the Company's clients; (ix) potential increases in the Company's costs; (x) the declaration and payment of dividends; (xi) the potential for unfavorable interpretation of existing government regulations or new government legislation; (xii) the impact of general economic conditions and interest rate fluctuations on the demand for the Company's services, including flood zone determination services; (xiii) the outcome of certain litigation and administrative proceedings involving the Company's principal customer; (xiv) uncertainties regarding the market acceptance of the Company's new services; (xv) difficulties in developing new technological solutions for current and prospective customers; (xvi) difficulties in establishing positive name recognition in the market place; (xvii) changes in existing service agreements; (xviii) difficulties in obtaining new customers and retaining existing customers; (xix) difficulties in achieving expected expense reductions as a result of management initiatives; and (xx) difficulties in determining the potential success of new sales and marketing personnel. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. Among the factors that could cause actual results to differ materially are the factors detailed in Items 1 through 3 and 7 of this report and the risks discussed under the caption "Risk Factors' included in the Company's Registration Statement on Form S-1, as amended (Reg. No. 333-57747). Prospective investors should also consult the risks described from time to time in the Company's Reports on Form 10-Q, 8-K and 10-K and Annual Reports to Shareholders. i 3 PART I ITEM 1. BUSINESS GENERAL Insurance Management Solutions Group, Inc. (collectively with its subsidiaries, the "Company"), through its wholly-owned subsidiaries, Insurance Management Solutions, Inc., Geotrac of America, Inc. (formerly Bankers Hazard Determination Services, Inc.) ("Geotrac"), IMS Direct, Inc. and Colonial Claims Corporation, 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. Outsourcing Services. 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. During 1998 and 1999, the Company processed approximately 660,000 and 767,000 insurance policies, respectively, including approximately 540,000 and 616,000 flood insurance policies, respectively, making it a significant provider of flood insurance outsourcing services. The Company currently provides flood outsourcing services to approved write-your-own carriers including its affiliate, Bankers Insurance Group, Inc. (together with its subsidiaries, "BIG"), Farmers Insurance Group, 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 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 services, over the next several years. The Company is a 62.7% 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 1994 to 1999, BIG's premiums grew from $131 million to $316 million, representing annual growth rates of 22.5%, 46.8%, 10.4%, 13.8% and 7.3%, respectively, and a compound annual growth rate of 19.3%. BIG is the largest underwriter of flood insurance policies through independent agents (and the second largest overall) in the United States. BIG is also the Company's principal customer, accounting for approximately 56.5% of the Company's total revenues and 94.8% of the Company's outsourcing revenues in 1998 and approximately 58.1% of the Company's total revenues and 79.5% of the Company's outsourcing revenues in 1999. Effective January 7, 1999, the Company acquired Colonial Catastrophe Claims Corporation ("Colonial Claims"), a Florida corporation. Colonial Claims contracts with P&C insurance carriers to handle property and casualty claims on their behalf. Colonial Claims has assembled a large network of independent claims adjusters who respond to individually reported loss assignments from Colonial Claims and are compensated based upon a set claims fee schedule. Colonial Claims reviews and approves claims settlements, assures consistency and quality of settlement practices, and transmits claims information to the insurance carriers. The insurers, in turn, approve and remit claims payments to the insureds. During 1999, Colonial claims accounted for approximately $7.6 million of the Company's outsourcing revenues. Flood Zone Determination Operations. In July, 1997, the Company acquired a 49% equity interest in Geotrac, Inc., an unaffiliated Ohio corporation ("Old Geotrac"). In July, 1998, the Company acquired the remaining 51% equity interest in Geotrac, Inc. 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 of America, Inc.". Geotrac of America, Inc. ("Geotrac") is a leading provider of flood zone determinations. 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. 1 4 During 1998 and 1999, Geotrac processed approximately 1.6 million and 1.3 million flood zone determinations, respectively, for over 880 and 1,380 customers, respectively, including mortgage lenders and P&C insurance companies. 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. Geotrac 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 over 92% of U.S. households are in counties covered by its electronic database. OVERVIEW OF THE FEDERAL FLOOD INSURANCE PROGRAM AND FLOOD INSURANCE MARKET 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 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 when other payments are escrowed. Lenders who fail to comply with the 1994 Reform Act are subject to substantial monetary penalties. From 1994 through 1999, the U.S. flood insurance market has grown from $947 million to $1.7 billion in total annual flood premiums representing annual growth rates of 17.7%, 8.5%, 15.0%, 15.1% and 4.2%, respectively, and a compound annual growth rate of 12.0%. During that same period, the dollar amount of annual flood premiums administered by the Company has grown from $59 million in 1994 to $187 million in 1999, representing annual growth rates of 36.1%, 27.6%, 29.5%, 19.6% and 18.3%, respectively, and a compound annual growth rate of 26.0%. Currently, almost 19,000 communities participate in the Flood Program, and approximately 100 insurance companies are registered to offer WYO flood insurance. 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. According to A.M. Best, premium revenues in the P&C industry have increased by an average of 3.1% annually since 1994. 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, 1998, there were approximately 2,500 P&C insurance companies in the United States. These companies generated approximately $282 billion in annual P&C premium revenues in 1998, of which more than one-half related to personal lines automobile, homeowners and flood insurance business, the core markets serviced by the Company. The Company believes there are a significant number of P&C insurance companies for which outsourcing is a viable alternative to maintaining in-house processing capabilities. More specifically, 2 5 the Company believes it can offer many of these insurance companies the opportunity to reduce their processing costs by outsourcing such functions to the Company for a flat fee. 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. 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 a study conducted by International Data, the amount spent annually by insurers on outsourcing is expected to increase from $3.5 billion in 1998 to $4.9 billion by 2003. 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. - Development of Internet Based Solutions. The Company believes that, in order to compete in an Internet economy, P&C companies will need to aggressively pursue Internet solutions for their business -- either directly to consumers or through their insurance agency (direct or independent) distribution channel. According to The Conning Commentary, a principal need of independent insurance agents is an effective electronic interface with insurance carriers. Until recently, most insurance company web-sites provided information content only; however, the current trend is toward quoting, rating and issuing policies via the Internet. The Company believes that there are a substantial number of P&C companies that have targeted the Internet as their primary initiative in terms of providing a mechanism for their producers to quote, rate and issue insurance policies. The Company also believes many of these companies will need to outsource the development of an Internet insurance transaction solution because of the proprietary nature of their information technology ("IT") systems and the difficulty of connecting them to the Internet. - 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. 3 6 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 is one of the leading providers of flood insurance outsourcing services in the United States, currently servicing over 616,000 flood 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. 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 and commercial 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 measure customer satisfaction. The Company believes that its focus on customer service has enabled it to retain all of its principal outsourcing customers since 1994. 4 7 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 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, (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 approved by FEMA to sell and service flood insurance, and (4) increasing the volume of flood outsourcing services business from the Company's existing customer base, which includes over 30 customers under contract, either directly or through BIG. - Expand Relationships With Existing Customers. The Company intends to capitalize on its existing outsourcing customer base by cross-marketing additional outsourcing services to certain of these existing customers. - Expand E-Solutions Focus. In late 1999, the Company created an e-solutions division to develop Internet insurance solutions for the P&C industry. The Company believes that it has the expertise to assist the P&C industry in its challenge of connecting to the Internet. The Company also believes that its solution of connecting legacy systems with Internet browser-based functionality will be an attractive alternative to P&C companies attempting to develop a solution using their own resources. - 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 767,000 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 created 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 with companies primarily involved in the reinsurance business. - Generate Recurring Revenues. The Company seeks to generate recurring revenues by entering into contractual relationships (typically three to seven 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. The Company will continue to pursue potential acquisitions that offer opportunities to increase market share or expand the Company's menu of outsourcing services. 5 8 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; Internet 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, an approved 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. 6 9 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 over 92% of U.S. households are located in counties covered by the Company's electronic flood zone database. For approximately 75% 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 or has partnered with software firms 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. 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 provides certain services that have increased the efficiency and cost effectiveness of the Company's flood zone determination business. Under a Secrecy and Confidentiality Agreement, KCS has agreed, for a period of five years from the date of termination of its relationship with Geotrac, not to engage, directly or indirectly, in certain activities relating to Geotrac's business. KCS currently builds databases and creates digitized maps that the Company uses in connection with its flood zone determination business. In addition, Geotrac presently uses KCS to perform manual flood zone determination searches at costs significantly below U.S. market rates. KCS currently performs approximately 600 manual searches per day. As the Company continues to shift its manual search processing to India, it expects to have approximately 1,000 manual searches per day performed in that country by June, 2000. These plans are subject to change based upon various factors, including the demand for manual searches as well as political and economic conditions in India. The Company also has retained three KCS systems analysts on a consulting basis at its Norwalk, Ohio headquarters to assist in the design and programming of new technologies. Each of these consultants directs a team of programmers in Bangalore, India. 7 10 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. CUSTOMER SUPPORT AND INSTALLATION The Company's outsourcing services are provided from three separate customer service centers in St. Petersburg, Florida -- one for policy and claims administration and two for catastrophic claims administration. The policy administration center has approximately 250 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 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 182 employees, approximately half of which are licensed claims representatives responsible for the adjustment of claims. Incoming calls are taken by 16 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 a separate customer service center relating exclusively to its flood zone determination business. The Company believes its service center 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 and by targeting prospective customers, such as insurers with high expense ratios or limited expertise in certain P&C lines. The Company's sales and marketing division includes a vice president, two full-time sales representatives and a marketing assistant. 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. INFORMATION SYSTEMS The Company utilizes fully-integrated, real-time, processing systems at its St. Petersburg, Florida 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 8 11 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's 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. CUSTOMERS The Company currently provides outsourcing services to approximately 30 customers. The Company's largest customer, BIG, accounted for approximately 76%, 57%, and 58% of the Company's revenues in 1997, 1998 and 1999, respectively. Consequently, 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. The Company provides outsourcing services to other WYO carriers, including Farmers Insurance Group, AAA Auto Club South Insurance Company and Mobile USA Insurance Company, Inc. The Company also provides outsourcing services to various insurance companies, such as 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 1,380 banks, credit unions, mortgage lenders, insurance companies and, other financial institutions. The Company's principal insurance company customers for such services include FM Global and Wausau Underwriters Insurance 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. primarily through its alliance with Equifax Mortgage Services, believed by the Company to be the largest mortgage credit reporting agency in the U.S. 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 9 12 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, Transamerica, Chicago Title Corp. 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. EMPLOYEES As of March 20, 2000, the Company had 708 full-time and 34 part-time employees, consisting of 42 in sales and marketing, 513 in customer service and support, 125 in technical support, and 62 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. RISK FACTORS The Company's financial condition and results of operations may be impacted by a number of factors, including, but not limited to the following risk factors, any of which could cause actual results to materially differ from historical or anticipated future results. 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, 1997, 1998 and 1999, revenues from services provided to BIG accounted for approximately 76%, 57% and 58%, respectively, of the Company's total revenues and approximately 98%, 95% and 80%, respectively, of the Company's revenues from outsourcing services. The Company has contracts with BIG pursuant to which it will continue to provide administrative services to BIG. 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. 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, which increased during 1999, are less conducive to a higher volume of mortgage lending 10 13 and flood zone determinations. A continued increase in interest rates could have a further 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, particularly claims outsourcing, and flood zone determination services. Regulatory Matters Bankers Insurance Company ("BIC"), a subsidiary of BIG, the Company's principal shareholder and customer, and Bankers Life Insurance Company ("BLIC") and Bankers Security Insurance Company ("BSIC"), subsidiaries of BIC, have been 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 their use of a private investigator to gather information on a DOI employee and the private investigator's unauthorized use of illegal wiretaps in connection therewith. On March 23, 2000, the Treasurer and Insurance Commissioner of the State of Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC and BSIC based upon the results of such investigation. The administrative complaint charges BIC, BLIC and BSIC with violating various provisions of the Florida Insurance Code including, among other things, a provision requiring insurance companies to have management, officers or directors that are, among other things, trustworthy. The complaint further notified BIC, BLIC and BSIC that the Insurance Commissioner intends to impose such penalties or take such other administrative actions as may be proper or appropriate under applicable law, including possibly entering an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida. BIC, BLIC and BSIC have informed the Company that they intend to vigorously defend against such action, but no assurances can be given as to the outcome thereof. In the event the DOI were to enter an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida, or impose other significant penalties on any of them, it would materially adversely affect the business and/or operations of BIG and, in turn, could result in the loss of or material decrease in the Company's business from BIG, which would have a material adverse effect on the Company's business, financial condition and results of operations. On November 19, 1999, the United States, on behalf of FEMA, filed a civil action against BIC in the U.S. District Court for the District of Maryland stemming from FEMA's investigation of certain cash management and claims processing practices of BIC in connection with its participation in the National Flood Insurance Program ("NFIP"). The complaint alleges, among other things, that BIC knowingly failed to report and pay interest income it had earned on NFIP funds to the United States in violation of the False Claims Act as well as various common law theories, including fraud, breach of contract, unjust enrichment and negligent misrepresentation. The complaint seeks civil penalties of $1.08 million and actual damages of approximately $1.1 million, as well as treble, punitive and consequential damages, costs and interest. BIC has informed the Company that it intends to vigorously defend against this action, but no assurances can be given as to the outcome thereof. However, BIG and its legal counsel have advised the Company that an adverse judgment in this action would not have a material adverse affect on the business and/or operations of BIC, although no assurances can be given in this regard. FEMA's investigation of certain claims processing practices of BIC in connection with its participation in the NFIP is continuing, and BIC has produced documentation in connection therewith. If the parties are unable to reach agreement in these matters, the United States could amend its complaint against BIC to add additional claims under the False Claims Act and/or various common law and equitable theories relating to such matters. In the event such continuing investigation 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. 11 14 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, it could have a material adverse effect on the Company's business, financial condition and results of operations. 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. Control by Principal Shareholder; Conflicts of Interest BIG currently owns approximately 62.7% of the outstanding shares of Common Stock. As a result, BIG is 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, and Robert M. Menke and Robert G. Menke, directors of the Company, 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. The ownership of BIG of shares of Common Stock 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, also serve as officers and directors of BIG. Mr. Meehan serves as Vice Chairman of the Board of Directors of BIG, Robert M. Menke serves as Chairman of the Board of Directors of BIG, and Robert G. Menke serves as 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. 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, and (iii) lease agreements pursuant to which BIG leases certain facilities 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. None of these agreements 12 15 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 Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Rights of Former Geotrac Shareholder The Company has entered into a Corporate Governance Agreement with Geotrac and Daniel J. White setting forth certain terms and conditions pertaining to the operation of Geotrac following the acquisition of the remaining 51% interest in Geotrac in July, 1998. The Corporate Governance Agreement provides, in part, that for so long as Mr. White is a shareholder of the Company or Geotrac or has an option to purchase Geotrac stock, (i) the Company will vote all of its shares of Geotrac stock to fix and maintain the number of Geotrac directors at five, (ii) the Company will vote its shares of Geotrac stock to elect as directors of Geotrac two persons designated by Mr. White, (iii) Mr. White's termination as a Geotrac employee will require the vote of four out of five members of the Board of Directors, and (iv) certain actions by Geotrac will require the unanimous approval of the Geotrac Board of Directors, including any merger or consolidation, the payment of management or similar fees to the Company, or its subsidiaries or affiliates, the sale or issuance of Geotrac stock, and the sale of Geotrac assets outside the ordinary course of business to anyone other than an affiliate of Geotrac. Mr. White also has a right of first refusal to purchase the assets of Geotrac in the event such assets are to be sold. The Corporate Governance Agreement therefore allows Mr. White to block certain transactions involving Geotrac even if such transactions are approved by all of the other directors of Geotrac and may be in the best interest of the Company and its shareholders. Mr. White is a director and shareholder of the Company. 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, David M. Howard, the Company's President and Chief Executive Officer, Robert G. Gantley, the Company's Vice President and Chief Operating Officer, Christopher P. Breakiron, the Company's Chief Financial Officer, Treasurer and Secretary, and Daniel J. White, Geotrac's President and Chief Executive Officer. 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. Limited Operating History in Third-Party Outsourcing Since its inception, the Company has provided outsourcing services to BIG, the largest underwriter of flood insurance policies through independent agents (and the second largest overall) in the United States. As BIG's outsourcing provider, the Company has become a significant provider of flood insurance outsourcing services; however, 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, 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. Existence of Well-Positioned Competitors 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. Management believes the market for flood insurance outsourcing services is dominated by several principal competitors. The Company 13 16 competes for flood insurance 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. Management believes the market for flood zone determination services is dominated by 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. Implementation of Acquisition Strategy The Company intends 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. Potential Liability to Clients Many of the Company's contractual engagements involved 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 may attempt 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, if any, 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 14 17 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 depend 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. Reliance on Technology and Computer Systems The Company currently licenses its primary processing software 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. 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. Volatility of Stock Price 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. 15 18 ITEM 2. PROPERTIES The following table sets forth certain information with respect to the principal facilities used in the Company's operations:
SQUARE LEASE LOCATION FEET FUNCTIONS EXPIRATION - -------- ------ --------- ---------- St. Petersburg, Florida(1)....... 76,700 Corporate Headquarters December 2001 and Outsourcing St. Petersburg, Florida(1)....... 7,400 Outsourcing December 2001 St. Petersburg, Florida.......... 35,507 Outsourcing February 2005(2) St. Petersburg, Florida.......... 6,600 Outsourcing May, 2000 Bozeman, Montana................. 4,000 Outsourcing December, 2001(3) Dunedin, Florida................. 5,200 Outsourcing February 2004 Norwalk, Ohio.................... 12,400 Flood Zone Determination August 2004(2) Norwalk, Ohio.................... 21,000 Flood Zone Determination November 2002(2)
- --------------- (1) Each of these facilities is leased or subleased from BIG. (2) The Company has the option to renew each of these leases for an additional five-year period. (3) The Company has the option to renew this lease for two additional one-year periods. 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. ITEM 3. 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. BIC, a subsidiary of BIG, the Company's principal shareholder and customer, and BLIC and BSIC, subsidiaries of BIC, have been subject to an investigation by the Florida DOI, the principal regulator of insurance activities in the State of Florida, stemming from their use of a private investigator to gather information on a DOI employee and the private investigator's unauthorized use of illegal wiretaps in connection therewith. On March 23, 2000, the Treasurer and Insurance Commissioner of the State of Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC and BSIC based upon the results of such investigation. The administrative complaint charges BIC, BLIC and BSIC with violating various provisions of the Florida Insurance Code including, among other things, a provision requiring insurance companies to have management, officers or directors that are, among other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC that the Insurance Commissioner intends to impose such penalties or take such other administrative actions as may be proper or appropriate under applicable law, including possibly entering an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida. BIC, BLIC and BSIC have informed the Company that they intend to vigorously defend against such action, but no assurances can be given as to the outcome thereof. In the event the DOI were to enter an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida, or impose other significant penalties on any of them, it would materially adversely affect the business and/or operations of BIC and, in turn, 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. On November 19, 1999, the United States, on behalf of FEMA, filed a civil action against BIC in the U.S. District Court for the District of Maryland stemming from FEMA's investigation of certain cash 16 19 management and claims processing practices of BIC in connection with its participation in the NFIP. The complaint alleges, among other things, that BIC knowingly failed to report and pay interest income it had earned on NFIP funds to the United States in violation of the False Claims Act as well as various common law theories, including fraud, breach of contract, unjust enrichment and negligent misrepresentation. The complaint seeks civil penalties of $1.08 million and actual damages of approximately $1.1 million, as well as treble, punitive and consequential damages, costs and interest. BIC has informed the Company that it intends to vigorously defend against this action, but no assurances can be given as to the outcome thereof. However, BIG and its legal counsel have advised the Company that an adverse judgment in this action would not have a material adverse affect on the business and/or operations of BIC, although no asurances can be given in this regard. FEMA's investigation of certain claims processing practices of BIC in connection with its participation in the NFIP is continuing, and BIC has produced documentation in connection therewith. If the parties are unable to reach agreement in these matters, the United States could amend its complaint against BIC to add additional claims under the False Claims Act and/or various common law and equitable theories relating to such matters. In the event such continuing investigation 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. During 1999, BIG, together with certain of its affiliates, including the Company, was subject to a wage and hour audit conducted by the Department of Labor ("DOL"). The Company has responded to the DOL's inquiries relating to the classification of its employees for the purpose of determining overtime compensation. The Company and BIG are in the process of jointly negotiating with representatives of the DOL in an effort to fairly determine the proper classification of certain employees and the amount of the past wages owed. Although management cannot currently determine the amount of any past wages to be awarded in this case, they believe any assessment will be shared with BIG and its affiliates. Management believes that the amount of any past wages to be awarded in this case will not have a material adverse effect on business, financial condition and results of operations of the Company, although no assurances can be given in this regard. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANT As of December 31, 1999 there was one executive officer who was not also a director of the Company. Christopher P. Breakiron, age 33, served as the acting Chief Financial Officer, Treasurer and Secretary of the Company from August, 1999 through October, 1999, when he assumed all three positions on a permanent basis. Mr. Breakiron is also a Vice President of the Company and has served in such capacity since April, 1999. From July, 1997 to August, 1999, he served as Controller of the Company. Prior to joining the Company, Mr. Breakiron worked as a senior auditor with Arthur Andersen LLP. He is a certified public accountant. On January 18, 2000, Robert G. Gantley was appointed as Chief Operating Officer and Vice President of the Company. Mr. Gantley, age 45, served as Vice President -- Claims of Insurance Management Solutions, Inc., the Company's principal outsourcing subsidiary, since August, 1997. From August, 1997 to June, 1998, he also served as Vice President -- Claims of the Company. Mr. Gantley joined BIG in October, 1996 and served as Vice President -- Claims of Bankers Insurance Company, a wholly-owned subsidiary of BIG, until February, 1999. Prior to joining BIG, he was Assistant Director of the Massachusetts State Lottery from 1993 to 1996 and spent over fifteen years with Allstate Insurance Group, most recently as a Territorial Claims Manager from 1989 to 1993. Mr. Gantley is a 1977 graduate of Harvard College and has over eighteen years experience in the insurance industry. 17 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In February, 1999, the Company completed an initial public offering of its Common Stock at an initial price of $11.00 per share. The Company's Common Stock is traded on the Nasdaq National Market under the symbol of "INMG". The following table sets forth the high and low closing sales price per share as reported by the Nasdaq National Stock Market for the Common Stock for the periods indicated.
QUARTER ENDED HIGH LOW ------------- ------ ----- March 31, 1999.............................................. $11.88 $8.25 June 30, 1999............................................... 11.19 8.00 September 30, 1999.......................................... 9.75 2.88 December 31, 1999........................................... 3.56 1.88
As of February 25, 2000, there were 22 record holders of the Common Stock. In June, 1998, the Company paid a dividend of $1.1 million to BIG. The Company currently anticipates that any future 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. On June 11, 1999, the Company entered into a revolving line of credit agreement ("LOC") with a financial institution that provides for borrowings of up to $12,000,000. Under the LOC, the Company is restricted from making any distributions or dividends payable in cash or capital stock of the Company on any shares of any class of its capital stock or applying any of its property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock or any partnership interest when the ratio of interest earning debt to earnings before interest, taxes, depreciation, and amortization exceeds 1.0 either before or as a result of the distribution. 18 21 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and Notes thereto and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company." The following selected consolidated financial data of the Company as of and for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 has been derived from the Company's audited consolidated financial statements. The results of operations presented below are not necessarily indicative of the results of operations that may be achieved in the future.
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues Outsourcing services........................... $ 3,444 $ 5,125 $29,714 $38,058 $52,168 Flood zone determination services.............. 5,127 7,705 8,792 25,734 19,161 ------- ------- ------- ------- ------- Total revenues......................... 8,571 12,830 38,506 63,792 71,329 ------- ------- ------- ------- ------- Expenses Cost of outsourcing services................... 2,955 3,896 21,989 26,875 37,428 Cost of flood zone determination services...... 3,415 5,362 4,764 11,131 8,102 Selling, general and administrative............ 804 1,121 3,026 8,381 11,857 Management services from Parent................ 725 1,054 2,344 3,260 2,256 Deferred compensation (non-recurring item)..... -- -- -- 728 -- Depreciation and amortization.................. 184 309 684 4,311 5,498 ------- ------- ------- ------- ------- Total expenses......................... 8,083 11,742 32,807 54,686 65,141 ------- ------- ------- ------- ------- Operating income................................. 488 1,088 5,699 9,106 6,188 Equity in earnings of Geotrac, Inc.(1)........... -- -- 201 -- -- Minority interest(1)............................. -- -- -- (473) -- Interest income.................................. -- -- -- 456 350 Interest expense(2).............................. (72) (75) (378) (2,194) (809) ------- ------- ------- ------- ------- Income before income taxes....................... 416 1,013 5,522 6,895 5,729 Provision for income taxes....................... 162 396 2,112 3,042 2,534 ------- ------- ------- ------- ------- Net income....................................... $ 254 $ 617 $ 3,410 $ 3,853 $ 3,195 ======= ======= ======= ======= ======= Net income per common share...................... $ .03 $ .06 $ .34 $ .38 $ .26 ======= ======= ======= ======= ======= Weighted average common shares outstanding(3).... 10,000 10,000 10,000 10,264 12,448 ------- ------- ------- ------- ------- Dividends declared on common stock(4)............ $ -- $ 1,000 $ 3,500 $ 1,100 $ -- ======= ======= ======= ======= =======
DECEMBER 31, --------------------------------------------- 1995 1996 1997 1998 1999 ------ ------ ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficiency)....................... $ (141) $ (425) $ (148) $(4,295) $ 7,117 Total assets....................................... 2,649 3,441 19,532 39,902 39,491 Long-term debt, less current portion............... 156 894 2,187 7,471 220 Notes payable--affiliates, less current portion.... -- -- -- 5,528 -- Preferred stock of subsidiary...................... -- -- 6,750 -- -- Total shareholders' equity(3)...................... 529 260 170 8,689 32,885
- --------------- (1) In 1997, the Company's investment in Old Geotrac was accounted for using the equity method of accounting, since the Company owned less than 50% and had a significant but not controlling influence. In July, 1998, the Company acquired the remaining 51% of Geotrac. As a result, the operations of 19 22 Geotrac for the year ended December 31, 1998 are consolidated with that of the Company, with the portion of Geotrac's net income allocable to the 51% interest held by the majority stockholders prior to June 30, 1998 reflected as a minority interest. (2) Dividends declared on Preferred Stock for the years ended December 31, 1997 and 1998 were $229,315 and $189,370, respectively, and are included in interest expense. See Note 7 to the Company's Consolidated Financial Statements. (3) In February, 1999, the Company completed an initial public offering ("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000 shares sold in the IPO, 1,350,000 were sold by the Venture Capital Corporation, a Cayman Islands company, and the remaining 2,000,000 shares were sold by the Company. The offering generated net proceeds to the Company of $19,164,000, after deducting offering expenses of approximately $1,296,000 paid by the Company. (4) 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto. 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. In July, 1997, the Company acquired a 49% interest in Geotrac, Inc. and, in July, 1998, acquired the remaining 51% interest. Geotrac was subsequently merged into BHDS with the surviving company being known as Geotrac of America, Inc. In September, 1998, IMS Direct, Inc. was formed as a wholly owned subsidiary of IMSG and in January, 1999, the Company acquired Colonial Claims Catastrophe Corporation. 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 1994 to 1999, BIG experienced substantial growth in total written premiums from $131 million to $316 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 79.5% of the Company's outsourcing services revenues and is 20 23 expected to continue to account for a significant majority of the Company's outsourcing revenues in the near future. 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. Federal residential flood insurance rates are set by FEMA and are the same for all flood insurance carriers. Consequently, policyholder retention is typically dependent upon the quality of customer service being offered. Higher retention or renewal rates provide more consistent recurring revenues. Flood insurance carriers often utilize independent agents to sell their product. Competing flood insurance carriers offering more attractive commissions to such agents pose a significant risk for declines in business. 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. 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. Management services from Parent are charged to the Company under a management agreement with BIG for common costs that are incurred by BIG. These common costs include human resources, legal, corporate planning and communications, cash management, certain executive management and rent. Charges for management services is based upon contractually agreed upon amounts. If the Company develops the capability to provide these services internally, certain sales and administrative support costs may fluctuate. In 1997, the Company's investment in Geotrac was accounted for using the equity method of accounting, since the Company owned less than 50% and had a significant but not controlling influence. In July, 1998, the Company acquired the remaining 51% of Geotrac. As a result, the operations of Geotrac for the year ended December 31, 1998 are consolidated with that of the Company, with the portion of Geotrac's net income allocable to the 51% interest held by the majority stockholder prior to June 30, 1998 reflected as a minority interest. 21 24 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain selected operating results of the Company as a percentage of total revenues:
YEAR ENDED DECEMBER 31, --------------------- 1997 1998 1999 ----- ----- ----- REVENUES: Outsourcing services........................................ 77.2% 59.7% 73.1% Flood zone determination services........................... 22.8 40.3 26.9 ----- ----- ----- Total revenues.................................... 100.0 100.0 100.0 ----- ----- ----- EXPENSES: Cost of outsourcing services................................ 57.1 42.2 52.5 Cost of flood zone determination services................... 12.4 17.4 11.3 Selling, general and administrative......................... 7.8 13.1 16.6 Management services from Parent............................. 6.1 5.1 3.2 Deferred compensation (non-recurring item).................. -- 1.1 -- Depreciation and amortization............................... 1.8 6.8 7.7 ----- ----- ----- Total expenses.................................... 85.2 85.7 91.3 ----- ----- ----- Operating income............................................ 14.8 14.3 8.7 Equity in earnings of Geotrac, Inc.......................... 0.5 -- -- Minority interest........................................... -- (0.7) -- Interest income............................................. -- 0.7 0.5 Interest expense............................................ (1.0) (3.5) (1.1) ----- ----- ----- Income before income taxes.................................. 14.3 10.8 8.1 Provision for income taxes.................................. 5.5 4.8 3.6 ----- ----- ----- Net income........................................ 8.8% 6.0% 4.5% ===== ===== =====
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998 Outsourcing Services Revenues. Outsourcing services revenues increased 37.1% to $52.2 million in 1999 from $38.1 million in 1998. The increase was primarily attributable to (i) incremental revenues from Colonial Claims, which was acquired in January, 1999, (ii) revenue generated under an affiliated technical support services arrangement for both personal and commercial lines of insurance entered into on April 1, 1999, (iii) claims fee income recognized during 1999 associated with the settlement of flood and wind damage claims resulting from Hurricane Georges in late September, 1998, and from Hurricanes Floyd and Irene during 1999 and, (iv) incremental revenues from the Company's direct marketing subsidiary, which was formed in August, 1998. Effective April 1, 1999, the Company amended its existing service agreements with affiliated insurers to provide for minimum aggregate quarterly service fee payments through December 31, 1999 with respect to certain lines of business. If such minimum service fee requirements with respect to said lines of business under the agreements had not been implemented as of April 1, 1999, aggregate affiliated outsourcing services revenues, which totaled $41.5 million in 1999, would have been $39.7 million in accordance with the terms of the affiliated service agreements as in effect prior to April 1, 1999. For the year ended December 31, 1999, the Company will not recognize approximately $500,000 of additional affiliated service fees under the minimum service fee agreement as the Company did not meet certain specified milestones on a timely basis. Such minimums were established to compensate the Company for maintaining an infrastructure to process certain lines of business of affiliated insurers that have not grown as rapidly as originally forecasted. Flood Zone Determination Services Revenues. Flood zone determination services revenues decreased 25.5% to $19.2 million in 1999 from $25.7 in 1998. The decrease in flood zone determination services revenues was primarily attributable to increases in interest rates from the corresponding period of the prior year and a 22 25 resulting decline in loan originations and mortgage refinancings, which fuel the demand for flood zone determinations. Additionally, during 1999, the Company experienced a reduction in flood zone determination revenue from several large customers that are experiencing financial difficulties. The decrease in flood zone determination services revenues in 1999 was partially offset by a novation of the Company's life-of-loan insurance policy in which an estimate of the present value of future losses to be claimed under the policy (approximately $500,000) was paid to the Company in exchange for a release of liability for such future losses under the policy. Cost of Outsourcing Services. Cost of outsourcing services increased 39.3% to $37.4 million in 1999 from $26.9 million in 1998. The increase in cost of outsourcing services was primarily attributable to (i) incremental expenses incurred by the recently acquired Colonial Claims, (ii) increases in information technology costs due to staff additions and use of contract programmers to develop new unaffiliated programs, and (iii) incremental direct costs (primarily personnel) incurred to service the growth of both affiliated and unaffiliated flood premium. These increases were partially offset by a decrease in the lease cost of fixed assets that were purchased by the Company from BIG on April 1, 1998. Prior to April 1, 1998, the depreciation for such equipment, which totaled $282,015 during the three months ended March 31, 1998, was charged to the Company under an arrangement similar to an operating lease and is included in cost of outsourcing services. Such costs are now included in depreciation and amortization. Cost of Flood Zone Determination Services. Cost of flood zone determination services decreased 27.2% to $8.1 million in 1999 from $11.1 million in 1998. The decrease in cost of flood zone determination services is primarily due to (i) a decrease in flood zone determination services revenue from the corresponding period in 1998, (ii) the merger of BHDS and Geotrac in July, 1998 and a subsequent elimination of certain duplicated functions and facilities, and (iii) a redesign of certain production workflows in April, 1999 that enabled the Company to increase employee productivity and reduce expenses. Selling General and Administrative Expense. Selling, general and administrative expenses increased 41.5% to $11.9 million in 1999 from $8.4 million in 1998. The increase in selling, general and administrative expenses was primarily attributable to (i) additional wages and related benefits associated with adding executive management, accounting, sales and marketing and other administrative staff to support the Company's expanded operations, (ii) incremental expenses incurred by the Company's direct marketing subsidiary, which was formed in August, 1998, (iii) incremental expenses incurred by Colonial Claims, which was acquired in January, 1999, (iv) and severance costs relating to the resignations of certain officers. Management Services from Parent. Management services from Parent decreased 30.8% to $2.3 million in 1999 from $3.3 million in 1998. The decrease was primarily related to an employment practices judgment that was settled during the third quarter of 1998 on behalf of the Company and its affiliates. Also contributing to the decrease in management services from Parent was an amendment to the management service agreement, which became effective January 1, 1999, pursuant to which certain accounting and internal audit functions are no longer performed by the Parent (such functions are currently performed by the Company directly). Depreciation and Amortization Expense. Depreciation and amortization expense increased 27.5% to $5.5 million in 1999 from $4.3 million in 1998. The increase was primarily related to (i) additional goodwill amortization recognized during 1999 as a result of the purchase of the remaining 51% of Geotrac, Inc. in July, 1998, (ii) goodwill amortization resulting from the purchase of Colonial Claims in January, 1999, (iii) amortization of software costs capitalized in accordance with SOP 98-1, which the Company began amortizing in January, 1999 and (iv) depreciation related to assets, consisting of telephone equipment and computer hardware and software, that were purchased by the Company from BIG in April, 1998 for use in its business. Prior to April 1, 1998, the depreciation for such equipment, which totaled $282,015 during the three months ended March 31, 1998, was charged to the Company under an arrangement similar to an operating lease and was included in cost of outsourcing services. Minority Interest. During July, 1998, the Company purchased the remaining 51% of Geotrac. However, the Company has elected to reflect the operations of Geotrac prior to the July, 1998 acquisition on a 23 26 consolidated basis with the Company, with the net income of Geotrac allocable to the 51% interest held by the prior majority stockholders reflected as minority interest. Interest Expense. Interest expense decreased 63.1% to $809,000 in 1999 from $2.2 million in 1998. The decrease was primarily related to the early repayment of most of the Company's debt obligations from net proceeds received by the Company from its initial public offering in February, 1999, partially offset by the write-off of deferred financing costs during 1999 as a result of the early repayment of a term loan. Provision for Income Taxes. The Company's effective income tax rates were 44.2% and 44.1% in 1999 and 1998, respectively. The effective tax rates reflect non-deductible goodwill recognized in connection with the acquisition of Geotrac in July, 1998 and Colonial Claims in January, 1999. Income before provision for income taxes in 1998, excluding minority interest which is presented net of tax in the accompanying consolidated financial statements, resulted in an effective income tax rate of 41.3% in 1998. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997 Outsourcing Services Revenues. Outsourcing services revenues increased $8.3 million, or 28.1%, to $38.0 million in 1998 from $29.7 million in 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, (iii) increased services provided to BIG due to the growth in the volume of BIG's flood insurance business, and (iv) a substantial influx of claims fee income during the fourth quarter of 1998 associated with the settlement of flood and wind damage claims resulting from Hurricane Georges in late September, 1998. 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 $16.9 million, or 192.7%, to $25.7 million in 1998 from $8.8 million in 1997. The revenue growth was primarily attributable to the inclusion of the consolidated revenues of both Geotrac and BHDS for 1998 as compared with the revenues of BHDS only for 1997. This was partially offset by a continued decline in the volume of flood zone determinations performed in the second half of 1998 as the demand for refinancing of existing mortgage loans decreased. Cost of Outsourcing Services. Cost of outsourcing services increased $4.9 million, or 22.2%, to $26.9 million in 1998 from $22.0 million in 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) increases in information services personnel costs due to additions to staff, (iii) increased services provided to BIG due to the growth in the volume of BIG's insurance business and (iv) the Company assuming responsibility for claims costs for independent adjusters and appraisers that were previously borne by BIG. These increases were partially offset by a decrease in the lease cost of fixed assets that were purchased by the Company from BIG on April 1, 1998. Prior to April 1, 1998, the depreciation for such equipment, which totaled $282,015 and $762,260 during 1998 and 1997, respectively, was charged to the Company under an arrangement similar to an operating lease and is included in cost of outsourcing services. Such costs are now included in depreciation and amortization. Cost of Flood Zone Determination Services. Cost of flood zone determination services increased $6.4 million, or 133.7%, to $11.1 million in 1998 from $4.8 million in 1997. The increase in cost of flood zone determinations was primarily attributable to the inclusion of the consolidated expenses of both Geotrac and BHDS for 1998 as compared with the expenses of BHDS only for 1997. As a percentage of flood zone determination services revenue, the decrease in cost of flood zone determination services resulted primarily from a reduction during 1998 of approximately $822,000 in insurance costs due to the Company terminating its insurance policy associated with its life of loan program effective June 1, 1998. Consequently, from such date forward, the Company deferred a portion of each life of loan fee received in order to account for its obligation to perform future flood zone redeterminations. 24 27 Selling, General and Administrative Expense. Selling, general and administrative expenses increased $5.4 million, or 176.9%, to $8.4 million in 1998 from $3.0 million in 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 1998 to support the Company's expanded operations, as well as the inclusion of the consolidated expenses of both Geotrac and BHDS for 1998 as compared with the expenses of BHDS only for 1997. Management Services from Parent. Management services from Parent increased $916,000, or 39.1%, to $3.3 million in 1998 from $2.3 million in 1997. The increase is primarily related to the Company's portion of an employment practices judgment totaling approximately $400,000 rendered in the third quarter of 1998 and an increase in management services provided to the Company due to the Company's expanded operations. Such increased services primarily include agency accounting, audit services, cash management services and legal services. Depreciation and Amortization Expense. Depreciation and amortization expense increased $3.6 million, or 530.6%, to $4.3 million in 1998 from $684,000 in 1997 primarily as a result of depreciation related to assets consisting of telephone equipment and computer hardware and software, transferred and assigned to the Company in April, 1998 for use in its business. Prior to April 1, 1998, the depreciation for such equipment, which totaled $282,015 and $762,260 during 1998 and 1997, respectively, was charged to the Company under an arrangement similar to an operating lease and is included in cost of outsourcing services. Also, 1998 reflects amortization of additional goodwill related to the purchase of the remaining 51% of Geotrac in July, 1998, as well as amortization of goodwill and depreciation related to the inclusion of both Geotrac and BHDS for 1998 as compared with the expenses of BHDS only for 1997. 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 $201,009 to the Company in 1997. During 1998, Geotrac was shown on a consolidated basis. Provision for Income Taxes. The Company's effective income tax rates were 44.1% and 38.3%, in 1998 and 1997, respectively. Income before income taxes in 1998, excluding minority interest, resulted in an effective income tax rate of 41.3%. This effective rate reflects the impact of a minority interest presented net of tax and other items discussed in Note 9 to the Consolidated Financial Statements of the Company. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company's principal sources of liquidity consisted of cash on-hand, cash flows from operations and available borrowings under the Company's revolving credit facility. Prior to 1999, the Company funded its operations through cash generated from operations and receipt of service fees advanced from BIG. Bank borrowings were used to finance fixed asset purchases. In February, 1999, the Company completed an initial public offering ("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation (the "Selling Shareholder"), a Cayman Islands company. The offering generated net proceeds to the Company of approximately $19.2 million after deducting offering expenses paid by the Company of approximately $1.3 million. The Company used a portion of the net proceeds from the offering, together with funds received from BIG from proceeds made available to BIG by a subsidiary of the Selling Shareholder, to repay all obligations with BIG and its affiliates. Additionally, the Company used a portion of the IPO proceeds to repay certain debt obligations. In June, 1999, the Company entered into a revolving line of credit agreement ("LOC") with a financial institution that provides for borrowings of up to two times the rolling four quarter earnings before interest, taxes, depreciation and amortization ("EBITDA"), but in no event more than $12,000,000. The LOC bears interest at a specified percentage over LIBOR (8.23% at December 31, 1999) based on the ratio of funded debt (as defined) to EBITDA. Interest payments are payable monthly and the remaining unpaid principal balance is due in full in July, 2001. The LOC is collateralized by substantially all of the Company's assets and is subject to certain quarterly financial covenants requiring the Company to maintain the following minimum 25 28 ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0; (ii) total liabilities to tangible net worth of not more than 1.0 to 1.0; and (iii) fixed charge coverage (as defined) or not less than 2.5 to 1.0. In June, 1999, the Company used $6.7 million of the available LOC to repay an existing term loan. Subsequent to June, 1999, the Company used the remaining IPO proceeds, together with excess cash reserves, to repay the LOC. Consequently, as of December 31, 1999, there was no outstanding balance under the LOC. The Company believes that cash on-hand, cash flows from operations and available borrowings under the Company's LOC facility will be sufficient to satisfy currently anticipated working capital and capital expenditure requirements for the next twelve months. Unanticipated rapid expansion, business or systems development, or potential acquisitions may cause the Company to require additional funds. The Company identifies and assesses, in the normal course of business, potential acquisitions of technologies or businesses which it believes to strategically fit is business plan. The Company may enter into such transactions should opportunities present themselves in the future. YEAR 2000 COMPLIANCE During 1999, the Company continued remediation program to prepare for 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, and the inability of non-information technology systems to function properly when the Year 2000 arrives. As of the date of this report, the Company has not experienced any significant problems related the Year 2000 Problem. Additionally, the Company has not become aware of any significant Year 2000 issues affecting the Company's major customers or suppliers, nor has it received any material complaints regarding Year 2000 Problems related to its services. To date, nearly all costs associated with addressing the Year 2000 Problem have been internal expenses, with the exception of the costs of engaging an independent accounting firm to validate the Company's Year 2000 remediation plan. The Company estimates that total costs incurred to date regarding the Year 2000 Problem to be in the range of $500,000 to $900,000. The remaining estimated costs to address any additional Year 2000 Problems is not expected to be significant, although no assurances can be given in this regard. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not entered into any transactions using derivative financial instruments or derivative commodity instruments and believes that its exposure to market risk associated with other financial instruments (such as variable rate debt) are not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Company and its independent certified public accountants' report are set forth on pages 36 through 61 of this report: Report of Independent Certified Public Accountants. Consolidated Balance Sheets as of December 31, 1998 and 1999. Consolidated Statements of Income for the years ended December 31, 1997, 1998 and 1999. Consolidated Statement of Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 26 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information to be set forth under the caption "Item 1: Election of Directors" in the Company's Proxy Statement, dated on or about April 19, 2000 for the Annual Meeting of Shareholders to be held June 1, 2000 (the "Proxy Statement"), and the information to be set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, are incorporated herein by reference. The information set forth under "Executive Officers of the Registrant" in Part I hereof is also incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information to be set forth under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference; provided, however that the Company specifically excludes from such incorporation by reference any information set forth under the caption "Compensation Committee Report on Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management to be set forth under the caption "Principal Shareholders" in the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information to be set forth under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) List of documents filed as part of this report: (1)Financial Statements. Insurance Management Solutions Group, Inc. Consolidated Financial Statements. Report of Independent Certified Public Accountants. Consolidated Balance Sheets as of December 31, 1998 and 1999. Consolidated Statements of Income for the years ended December 31, 1997, 1998 and 1999. Consolidated Statement of Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999. Notes to Consolidated Financial Statements. (2) Financial Statement Schedules. None. 27 30 (3) Exhibits.
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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.* 10.1 -- Employment Agreement, dated August 10, 1998, between David K. Meehan 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 BankersInsurance 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., including Addendum to Administration Services Agreement, dated December 2, 1998 and effective January 1, 1998, and Addendum to Administration Services Agreement, effective January 1, 1999.* 10.13 -- Service Agreement, dated January 1, 1998, between Insurance Management Solutions, Inc. and Bankers Insurance Company, including Addendum dated April 1, 1998 and form of Addendum to Service Agreements effective January 1, 1999.* 10.14 -- Service Agreement dated January 1, 1998 between Insurance Management Solutions, Inc. and Bankers Security Insurance Company, including form of Addendum to Service Agreements effective January 1, 1999.* 10.15 -- Service Agreement dated January 1, 1998 between Insurance Management Solutions, Inc. and First Community Insurance Company, including form of Addendum to Service Agreements effective January 1, 1999.* 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.*
28 31
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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 South Trust 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 July 31, 1998, between Geotrac of America, Inc. (as successor to 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 Insurance Management Information Services, Inc.* 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 July 31, 1998, between Geotrac, Inc., Daniel J. White and Insurance Management Solutions Group, Inc.* 10.27 -- Tax Indemnity Agreement dated July 31, 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.*
29 32
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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 of America, Inc. (as successor to Geotrac, Inc. and 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 of America, Inc. (as successor to Geotrac, Inc. and 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 of America, 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 America Bank--Florida F.S.B., Geotrac of America, 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 of America, 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 of America, 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 of America, Inc. (as successor to Bankers Hazard Determination Services, Inc.).* 10.46 -- Security Agreement dated December 30, 1997, between Geotrac of America, 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 of America, Inc. (as successor to Geotrac, Inc. and National Flood Certification Services, Inc.) to Marine Bank, in the amount of $600,000.* 10.48 -- Security Agreement dated December 27, 1993, between Geotrac of America, Inc.(as successor to Geotrac, Inc. and 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.*
30 33
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 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 of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac) and Mortgage Corporation of America.* 10.53 -- Flood Compliance Service Agreement dated March 1, 1997, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac) and CitFed Mortgage Corporation of America.* 10.54 -- Flood Compliance Service Agreement dated March 1, 1998, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac), ABN AMRO North American and certain of its affiliates.* 10.55 -- Flood Compliance Service Agreement dated April 12, 1997, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac) and Third Federal Savings.* 10.56 -- Flood Compliance Service Agreement dated April 9, 1997, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac) and MidAm, Inc.* 10.57 -- Flood Compliance Service Agreement dated December 28, 1995, between Geotrac of America, Inc. (as successor to Geotrac, Inc.) and Crestar Bank.* 10.58 -- Flood Compliance Service Agreement dated April 1, 1996, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and SMS Geotrac) and ReliaStar Mortgage Corporation.* 10.59 -- Flood Zone Determination Agreement dated March 25, 1993, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and National Flood Certification Services, Inc.) and AIG Consultants, Inc.* 10.60 -- Flood Zone Determination Agreement dated December 28, 1995, between Geotrac of America, 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 of America, Inc. (as successor to Geotrac, Inc. and National Flood Certification Services, Inc.) and SunBank, N.A.* 10.62 -- Flood Zone Determination Agreement dated November 8, 1993, between Geotrac of America, Inc. (as successor to Geotrac, Inc. and 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 July 31, 1998, between Insurance Management Solutions Group, Inc. and Daniel J. and Sandra White.*
31 34
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.70 -- Software License Agreement, effective January 1, 1998, between Insurance Management Solutions, Inc., Bankers Insurance Group, Inc. and Bankers Insurance Company.* 10.71 -- First Amendment to Loan and Security Agreement, dated July 31, 1998, between Geotrac, Inc. and Huntington National Bank.* 10.72 -- Continuing Guaranty Unlimited, dated July 29, 1998, by Insurance Management Solutions Group, Inc. in favor of Huntington National Bank.* 10.73 -- Subordination Agreement dated July 31, 1998 between Geotrac of America, Inc., Daniel J. and Sandra White, and Huntington National Bank.* 10.74 -- Subordination Agreement dated July 31, 1998 between Geotrac of America, Inc., Insurance Management Solutions Group, Inc. and Huntington National Bank.* 10.75 -- Tax Indemnity Agreement dated July 31, 1998 between Insurance Management Solutions Group, Inc., Insurance Management Solutions, Inc. and Geotrac of America, Inc., including Addendum dated July 31, 1998.* 10.76 -- Tax Allocation Agreement dated July 31, 1998 between Insurance Management Solutions Group, Inc., Insurance Management Solutions, Inc. and Geotrac of America, Inc., including Addendum dated July 31, 1998.* 10.77 -- Employment Agreement dated June 11, 1998 between Jeffrey S. Bragg and Insurance Management Solutions Group, Inc.* 10.78 -- Employment Agreement dated June 11, 1998 between Kelly K. King and Insurance Management Solutions Group, Inc.* 10.79 -- Articles of Merger filed with the Florida Department of State relating to the merger between Bankers Hazard Determination Services, Inc. and Geotrac, Inc.* 10.80 -- Certificate of Merger filed with the Ohio Department of State relating to the merger between Bankers Hazard Determination Services, Inc. and Geotrac, Inc.* 10.81 -- Guaranty of Payment of Debt, dated July 31, 1998, by Insurance Management Solutions Group, Inc. and Bankers Insurance Group, Inc. in favor of Daniel J. White and Sandra White.* 10.82 -- Secrecy and Confidentiality Agreement, dated October 8, 1993, between Geotrac of America, Inc. (formerly Geotrac, Inc.) and Kirloskar Computer Services, Ltd.* 10.83 -- Service Agreement dated December 1, 1998 between Insurance Management Solutions, Inc. and Bankers Life Insurance Company, including Addendum to Service Agreements dated December 11, 1998 and effective January 1, 1999.* 10.84 -- Stock Purchase Agreement, dated July 31, 1997, between YoSystems, Inc., Bankers Hazard Determination Services, Inc. and Daniel J. and Sandra White.* 10.85 -- Employment Agreement, dated September 22, 1998 between Kathleen M. Batson and Insurance Management Solutions Group, Inc.* 10.86 -- Term Note dated July 31, 1997, from YoSystems, Inc. and SMS Geotrac, Inc. to Huntington National Bank in the principal amount of $8,750,000.* 10.87 -- AYO Claims Agreement between Florida Windstorm Underwriting Association and Bankers Insurance Group, Inc., dated February, 1998.* 10.88 -- Assignment of AYO Claims Agreement among Bankers Insurance Group, Inc., Bankers Insurance Company and Florida Windstorm Underwriting Association dated December 15, 1998.* 10.89 -- Software Transfer Agreement dated September 1, 1998 by and among Bankers Insurance Group, Inc., Bankers Insurance Company, Insurance Management Solutions, Inc., and First Community Insurance Company.*
32 35
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 10.90 -- Promissory Note, dated January 7, 1999, of Insurance Management Solutions Group, Inc. in favor of J. Douglas Branham and Felicia A. Rivas.* 10.91 -- Registration Rights Agreement dated January, 1999, between Insurance Management Solutions Group, Inc. and J. Douglas Branham and Felicia A. Rivas.* 10.92 -- Stock Purchase Agreement dated December 10, 1998 between Colonial Catastrophe Claims Corporation, J. Douglas Branham, Felicia A. Rivas, and Insurance Management Solutions Group, Inc., including Addenda thereto.* 10.93 -- Loan Agreement dated December 16, 1998 between Bankers Insurance Group, Inc. and Western International Insurance Company.* 10.94 -- Promissory Note of Bankers Insurance Group, Inc. in favor of Western International Insurance Company.* 10.95 -- Agreement for Satisfaction of Debt and Capitalization of Subsidiary dated December 16, 1998 between Venture Capital Corporation and Western International Insurance Company.* 10.96 -- Plan of Merger dated January 7, 1999 and effective January 15, 1999 between IMS Colonial, Inc. and Colonial Catastrophe Claims Corporation.* 10.97 -- Flood Insurance Services Agreement, dated January 14, 1999, by and between Insurance Management Solutions Group, Inc. and Farmers Services Corporation.* 10.98 -- Funding Agreement, dated February 16, 1999, by and between Bankers Insurance Group, Inc., Bankers Insurance Company, Venture Capital Corporation and Western International Insurance Company.** 10.99 -- Flood Insurance Services Agreement, dated October 23, 1998, by and between Insurance Management Solutions, Inc. and Middlesex Mutual Assurance Company.** 10.100 -- Flood Insurance Services Agreement, effective January 13, 1999, by and between Insurance Management Solutions, Inc. and Island Insurance Companies, Ltd.** 10.101 -- Lease Agreement, dated February 1, 1999, by and between Colonial Real Estate of Dunedin, Inc. and Colonial Claims Corporation.** 10.102 -- Second Addendum to service Agreements, effective as of April 1, 1999, by and between Insurance Management Solutions, Inc. and each of Bankers Insurance Company, First Community Insurance Company and Bankers Security Insurance Company.*** 10.103 -- Technical Support Services Agreement, dated April 1, 1999, by and between Insurance Management Solutions, Inc. and Bankers Insurance Group, Inc. and its subsidiaries.*** 10.104 -- Loan Agreement, dated June 11, 1999, by and between Insurance Management Solutions Group, Inc. (including its Subsidiaries) and NationsBank, N.A.*** 10.105 -- Security Agreement, dated June 11, 1999, by and between Insurance Management Solutions Group, Inc. (including its Subsidiaries) and NationsBank, N.A.*** 10.106 -- Promissory Note of Insurance Management Solutions Group, Inc. (including its Subsidiaries), dated June 11, 1999, in favor of NationsBank, N.A.*** 10.107 -- Lease Agreement, dated September 27, 1999, by and between Koger Equity, Inc. and Insurance Management Solutions Group, Inc. 10.108 -- Lease Agreement, dated December 5, 1998, by and between Bronken-Meyers, LLC and Insurance Management Solutions Group, Inc.
33 36
EXHIBIT NUMBER EXHIBIT DESCRIPTION - ------- ------------------- 21.1 -- List of subsidiaries of Insurance Management Solutions Group, Inc.* 24.1 -- Power of Attorney relating to subsequent amendments (included on signature page hereto). 27.1 -- Financial Data Schedule (filed for SEC purposes only).
- --------------- * Previously filed as part of the Company's Form S-1 Registration Statement (Reg. No. 333-57747) originally filed on June 28, 1998, as amended, and incorporated by reference herein. ** Previously filed as part of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated by reference herein. *** Previously filed as part of the Company's Form 10-Q for the quarter ended June 30, 1999, and incorporated by reference herein. Exhibits 10.1, 10.2, 10.3, 10.22, 10.65, 10.77, 10.78 and 10.85 represent management contracts and compensatory plans. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the registrant during the fourth quarter of the year covered by this report. 34 37 INDEX TO FINANCIAL STATEMENTS
PAGE ---- INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants........ 36 Consolidated Balance Sheets as of December 31, 1998 and 37 1999................................................... Consolidated Statements of Income for the years ended 38 December 31, 1997, 1998 and 1999....................... Consolidated Statement of Shareholders' Equity for the 39 years ended December 31, 1997, 1998 and 1999........... Consolidated Statements of Cash Flows for the years ended 40 December 31, 1997, 1998 and 1999....................... Notes to Consolidated Financial Statements................ 41
35 38 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, 1998 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 in the United States. 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, 1998 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. GRANT THORNTON LLP Tampa, Florida February 16, 2000 (except for note 11, paragraphs 5 and 6 to which the date is March 23, 2000) 36 39 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1998 1999 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 1,868,867 $ 4,702,861 Accounts receivable, net.................................. 3,549,044 3,621,714 Due from affiliates....................................... 570,139 2,920,543 Note and interest receivable -- affiliate................. 5,271,406 -- Income taxes recoverable.................................. 1,148,902 -- Prepaid expenses and other assets......................... 859,684 1,572,976 ----------- ----------- Total current assets.............................. 13,268,042 12,818,094 PROPERTY AND EQUIPMENT, net................................. 8,507,897 7,225,494 OTHER ASSETS Goodwill, net............................................. 14,515,785 16,257,663 Customer contracts, net................................... 1,316,667 1,116,667 Deferred tax assets....................................... 967,191 1,063,366 Other..................................................... 1,326,273 1,009,623 ----------- ----------- Total assets...................................... $39,901,855 $39,490,907 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt......................... $ 3,026,944 $ 481,637 Current portion of notes and interest payable -- affiliates.................................. 9,180,743 -- Accounts payable, trade................................... 831,674 990,495 Due to affiliates......................................... 1,748,509 12,833 Employee related accrued expenses......................... 1,804,677 2,294,858 Other accrued expenses.................................... 755,436 1,293,060 Income taxes payable...................................... -- 413,241 Deferred revenue.......................................... 214,891 214,891 ----------- ----------- Total current liabilities......................... 17,562,874 5,701,015 LONG-TERM DEBT, less current portion........................ 7,470,539 219,857 NOTES PAYABLE -- AFFILIATES, less current portion........... 5,527,677 -- DEFERRED REVENUE............................................ 651,602 684,915 COMMITMENTS AND CONTINGENCIES 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, 10,524,198 and 12,678,743 shares issued and outstanding at December 31, 1998 and 1999, respectively........................................... 105,242 126,787 Additional paid-in capital................................ 5,830,930 26,810,282 Retained earnings......................................... 2,752,991 5,948,051 ----------- ----------- Total shareholders' equity........................ 8,689,163 32,885,120 ----------- ----------- Total liabilities and shareholders' equity........ $39,901,855 $39,490,907 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 37 40 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ----------- ----------- ----------- REVENUES Outsourcing services -- affiliated.................... $29,114,601 $36,068,944 $41,465,498 Outsourcing services.................................. 599,443 1,989,306 10,702,732 Flood zone determination services..................... 7,763,576 24,454,558 18,540,543 Flood zone determination services -- affiliated....... 1,028,359 1,279,689 620,320 ----------- ----------- ----------- Total revenues................................ 38,505,979 63,792,497 71,329,093 ----------- ----------- ----------- EXPENSES Cost of outsourcing services.......................... 21,988,824 26,874,609 37,427,886 Cost of flood zone determination services............. 4,763,723 11,131,254 8,102,234 Selling, general and administrative................... 3,026,388 8,381,290 11,856,833 Management services from Parent....................... 2,343,866 3,259,712 2,255,810 Deferred compensation (non-recurring item)............ -- 728,069 -- Depreciation and amortization......................... 683,672 4,311,011 5,498,007 ----------- ----------- ----------- Total expenses................................ 32,806,473 54,685,945 65,140,770 ----------- ----------- ----------- OPERATING INCOME........................................ 5,699,506 9,106,552 6,188,323 ----------- ----------- ----------- EQUITY IN EARNINGS OF GEOTRAC, INC...................... 201,009 -- -- ----------- ----------- ----------- MINORITY INTEREST....................................... -- (472,803) -- OTHER INCOME (EXPENSE): Interest income....................................... -- 455,995 349,680 Interest expense...................................... (378,660) (2,194,353) (809,383) ----------- ----------- ----------- Total other income (expense).................. (378,660) (1,738,358) (459,703) INCOME BEFORE PROVISION FOR INCOME TAXES................ 5,521,855 6,895,391 5,728,620 PROVISION FOR INCOME TAXES.............................. 2,112,200 3,042,400 2,533,560 ----------- ----------- ----------- NET INCOME.............................................. $ 3,409,655 $ 3,852,991 $ 3,195,060 =========== =========== =========== NET INCOME PER COMMON SHARE............................. $ .34 $ .38 $ .26 =========== =========== =========== Weighted average common shares outstanding.............. 10,000,000 10,264,253 12,448,183 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 38 41 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL -------- ----------- ----------- ----------- Balance at December 31, 1996.................. $100,000 $ 160,336 $ -- $ 260,336 Cash dividends to Parent.................... -- (90,345) (3,409,655) (3,500,000) Net income.................................. -- -- 3,409,655 3,409,655 -------- ----------- ----------- ----------- Balance at December 31, 1997.................. 100,000 69,991 -- 169,991 Cash dividends to Parent.................... -- -- (1,100,000) (1,100,000) Issuance of Common Stock as partial consideration for the acquisition of Geotrac, Inc. (Note 3)................... 5,242 5,760,939 -- 5,766,181 Net income.................................. -- -- 3,852,991 3,852,991 -------- ----------- ----------- ----------- Balance at December 31, 1998.................. 105,242 5,830,930 2,752,991 8,689,163 Issuance of Common Stock as partial consideration for the acquisition of Colonial Claims.......................... 1,545 1,698,455 -- 1,700,000 Initial public offering of Common Stock, net of offering costs........................ 20,000 19,143,897 -- 19,163,897 Issuance of stock options to non-employees............................ -- 137,000 -- 137,000 Net income.................................. -- -- 3,195,060 3,195,060 -------- ----------- ----------- ----------- Balance at December 31, 1999.................. $126,787 $26,810,282 $ 5,948,051 $32,885,120 ======== =========== =========== ===========
The accompanying notes are an integral part of this consolidated statement. 39 42 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $3,409,655 $3,852,991 $ 3,195,060 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 683,672 4,311,011 5,498,007 Depreciation and amortization of Geotrac prior to July 1998 acquisition...................................... -- (712,990) -- Loss on disposal of property and equipment.............. 2,329 37,914 350,785 Equity in earnings of Geotrac, Inc...................... (201,009) (485,034) -- Write-off of deferred financing costs................... -- -- 244,752 Non-employee stock options.............................. -- -- 137,000 Deferred income taxes, net.............................. 131,000 (382,191) (202,564) Changes in assets and liabilities: Accounts receivable................................... (324,418) (238,449) 928,223 Income taxes recoverable.............................. -- (1,148,902) 1,148,902 Prepaid expenses and other current assets............. (45,031) (574,122) (388,639) Other assets.......................................... (40,394) (257,648) (199,673) Accounts payable, trade............................... 217,646 252,012 140,996 Employee related accrued expenses..................... 1,280,241 (695,910) 490,181 Other accrued expenses................................ 352,867 566,625 (446,468) Income taxes payable.................................. 1,766,329 (2,443,058) 413,241 Deferred revenue...................................... 449,016 333,313 33,313 ---------- ---------- ------------ Net cash provided by operating activities.......... 7,681,903 2,415,562 11,343,116 ---------- ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Geotrac, net of cash acquired.............. -- 2,797,008 -- Cash investment in Geotrac, Inc........................... (6,750,000) -- -- Purchases of property and equipment....................... (1,498,298) (1,613,518) (3,185,028) Payment of acquisition debt............................... -- (1,420,530) (500,000) Acquisition of Colonial Claims, net of cash acquired...... -- -- 1,092 Payment of dividend to prior Colonial Claims shareholders............................................ -- -- (670,000) ---------- ---------- ------------ Net cash used in investing activities.............. (8,248,298) (237,040) (4,353,936) ---------- ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds received from initial public offering........ -- -- 19,163,897 Proceeds from issuance of Preferred Stock of Subsidiary... 6,750,000 -- -- Proceeds from the issuance of debt........................ 2,815,000 -- -- Repayment of debt......................................... (315,500) (5,251,662) (9,795,989) Cash dividends paid to Parent............................. (3,500,000) (1,100,000) -- Repayment of affiliated notes and accrued interest........ -- -- (14,708,420) Collection of affiliated note and interest receivable..... -- -- 5,271,406 Net advances to (from) affiliates......................... (5,068,035) 6,680,187 (4,086,080) Deferred offering costs................................... -- (753,250) -- ---------- ---------- ------------ Net cash provided by (used in) financing activities....................................... 681,465 (424,725) (4,155,186) ---------- ---------- ------------ INCREASE IN CASH AND CASH EQUIVALENTS....................... 115,070 1,753,797 2,833,994 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- 115,070 1,868,867 ---------- ---------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 115,070 $1,868,867 $ 4,702,861 ========== ========== ============
The accompanying notes are an integral part of these consolidated statements. 40 43 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. In July 1997, the Company acquired a 49% interest in Geotrac, Inc. and, in July 1998 acquired the remaining 51% interest. Geotrac was subsequently merged into BHDS with the surviving company being known as Geotrac of America, Inc. ("Geotrac of America"). In September 1998, IMS Direct, Inc. was formed as a wholly owned subsidiary of IMSG and in January, 1999, the Company acquired Colonial Claims Catastrophe Corporation ("Colonial"). IMSG, IMS, IMS Direct, Geotrac of America and Colonial are hereinafter collectively known as the "Company". 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 and Colonial, 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 Geotrac of America. 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 BIG. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. In 1997, the Company's investment in Geotrac, Inc. was accounted for using the equity method since the Company owned less than 50% and had a significant but not controlling influence. In 1998, the operations of Geotrac for the year ended December 31, 1998 are consolidated in the Company's statement of income. The minority interest deduction in the statement of income represents the net income of Geotrac allocable to the 51% interests held by the other stockholders during the six months ended June 30, 1998, prior to the Company acquiring the remaining 51% interest in Geotrac. USE OF ESTIMATES The preparation of the financial statements conforms with accounting principles generally accepted in the United States and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 1998 and 1999, cash equivalents consisted of U.S. Treasury bills, certificates of deposit and overnight repurchase agreements. 41 44 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ACCOUNTS RECEIVABLE TRADE AND CONCENTRATION OF CREDIT RISK Accounts receivable, trade represents amounts due from insurance companies and financial institutions related to flood zone determinations and claims adjusting services performed. Credit is granted to customers based on management's assessment of their credit worthiness. Customer deposits are required in certain instances. The allowance for doubtful accounts totaled approximately $250,000 as of December 31, 1998 and 1999. Net bad debt expense totaled $134,733 and $301,813 during the years ended December 31, 1998 and 1999, respectively. 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. DEFERRED OFFERING COSTS The Company incurred accounting, legal, printing and other expenses in connection with its initial public offering of its Common Stock. These offering costs, which totaled $791,336 at December 31, 1998 and are included in other assets in the accompanying consolidated balance sheet, were subsequently charged to additional paid-in capital against the proceeds from the initial public offering. GOODWILL Goodwill is being amortized using the straight-line method over twenty years. The amortization period was determined based on various factors including the nature of the product or service provided, the Company's strong market position and historical and projected operating results. Accumulated amortization at December 31, 1998 and 1999 was $544,424 and $1,434,296, respectively. CUSTOMER CONTRACTS Customer contracts are being amortized using the straight-line method over seven years. The amortization period, which does not materially differ from the underlying contract lives, was determined based on historical and expected contract duration periods as well as the nature of the products and services provided. Accumulated amortization at December 31, 1998 and 1999 was $100,000 and $300,000, respectively. CAPITALIZED SOFTWARE COSTS The Company capitalizes certain qualifying software development costs incurred during the application development stage, as defined. During the fourth quarter of 1998 and during fiscal 1999, the Company capitalized $263,462 and $976,225, respectively, of such costs, which are included in "Other assets" in the accompanying consolidated balance sheets as of December 31, 1998 and 1999, respectively. Prior to September 1998, qualifying capitalizable costs incurred by the Company were not material. Amortization is recorded using the straight-line method over the service life of the software or the term of the customer contract to which the software relates, which ranges from one to five years. Accumulated amortization at December 31, 1999 was $247,497. No amortization was recorded during 1998. 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. 12l"), "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 42 45 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. No impairment exists for all periods presented. REVENUE RECOGNITION AND DEFERRED REVENUE Outsourcing Services Revenue Revenue generated from outsourcing services is recognized as earned when 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 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 totaling $214,891 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 were expected to 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. During 1999, the Company determined that the majority of claims being settled on behalf of its affiliated customers were actually settled within or shortly after the expiration of the policy term for which the Company was receiving a service fee based upon the underlying earned premium. As such, during 1999, the Company discontinued its practice of deferring claims revenue and will amortize the remaining deferred revenue balance, which totaled $214,891 as of December 31, 1999, ratably over the 2000 calendar year. 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. Flood Zone Determination Revenues The Company's flood zone revenues are principally derived from flood zone determination services and life-of-loan monitoring services. Flood zone determinations involve the Company ascertaining and certifying to a property's flood zone classification. Revenues for these services are recognized upon completion of each flood zone determination as each determination is completed within a short period of time. The Company receives an up-front, non-refundable fee to provide life of loan monitoring of flood zone determinations whereby the Company notifies its customers of changes in previously issued flood zone determinations. The Company defers a portion of the fee associated with this future obligation and amortizes these amounts using the straight-line method over the average life of the underlying loan, approximately 7 years. 43 46 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities. Prior to July 31, 1998, the Company's results of operations were 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 were determined by the amount that would have been due and payable had the Company filed a separate income tax return. As of July 31, 1998, BIG had sold a sufficient number of shares in the Company such that the Company no longer files its tax return with Bankers International Financial Corporation ("BIFC") on a consolidated basis. Effective as of July 31, 1998, the Company and BIFC entered into a Tax Indemnity Agreement pursuant to which (i) BIFC agrees to indemnify the Company in the event the Company incurs a tax liability as a result of taxable income of BIFC or one of its subsidiaries, and (ii) the Company agrees to indemnify BIFC in the event BIFC incurs a tax liability as a result of taxable income of the Company or one of its subsidiaries. Each party also agrees to reimburse the other for certain tax credits arising on or before July 31, 1998. Under the Tax Indemnity Agreement, the parties terminated a previous tax allocation agreement which had been in effect since October 1, 1993. NET INCOME PER COMMON SHARE Net income per common share, which represents both basic and diluted earnings per share ("EPS") since no dilutive securities were outstanding for all periods presented, is computed by dividing net income by the weighted average common shares outstanding. The following table reconciles the numerator and denominator of the basic and dilutive EPS computation:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 1998 1999 ----------- ----------- ----------- Numerator: Net income.................................... $ 3,409,655 $ 3,852,991 $ 3,195,060 =========== =========== =========== Denominator: Weighted average number of Common Shares used in basic EPS............................... 10,000,000 10,264,253 12,448,183 Diluted stock options......................... -- -- -- ----------- ----------- ----------- Weighted average number of Common Shares and diluted potential Common Stock used in diluted EPS................................ 10,000,000 10,264,253 12,448,183 =========== =========== ===========
For the year ended December 31, 1999, options to purchase 453,500 shares of Common Stock were outstanding during the period but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the Common Stock, and therefore, the effect would be antidilutive. 44 47 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK BASED COMPENSATION The Company accounts for stock based compensation awards to its employees pursuant to Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued to Employees", and its related interpretations which prescribe the use of the intrinsic value based method. However, the Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock Based Compensation." For awards for other than employees, the Company accounts for stock based compensation awards pursuant to the fair value based method of SFAS No. 123. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of the Company's financial instruments, which include cash and cash equivalents, 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. NOTE 3. ACQUISITIONS GEOTRAC, INC. Acquisition of 49% Interest On July 31, 1997, the Company, through its subsidiary, BHDS, invested cash in the amount of $6,750,000 in YoSystems in exchange for 490 shares of common stock issued by YoSystems, representing a 49% equity interest. At the time of the Company's investment, YoSystems' President and his wife owned 510 shares of YoSystems' common stock, representing a 100% equity interest. In addition, at the time of the Company's contribution, YoSystems had nominal net assets. As a result of the Company's capital infusion, the net assets of YoSystems increased to approximately $6,750,000. The Company's equity share of these net assets equated to 49% of $6,750,000, or $3,307,500, with the remainder of the Company's investment, which totaled $3,442,500, representing goodwill. On July 31, 1997, 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. 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. Acquisition of Remaining 51% Interest In July 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: 524,198 shares of the Company's Common Stock valued at $11.00 per share, the initial public offering price....... $5,766,181 Promissory note............................................. 1,500,000 Cash paid in December 1998.................................. 728,069 ---------- $7,994,250 ==========
45 48 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The recording of the Company's additional 51% interest in Geotrac and the elimination of the investment in Geotrac account through the consolidation process at July 1, 1998 resulted in the recognition of consolidated goodwill of $14,933,247 and net assets of $339,265 recorded at estimated fair values under the purchase method of accounting as follows:
JULY 1, 1998 ------------ Current assets.............................................. $ 5,968,680 Property and equipment...................................... 3,305,740 Customer contracts.......................................... 1,416,667 Other assets................................................ 299,065 Current liabilities......................................... (3,453,093) Long-term obligations....................................... (7,197,794) ----------- Net assets acquired......................................... 339,265 Goodwill.................................................... 14,933,247 ----------- $15,272,512 ===========
The following unaudited pro forma consolidated results of operations for the year ended December 31, 1998 is presented as if the acquisition of Geotrac, Inc. had been made on January 1, 1998. The unaudited pro forma information reflects the additional goodwill amortization and interest expense that would have been incurred if the Company had purchased Geotrac, Inc. on January 1, 1998. These pro forma results are not necessarily indicative of the results of operations that would have occurred had the purchase been made at January 1, 1998 or the future results of the consolidated operations (in thousands, except per share data): Revenue..................................................... $63,792 Operating income............................................ 9,758 Net income.................................................. 4,610 Net income per common share................................. $ .44
In addition, the Company entered into a Corporate Governance Agreement with Geotrac and its president and former majority shareholder (the "former majority shareholder") setting forth certain terms and conditions upon which Geotrac will operate following the merger. The Corporate Governance Agreement provides, in part, that, for so long as the former majority shareholder owns stock in the Company or Geotrac, or has an option to purchase stock in Geotrac, (i) the Company will vote all of its shares in Geotrac to fix and maintain the number of directors on the Geotrac Board of Directors at five, (ii) the Company will vote its shares in Geotrac to elect as directors of Geotrac two persons designated by the former majority shareholder, (iii) the termination of the former majority shareholder as an employee of Geotrac will require the vote of four out of five members of the Board of Directors, and (iv) certain actions by Geotrac will require the unanimous approval of the Geotrac Board of Directors, including any merger or consolidation, the payment of management or similar fees to the Company or its subsidiaries and affiliates, the sale or issuance of Geotrac stock, and the sale of Geotrac assets outside the ordinary course of business to anyone other than an affiliate of Geotrac. The former majority shareholder also has a right of first refusal to purchase the assets of Geotrac in the event such assets are to be sold. COLONIAL CATASTROPHE Effective January 7, 1999, the Company, through a wholly-owned subsidiary, acquired all of the issued and outstanding capital stock of Colonial Catastrophe Claims Corporation, a Florida corporation ("Colonial Catastrophe"), in exchange for (i) 154,545 shares of Common Stock, (ii) cash in the amount of $500,000, (iii) a promissory note in the principal amount of $500,000, and (iv) an earn-out payment of $300,000, which was paid during February, 2000 in 121,518 shares of Common Stock, based upon achieving a target income 46 49 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) before taxes of Colonial Claims for the year ended December 31, 1999. On January 15, 1999, Colonial Catastrophe was merged into the acquiring subsidiary and the name of the acquiring subsidiary was changed to "Colonial Claims Corporation" (hereinafter "Colonial Claims"). The acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion No. 16 "Business Combinations". The results of operations of Colonial Claims is included in the accompanying financial statements since the date of acquisition. The total cost of the acquisition, including the $300,000 earn-out payment made in February, 2000, was $3.0 million which exceeded the fair value of the net assets by $2.6 million. Such excess is being amortized on a straight-line basis over twenty years. In addition, Colonial Claims entered into a separate employment agreement with each of the previous shareholders pursuant to which they will serve as employees of Colonial Claims. Each of the employment agreements is for a period of five years and provides for an initial annual base salary of $102,000 (subject to a 5% increase), plus additional compensation based on annual revenues of the Colonial Claims business. The following unaudited pro forma consolidated results of operations for the year ended December 31, 1998 is presented as if the acquisition of Colonial Catastrophe had been made on January 1, 1998. The unaudited pro forma information reflects the additional goodwill amortization that would have been incurred if the Company had purchased Colonial Catastrophe on January 1, 1998. These pro forma results are not necessarily indicative of the results of operations that would have occurred had the purchase been made at January 1, 1998 or the future results of the consolidated operations (in thousands, except per share data):
1998 ------- Revenue..................................................... $70,010 Operating income............................................ 10,110 Net income.................................................. 4,421 Net income per common share................................. $ .42
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, LIFE ------------------------- (YEARS) 1998 1999 ------- ----------- ----------- Computer equipment and software..................... 3-5 $ 8,472,112 $ 9,707,957 Office furniture and equipment...................... 5 2,060,498 2,719,441 Leasehold improvements.............................. 5 148,471 181,045 Maps and map database............................... 5 2,029,221 2,087,570 Automobiles......................................... 5 23,608 23,608 ----------- ----------- 12,733,910 14,719,621 Less -- accumulated depreciation and amortization... (4,226,013) (7,494,127) ----------- ----------- $ 8,507,897 $ 7,225,494 =========== ===========
Maps and map database, which are used as a basis for making flood zone determinations, include the capitalized costs of purchasing maps as well as the direct labor cost of converting the maps to digitized computer files. Depreciation and amortization expense was $611,954, $2,941,602 and $4,132,898 in 1997, 1998 and 1999, respectively. 47 50 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5. OTHER ACCRUED EXPENSES Other accrued expenses consisted of the following as of December 31, 1998 and 1999:
1998 1999 -------- ---------- Adjuster expenses payable................................... $ -- $ 539,062 Accrued earn-out payable.................................... -- 300,000 Accrued professional fees................................... 205,000 80,000 Taxes payable other than income............................. 112,759 237,440 Commissions payable......................................... 95,018 61,557 Other accrued expenses...................................... 342,659 75,001 -------- ---------- $755,436 $1,293,060 ======== ==========
NOTE 6. NOTES RECEIVABLE AND PAYABLE -- AFFILIATES On March 31, 1998, the Company entered into a $4,950,000 promissory note with an affiliate that had previously advanced funds to the Company. The note, which is included in "Current portion of notes and interest payable-affiliates" in the accompanying December 31, 1998 consolidated balance sheet, bears interest at 8.5% per annum and is payable in full together with accrued interest in April 1999. During 1999, the note was repaid from proceeds received from the initial public offering. On April 1, 1998, the Company entered into a $4,950,000 promissory note with an affiliate to which the Company had previously advanced funds. The note, which is reflected as "Note and interest receivable -- affiliate" in the accompanying December 31, 1998 consolidated balance sheet, bears interest at 8.5% per annum and is payable in full together with accrued interest in April 1999. During 1999, the note was repaid by BIG from funds made available to BIG by a loan from a subsidiary of the selling shareholder in the initial public offering. 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 in exchange for consideration consisting of $325,075 in cash and two promissory notes totaling $2,802,175 ($2,663,424 at December 31, 1998). The notes, which are included in notes payable -- affiliates in the accompanying December 31, 1998 consolidated balance sheet, were repaid during 1999 from proceeds received from the initial public offering. In July 1998, in connection with the Geotrac acquisition, the Company issued a note payable to Geotrac's previous majority shareholder in the amount of $1,500,000. The note requires quarterly interest payments at a fixed interest rate of 8.5%. The note, which is included in "Notes payable -- affiliates, less current portion" in the accompanying consolidated balance sheet at December 31, 1998, was repaid during 1999 from proceeds received from the initial public offering. 48 51 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, ---------------------- 1998 1999 ----------- -------- Note payable to bank, interest at Company's option of: 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, due in quarterly installments of $312,500, plus accrued interest thereon, plus annual prepayments in an amount equal to fifty percent of excess cash flow, as defined, with the final payment due June 2004, collateralized by certain fixed assets of the Company............................... $ 6,875,000 $ -- 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.................... 1,479,541 -- Note payable to bank, interest at the lender's base lending rate, 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........ 404,500 -- Notes payable to banks, interest at both fixed (8.19%) and at the lender's base lending rate due in monthly principal installments ranging from $1,000 to $5,104, with the final payments due from December 1999 to 2000, collateralized by certain fixed assets of the Company, with certain notes guaranteed by the Company's Parent........................ 302,119 -- Capitalized equipment lease obligations (net of interest of approximately $91,000 and $40,000 at December 31, 1998 and 1999, respectively) due in monthly principal and interest payments of approximately $52,000 through 2001............ 1,436,323 701,494 ----------- -------- 10,497,483 701,494 Less current maturities..................................... 3,026,944 481,637 ----------- -------- $ 7,470,539 $219,857 =========== ========
In June, 1999, the Company entered into a revolving line of credit agreement ("LOC") with a financial institution that provides for borrowings of up to two times the rolling four quarter earnings before interest, taxes, depreciation and amortization ("EBITDA"), but in no event more than $12,000,000. The LOC bears interest at a specified percentage over LIBOR (8.23% at December 31, 1999) based on the ratio of funded debt (as defined) to EBITDA. Interest payments are payable monthly and the remaining unpaid principal balance is due in full in July, 2001. The LOC is collateralized by substantially all of the Company's assets and is subject to certain quarterly financial covenants requiring the Company to maintain the following minimum ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0; (ii) total liabilities to tangible net worth of not more than 1.0 to 1.0; and (iii) fixed charge coverage (as defined) of not less than 2.5 to 1.0. Additionally, the Company is restricted from making any distributions or dividends payable in cash or capital stock of the Company on any shares of any class of its capital stock or applying any of its property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock or any partnership interest when the ratio of interest earning debt to earnings before interest, taxes, depreciation, and amortization exceeds 1.0 either before or as a result of the distribution. As of December 31, 1999, there was no 49 52 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) restriction on the amount of retained earnings available for dividend distribution. Additionally, as of December 31, 1999, there was no outstanding balance under the LOC. At December 31, 1998 and 1999, property and equipment includes $1,713,595 and $1,603,784 of assets, respectively, and $348,857 and $966,074 of accumulated amortization, respectively, recorded under capital leases. NOTE 8. PREFERRED STOCK OF SUBSIDIARY In connection with the Company's purchase of a 49% interest in Geotrac, Inc., BHDS issued 675,000 shares of non-cumulative, 8% Preferred Stock to a corporation owned by the half-brother of a director of the Company. The 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. In May 1998, IMSG repurchased the outstanding Preferred Stock of BHDS in exchange for a note in the same amount. During December 1998, the note, which was payable in its entirety on December 31, 1998, was refinanced with the same lender into an installment note requiring monthly payments of principal and accrued interest of $138,701 (interest rate of 8.566%) commencing in January 1999 until its maturity in August 2002. At December 31, 1998, $1,225,557 is included in "Current portion of notes and interest payable--affiliates" and $3,902,677 is included in "Notes payable--affiliates, less current portion," in the accompanying consolidated balance sheet, which reflects the modification of the terms of the loan. Subsequent to May 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 during 1997 and 1998 were $229,315 and $189,370, respectively, and are included in "Interest expense" in the accompanying consolidated statements of income as the amounts are insignificant and the preferred stock has certain characteristics similar to debt. The installment note was subsequently repaid from proceeds received from the initial public offering. NOTE 9. SHAREHOLDERS' EQUITY COMMON STOCK 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 (pre-split) shares of Common Stock for each share of Common Stock then outstanding, resulting in an increase in the number of outstanding shares of Common Stock from 500 (pre-split) to 20,000,000 (pre-split) shares. On December 17, 1998 the Company effected a one-for-two reverse split of its Common Stock. The May and December 1998 recapitalizations have been retroactively reflected in the accompanying consolidated financial statements. INITIAL PUBLIC OFFERING In February 1999, the Company completed an initial public offering ("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000 shares sold in the IPO, 1,350,000 were sold by the Selling Shareholder and the remaining 2,000,000 shares were sold by the Company. The offering generated net proceeds to the Company of $19,164,000, after deducting offering expenses of approximately $1,296,000 paid by the Company. Such offering expenses were charged to additional paid-in capital against proceeds from the IPO. 50 53 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of Preferred Stock, $.0l 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. LONG TERM INCENTIVE PLAN The Long-Term Incentive Plan (the "Incentive Plan"), approved by the Company's Board of Directors and shareholders, provides for the grant of incentive or nonqualified stock options to purchase up to 875,000 shares of Common Stock. All such options are granted at fair market value or above and expire on the tenth anniversary from the date of grant. Options shall become exercisable 60% after three years, 20% after four years and 20% after five years. As of December 31, 1999, options to purchase 429,500 shares are outstanding under the Incentive Plan. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN The Non-Employee Directors' Stock Option Plan (the "Non-Employee Director Plan"), approved by the Company's Board of Directors and shareholders, provides for the grant of nonqualified stock options to purchase up to 7,200 shares of Common Stock in any three-year period to members of the Board of Directors who are not employees of the Company. A total of 200,000 shares may be issued pursuant to this plan. Non-employee directors receiving such options will become vested in options for the purchase of 800 shares of Common Stock after the adjournment of each annual meeting of shareholders of the Company, to the extent he or she has been granted options that have not yet vested, and provided that he or she is then a non-employee director of the Company. In addition, each non-employee director shall become vested in options for the purchase of 400 shares of Common Stock upon the adjournment of each regularly scheduled quarterly meeting of the Board of Directors (other than following the annual meeting of shareholders), to the extent he or she has been granted options that have not yet vested, and provided that he or she is then a non-employee director of the Company. 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 upon vesting, and will expire on the sixth anniversary of the date of grant. As of December 31, 1999, options to purchase 24,000 shares are outstanding under the Non-Employee Directors' Plan. NON-QUALIFIED STOCK OPTION PLAN The Non-Qualified Stock Option Plan (the "Non-Qualified Plan"), approved by the Company's Board of Directors and shareholders, provides for the grant of non-qualified stock options to purchase up to 125,000 shares of Common Stock. Immediately following completion of the initial public offering, options to purchase 125,000 shares of Common Stock at the initial public offering price ($11.00) were granted to certain executive officers of BIG. All of such options expire on the tenth anniversary from the date of grant. Options shall become exercisable 60% after three years, 20% after four years and 20% after five years. As of December 31, 1999, options to purchase 100,000 shares were outstanding under the Non-Qualified Plan. Under this plan, the Company will recognize aggregate compensation expense of approximately $600,000 of which $137,000 was recognized during the year ended December 31, 1999 and is included in selling, general and administrative expenses in the accompanying consolidated statement of income. The balance will be recognized ratably over the remainder of the vesting period. 51 54 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes option activity from December 31, 1998 through December 31, 1999:
OPTIONS NUMBER OF WEIGHTED AVAILABLE OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE --------- ----------- -------------- Balance at December 31, 1998........................ -- -- $ -- Options authorized................................ 1,200,000 -- -- Options granted................................... (794,500) 794,500 10.76 Options cancelled................................. 241,000 (241,000) 11.00 Options exercised................................. -- -- -- --------- -------- ------ Balance at December 31, 1999........................ 646,500 553,500 $10.64 ========= ======== ======
The range of exercise prices, shares, weighted average contractual life and exercise price for the options outstanding as of December 31, 1999 are presented below:
RANGE OF NUMBER OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE - --------------- --------- ---------------- ---------------- $7.69 -- 11.00 553,500 6.20 years $10.64
As of December 31, 1999, there were 18,000 options that were exercisable at a weighted average exercise price of $11.00. The per-share weighted-average fair value of stock options granted during 1999 was $6.37 using the Black-Scholes option-pricing model with the following weighted-average assumptions: Expected dividend yield of 0%, risk-free interest rate of 5.75%, expected volatility of 65% and an expected life of 5 years. PRO FORMA RESULTS The Company applies APB Opinion No. 25 in accounting for its Incentive Plan and Non-Employee Director Plan and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the company determined compensation cost based on SFAS No. 123, the Company's net income would have been as follows:
1999 --------------------- NET DILUTED INCOME EPS ---------- ------- As reported................................................. $3,195,060 $ .26 Statement 123 compensation (net of tax)..................... (617,500) (.05) Pro forma disclosure........................................ $2,577,560 $ .21
The disclosure presented above represents only the estimated fair value of stock options granted in 1999 and is not necessarily indicative of the fair value of stock options that could be granted by the Company in future fiscal years or of all options currently outstanding. 52 55 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. INCOME TAXES The provision for income taxes is summarized as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ---------- ---------- Current: Federal...................................... $1,686,500 $2,090,400 $1,955,660 State........................................ 294,700 450,000 481,900 ---------- ---------- ---------- 1,981,200 2,540,400 2,437,560 ---------- ---------- ---------- Deferred: Federal...................................... 112,400 435,400 77,000 State........................................ 18,600 66,600 19,000 ---------- ---------- ---------- 131,000 502,000 96,000 ---------- ---------- ---------- $2,112,200 $3,042,400 $2,533,560 ========== ========== ==========
Reconciliation of the federal statutory income tax rate of 34% to the effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ---------- ---------- Federal income taxes, at statutory rates....... $1,877,400 $2,344,400 $1,947,700 State taxes, net of federal benefit............ 200,400 323,500 292,200 Equity in earnings of Geotrac, Inc............. (68,300) -- -- Minority interest.............................. -- 160,800 -- Dividends declared on Preferred Stock of Subsidiary................................... 78,000 64,400 -- Non-deductible goodwill........................ 24,400 85,500 175,000 Non-deductible meals and entertainment......... -- 12,700 58,900 Other, net..................................... 300 51,100 59,760 ---------- ---------- ---------- $2,112,200 $3,042,400 $2,533,560 ========== ========== ==========
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, --------------------- 1998 1999 -------- ---------- Deferred tax assets: Vacation pay.............................................. $207,700 $ 279,800 Deferred recognition of life-of-loan premium.............. 735,200 628,100 Deferred revenue.......................................... 65,000 -- Depreciation and fixed asset bases differences............ -- 181,100 Other..................................................... 1,100 26,300 Deferred tax liability: Goodwill and customer list bases differences.............. (30,600) (52,300) Depreciation and fixed asset bases differences............ (11,400) -- -------- ---------- Net deferred tax asset............................ $967,000 $1,063,000 ======== ==========
53 56 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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). 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. The Company's business is dependent upon various factors, such as general economic conditions and weather patterns, which 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. 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. OPERATING LEASES The Company leases property and equipment under operating leases expiring in various years through 2005. Future minimum rental payments under non-cancelable operating leases, exclusive of related party leases discussed in Note 12, having initial or remaining terms in excess of one year as of December 31, 1999 are as follows:
YEAR ENDED DECEMBER 31, AMOUNT - ----------------------- ---------- 2000........................................................ $1,889,000 2001........................................................ 1,462,000 2002........................................................ 1,075,000 2003........................................................ 840,000 2004........................................................ 672,000 Thereafter.................................................. 44,000 ---------- Total future minimum rental payments.............. $5,982,000 ==========
Total rental expense, excluding amounts paid to BIG under the affiliated lease agreements, totaled $109,000, $470,000 and $1,025,000 for the years ended 1997, 1998 and 1999, respectively. LEGAL PROCEEDINGS Bankers Insurance Company ("BIC"), a subsidiary of BIG, the Company's principal shareholder and customer, and Bankers Life Insurance Company ("BLIC") and Bankers Security Insurance Company ("BSIC"), subsidiaries of BIC, have been 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 their use of a private investigator to gather information on a DOI employee and the private investigator's unauthorized use of illegal wiretaps in connection therewith. On March 23, 2000, the Treasurer and Insurance Commissioner of the State of Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC and BSIC based upon the results of such investigation. The administrative complaint charges BIC, BLIC and BSIC with violating various provisions of the Florida Insurance Code including, among other things, a provision requiring 54 57 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) insurance companies to have management, officers or directors that are, among other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC that the Insurance Commissioner intends to impose such penalties or take such other administrative actions as may be proper or appropriate under applicable law, including possibly entering an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida. BIC, BLIC and BSIC have informed the Company that they intend to vigorously defend against such action, but no assurances can be given as to the outcome thereof. In the event the DOI were to enter an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida, or impose other significant penalties on any of them, it would materially adversely affect the business and/or operations of BIG and, in turn, could result in the loss of or material decrease in the Company's business from BIG, which would have a material adverse effect on the Company's business, financial condition and results of operations. On November 19, 1999, the United States, on behalf of FEMA, filed a civil action against BIC in the U.S. District Court for the District of Maryland stemming from FEMA's investigation of certain cash management and claims processing practices of BIC in connection with its participation in the National Flood Insurance Program ("NFIP"). The complaint alleges, among other things, that BIC knowingly failed to report and pay interest income it had earned on NFIP funds to the United States in violation of the False Claims Act as well as various common law theories, including fraud, breach of contract, unjust enrichment and negligent misrepresentation. The complaint seeks civil penalties of $1.08 million and actual damages of approximately $1.1 million, as well as treble, punitive and consequential damages, costs and interest. BIC has informed the Company that it intends to vigorously defend against the action, but no assurances can be given as to the outcome thereof. However, BIG and its legal counsel have advised the Company that an adverse judgment in this action would not have a material adverse affect on the business and/or operations of BIC, although no assurances can be given in this regard. FEMA's investigation of certain claims processing practices of BIC in connection with its participation in the NFIP is continuing, and BIC has produced documentation in connection therewith. If the parties are unable to reach agreement in these matters, the United States could amend its complaint against BIC to add additional claims under the False Claims Act and/or various common law and equitable theories relating to such matters. In the event such continuing investigation 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. During 1999, BIG, together with certain of its affiliates, including the Company, was subject to a wage and hour audit conducted by the Department of Labor ("DOL"). The Company has responded to the DOL's inquiries relating to the classification of its employees for the purpose of determining overtime compensation. The Company and BIG are in the process of jointly negotiating with representatives of the DOL in an effort to fairly determine the proper classification of certain employees and the amount of the past wages owed. Although management cannot currently determine the amount of past wages to be assessed to the Company, they do not believe it will have a material adverse effect on business, financial condition and results of operations of the Company, although no assurances can be given in this regard. 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. 55 58 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) COMMON STOCK AWARDS Prior to the Company's acquisition of Geotrac, Inc., Geotrac's president had a non-binding commitment to grant to certain former and current employees options to purchase shares of Geotrac, Inc. common stock held by the president and his wife, for prior employee services rendered. During May 1998, the president and his wife contributed 46.45 shares of their Common Stock to these individuals which is recorded as deferred compensation (non-recurring item) totaling $728,069 in the accompanying December 31, 1998 consolidated statement of income. The valuation of the Common Stock used to compute the deferred compensation expense was determined by dividing the purchase price of $7,994,250 for the 51% interest in Geotrac by 510 shares, the remaining shares purchased. EMPLOYMENT AGREEMENTS The Company entered into employment agreements with certain members of its executive management team. 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 then current annual base salary, 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. ("Geotrac's President"). 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 Geotrac's President's death or disability, Geotrac, Inc.'s obligations under the agreement will automatically terminate, except that Geotrac's President 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 Geotrac's President 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 Geotrac's President 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 Geotrac's President by his new employer, if any. The agreement contains certain non-compete provisions which prevent Geotrac's President from engaging in the flood zone compliance business within a specified area and soliciting or employing any Geotrac, Inc. employees. NOTE 12. RELATED PARTY TRANSACTIONS SERVICE AND ADMINISTRATIVE AGREEMENTS During 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 $3,236,255 of the outsourcing revenues for 1997. For the years ending December 31, 1998 and 1999, 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 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 56 59 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 and $36,068,944 of total outsourcing revenue in 1997 and 1998, respectively. Effective December 1, 1998, the Company entered into a Service Agreement with Bankers Life Insurance Company ("BLIC"), an indirect subsidiary of BIG, pursuant to which the Company provides certain administrative services and allows BLIC to make use of certain of the Company's property, equipment and facilities in connection with BLIC's day-to-day operations. Under the Service Agreement, as amended, BLIC agrees to pay the Company predetermined fees on a quarterly basis. The term of the Service Agreement with BLIC ends on June 1, 2001, but may be terminated at any time by BLIC upon 90 days prior written notice. Effective January 1, 1999, these fee arrangements were modified to provide for tiered pricing based on the volume of business processed. These modifications resulted in a reduction in the base fees charged for certain lines of business and increases in base fees charged for other lines of business to better reflect the services provided and competitive market rates for such services. The term of each Service Agreement shall expire in June 2001, provided that it shall thereafter be automatically extended until terminated upon 90 days prior notice by either party. Effective April 1, 1999, the Company further amended its existing service agreements with affiliated insurers to provide for minimum aggregate quarterly service fee payments through December 31, 1999 with respect to certain lines of business, provided that certain key tasks are performed timely. If such minimum service fee requirements with respect to said lines of business under the agreements had not been implemented as of April 1, 1999, aggregate affiliated outsourcing services revenues, which totaled $41.5 million for the year ended December 31, 1999 would have been $39.7 million in accordance with the terms of the affiliated service agreements as in effect prior to April 1, 1999. Additionally, for the year ended December 31, 1999, the Company did not recognize approximately $500,000 of additional affiliated service fees under the minimum service fee agreement as the Company did not meet certain specified milestones on a timely basis. Such minimums were established to compensate the Company for maintaining an infrastructure to process certain lines of business of affiliated insurers that have not grown as rapidly as originally forecasted. In April, 1999, the Company also entered into a Technical Support Services Agreement with BIG pursuant to which the Company provides BIG with certain technical support services, computer programming and systems analysis services. Under this agreement, such services are charged to BIG on a time and materials basis. Revenue provided under this agreement totaled approximately $1.3 million during the year ended December 31, 1999, which is included in affiliated outsourcing services revenue in the accompanying consolidated statements of operations. 57 60 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has historically been charged a monthly management fee under an administrative services 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 1997 were $2,343,866. During 1998, the Company was charged for these services, exclusive of rent, generally based on agreed-upon amounts (quarterly fee of $396,250 and an annual fee of $120,000 for routine legal services) totaling $2,250,490. During 1999, the administration services agreement was amended to eliminate certain accounting and internal audit service functions (which functions are currently performed by the Company directly) and to reduce the quarterly fee payable by the Company to BIG to $258,750, subject to renegotiation by either party. The agreement, which expired on December 31, 1999, is in the process of being renegotiated under similar terms and conditions. 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 lease agreements, which expired on December 31, 1999, are in the process of being renegotiated. Rent expense of $961,569, $1,009,222 and $1,009,222 for the years ended December 31, 1997, 1998 and 1999, respectively, is included in "Management services from Parent" in the accompanying consolidated statements of income. 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, $6,124,060, and $7,538,871 for years ended December 31, 1997, 1998 and 1999, 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 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 $1,028,359, $1,279,689 and $620,320 for 1997, 1998 and 1999, respectively. OTHER RELATED PARTY TRANSACTIONS On July 31, 1998, the Parent sold 2,050,000 shares of the issued and outstanding Common Stock it held in the Company to Venture Capital Corporation ("VCC"), a Cayman Islands corporation. VCC acquired its interest in the Company directly from the Company's Parent. VCC 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. VCC sold a portion of its interest in the Company in the initial public offering, and a subsidiary of VCC lent approximately $12.0 million to BIG in exchange for a subordinated note. A portion of the funds received by BIG were used to satisfy the "Due from affiliates" and the "Note receivable -- affiliate" recorded by the Company. Additionally, the Company used a portion of the offering proceeds to repay the "Due to affiliates", income taxes payable to Parent and "Note payable -- affiliate" balances. 58 61 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's Chairman of the Board also serves as Vice Chairman of the Board of Directors of BIG, and two other directors of the Company serve as executive officers and/or directors of BIG. As the interests of the Company and BIG may differ, these individuals may face certain conflicts of interests. 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 which covers substantially all employees. To participate in the plan, employees must be at least 18 years old and have completed 90 days of service. The Company makes matching contributions of up to 5% of each participant's deferral. The Company's expense related to this plan was approximately $466,096, $647,072, and $821,217 in 1997, 1998 and 1999, respectively. 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 ----------- -------------- ------------ ------------ 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.................. 69,781 308,879 -- 378,660 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 1998 Operating revenues -- affiliated.......... $37,596,598 $ 1,279,689 $ (1,527,654) $37,348,633 Operating revenues -- unaffiliated........ 1,989,306 24,454,558 -- 26,443,864 Operating income.................. 1,867,742 7,238,810 -- 9,106,552 Interest expense.................. 1,078,759 1,115,594 -- 2,194,353 Depreciation and amortization..... 2,236,940 2,074,071 -- 4,311,011 Identifiable assets............... 18,664,056 28,443,025 (7,205,226) 39,901,855 Minority interest................. -- (472,803) -- (472,803) 1999 Operating revenues -- affiliated.......... $42,142,568 $ 620,320 $ (677,070) $42,085,818 Operating revenues -- unaffiliated........ 10,702,732 18,540,543 -- 29,243,275 Operating income.................. 1,870,427 4,317,896 -- 6,188,323 Interest expense.................. 255,393 669,530 (115,540) 809,383 Depreciation and amortization..... 3,229,839 2,268,168 -- 5,498,007 Identifiable assets............... 28,723,070 26,089,991 (15,322,154) 39,490,907
59 62 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1998 1999 -------- ---------- ---------- Cash paid for: Interest.......................................... $149,345 $1,614,807 $1,141,161 Income taxes...................................... 214,743 7,381,907 1,470,000
During 1998, the Company acquired fixed assets by issuing various debt obligations (including capital leases) totaling $4,265,639. During 1998, the Company repurchased the Preferred Stock of a subsidiary by issuing a note in the amount of $6,750,000. During 1998, the Company acquired the remaining 51% interest in Geotrac, Inc. and in 1999, acquired Colonial Catastrophe. In conjunction with these acquisitions, assets acquired and liabilities assumed were as follows:
YEAR ENDED DECEMBER 31, ------------------------ 1998 1999 ----------- ---------- Common Stock................................................ $ 5,766,181 $1,700,000 Common Stock payable........................................ -- 300,000 Promissory note............................................. 1,500,000 500,000 Short-term obligation....................................... 728,069 500,000 ----------- ---------- $ 7,994,250 $3,000,000 =========== ========== Fair value of assets acquired............................... $10,990,152 $1,846,555 Liabilities assumed......................................... 10,650,887 1,478,306 ----------- ---------- Net assets.................................................. 339,265 368,249 Goodwill.................................................... 14,933,247 2,631,751 ----------- ---------- $15,272,512 $3,000,000 =========== ==========
NOTE 16. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Following is a summary of the quarterly results of operations for the quarterly periods in 1997, 1998 and 1999:
QUARTER ENDED ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- ----------- ------------ ----------- 1997 Total revenues...................... $ 8,803,550 $ 9,813,294 $10,142,111 $ 9,747,024 Operating income.................... 1,381,397 1,416,770 1,629,721 1,271,618 Net income.......................... 833,031 852,687 841,836 882,101 Net income per common share......... 0.08 0.09 0.08 0.09 1998 Total revenues...................... $15,518,805 $15,725,571 $16,128,175 $16,419,946 Operating income.................... 3,028,012 1,938,285 2,147,585 1,992,670 Net income.......................... 1,108,368 848,288 950,763 945,572 Net income per common share......... 0.11 0.08 0.09 0.09 1999 Total revenues...................... $18,105,319 $18,478,008 $15,646,548 $19,099,218 Operating income.................... 2,471,611 3,134,248 (20,116) 602,580 Net income.......................... 1,318,543 1,848,448 (228,071) 256,140 Net income per common share......... 0.11 0.15 (0.02) 0.02
60 63 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The consecutive growth in total revenues during 1998 and 1999 is primarily due to the acquisitions of Geotrac during 1998 and Colonial Catastrophe during 1999 and the corresponding incremental revenues, operating income and net income contributed by those acquisitions. 61 64 SIGNATURES Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. By: /s/ DAVID K. MEEHAN ------------------------------------ David K. Meehan Chairman of the Board March 30, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David K. Meehan, David M. Howard and Christopher P. Breakiron, and each of them, 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 to this report, and to file the same, with all exhibits thereto, and any 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 perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 30, 2000.
SIGNATURE TITLE --------- ----- /s/ DAVID K. MEEHAN Chairman of the Board and Director - ----------------------------------------------------- David K. Meehan /s/ DAVID M. HOWARD President, Chief Executive Officer and - ----------------------------------------------------- Director (Principal Executive Officer) David M. Howard /s/ ROBERT G. MENKE Director - ----------------------------------------------------- Robert G. Menke /s/ WILLIAM D. HUSSEY Director - ----------------------------------------------------- William D. Hussey /s/ DANIEL J. WHITE Director - ----------------------------------------------------- Daniel J. White /s/ CHRISTOPHER P. BREAKIRON Vice President, Chief Financial Officer, - ----------------------------------------------------- Treasurer and Secretary (Principal Financial Christopher P. Breakiron and Accounting Officer) /s/ ROBERT M. MENKE Director - ----------------------------------------------------- Robert M. Menke /s/ JOHN A. GRANT, JR. Director - ----------------------------------------------------- John A. Grant, Jr. /s/ E. RAY SOLOMON Director - ----------------------------------------------------- E. Ray Solomon /s/ ALEJANDRO M. SANCHEZ Director - ----------------------------------------------------- Alejandro M. Sanchez
62 EX-10.107 2 LEASE AGREEMENT DATED SEPTEMBER 27, 1999 1 Exhibit 10.107 KOGER LEASE ----- THIS LEASE AGREEMENT, dated SEP 27 1999 by and between KOGER EQUITY. INC. a Florida Corporation ("Landlord") with its principal office at 8880 Freedom Crossing Trail, Jacksonville, FL 32256(Federal I.D. 59-2898045) and INSURANCE MANAGEMENT SOLUTIONS GROUP, INC., a Corporation organized and existing under the laws of the State of Florida ("Tenant"), with its principal office at 360 Central Avenue, Suite 100 St. Petersburg, Fl. (Federal I.D. 59-3422536). 1. LEASE PROVISIONS A. DESCRIPTION OF PREMISES D. PAYMENTS Suite Number(s) 200 Payee KOGER EQUITY, INC. Building Name GILCHRIST Address Post Office Box D860504 Address 801 94TH AVENUE NORTH City/State/Zip Orlando, Fl. 32886-0504 County PINELLAS Tenant Account# 051083 (note on remittance) City ST. PETERSBURG State/Zip FL 33702 E. NOTICES Tenant Insurance Management Solutions 360 Central Ave., Suite 100 B. LEASED AREA St. Petersburg, Fl. 33701 Agreed to be approximately 35507 rentable square feet (includes Tenant's share of common area). Copy to C. LEASE TERMS Lease Term (Months) 61 Landlord KOGER EQUITY, INC. Commencement Date 15 January 2000 877 Executive Center Dr. W Expiration Date 14 February 2005 Suite 100 Monthly Base Rent $ 41424.83 St. Petersburg, Fl. 33702 Sales or Use Tax $ 2899.73 Total $ 44324.56 Copy to KOGER EQUITY, INC. Security Deposit * $ 45000.00 (See Section 2 of Rider) Attn: President HVAC Access Fee Per Hour/Unit $4.00 (See Section 7 of Rider) 8880 Freedom Crossing Trail Jacksonville, Florida 32256
The provisions contained in Sections 2 through 29 are incorporated into and become a part of this Lease by reference. Tenant and Landlord have executed or caused to be executed this Lease on the dates shown below the signatures, effective as of the date first set forth above. Tenant: INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. Landlord: KOGER EQUITY, INC. By /s/ David K. Meehan (SEAL) By /s/ Thomas C. McGeachy (SEAL) - -------------------------------------------------- -------------------------------------------------- (Print Name) DAVID K. MEEHAN (Print Name) THOMAS C. MC GEACHY - -------------------------------------------------- -------------------------------------------------- Title Chairman Title Vice President - -------------------------------------------------- -------------------------------------------------- Attest /s/ Chris Breakiron Attest /s/ Mary Sue Wakeman - -------------------------------------------------- -------------------------------------------------- (Print Name) CHRIS BREAKIRON (Print Name) MARY SUE WAKEMAN - -------------------------------------------------- -------------------------------------------------- Title V.P., CFO Title - -------------------------------------------------- -------------------------------------------------- (Corporate Seal) (Corporate Seal) Date 9/24/99 Date 9/27/99 - -------------------------------------------------- -------------------------------------------------- Signed and Sealed in the presence of: Signed and Sealed in the presence of: (1) /s/ Lisa M. Powell (1) - -------------------------------------------------- -------------------------------------------------- (Print Name) LISA M. POWELL (Print Name) - -------------------------------------------------- -------------------------------------------------- (2) /s/ Judith A. Peterson (2) - -------------------------------------------------- -------------------------------------------------- (Print Name) Judith A. Peterson (Print Name) - -------------------------------------------------- -------------------------------------------------- As to Tenant As to Landlord
Lease Form 199 1 of 9 2 LEASE PROVISIONS INCORPORATED BY REFERENCE 2. LEASE OF PREMISES: Landlord leases to Tenant and Tenant takes from Landlord the premises ("Premises") shown on Exhibit "A", to be used exclusively by Tenant, in the building ("Building") on the Property ("Property") located at the address stated in Section 1A under the terms and conditions contained in this Lease. 3. TERM AND POSSESSION: The term of this Lease ("Term") shall commence on the date ("Commencement Date") and expire on the date ("Expiration Date") all stated in Section 1C unless modified under other provisions in this Lease. Landlord agrees to have the Premises substantially completed and ready for possession on or before Commencement Date, subject to causes or events beyond the control of Landlord ("Unforeseen Causes"). Should there be a delay, Tenant agrees to accept possession of the Premises within 10 days after the receipt of written notice by Landlord of substantial completion and the Commencement Date then shall be the first day of the calendar month immediately following the occupancy date, and the Expiration Date shall be changed to maintain the Lease Term in Section 1C, and these changes shall be reflected in a Lease Amendment. 4. USE: Tenant shall use the Premises for general office purposes only and shall not use or permit the use or occupancy of the Premises in any manner which: (a) is unlawful; (b) may be dangerous; (c) may invalidate any insurance policy held by Landlord affecting the Building; (d) may create a nuisance, disturb other Tenants of the Building or the occupants of neighboring Property or injure the reputation of the Building; or (e) violates the "Rules and Regulations," which are subject to change, of the Building, a copy of which is available in Landlord's office, or any restriction, covenant or encumbrance of record affecting the Property. Tenant shall be responsible for any costs incurred by Landlord by reason of Tenant's and/or Tenant's agents', employees' or invitees' misuse and/or damage of the Premises or common areas. Tenant shall pay Landlord such costs as Additional Rent. 5. RENT AND SALES/USE TAX: Monthly Rent is due in advance on the first day of each month and will be delinquent on the 10th day of the month. "Monthly Rent" shall mean: (a) the initial monthly base rent stated in Section 1C for the first twelve months following the Commencement Date of the Term of this Lease ("Base Year") and (b) the adjusted Monthly Rent, as adjusted under this Lease. Monthly Rent and any Additional Rent ("Additional Rent") (collectively called "Rent") plus any sales or use taxes shall be paid without notice or demand and without any deduction. Tenant agrees to pay to Landlord all Rent and other sums under this Lease at the address specified in Section 1D, or at any other place designated in writing by Landlord. Rent for any partial lease month shall be prorated. Tenant's obligation to pay Rent to Landlord shall be independent of every other covenant or obligation under this Lease. All delinquent Rent or other sums due shall bear interest at the maximum rate permitted by applicable law or 18% per annum, whichever is less, from the date due until paid plus, Tenant shall pay a late payment service charge, equal to 5% of the total delinquent amount or $100.00, whichever is greater, for each month for which payment of Rent or other sums due are not received by Landlord when due. Tenant shall pay a charge equal to $25.00 per returned check or the amount to which Landlord is entitled under state law, whichever is greater. No late fees and charges shall exceed the amounts permitted by applicable state law. Unless Tenant has tax exempt status, in addition to the Rent and other sums due to Landlord under this Lease, Tenant shall pay to Landlord any sales, use, or other tax, excluding Federal or State income taxes, now or hereafter imposed upon Rents and other sums due to Landlord under this Lease. 6. RENT ADJUSTMENT AND REAL ESTATE TAXES: Monthly Rent for each successive twelve month period ("Lease Year") subsequent to the Base Year shall be increased by 3% of the Monthly Rent for the previous Lease Year. Landlord shall endeavor to notify Tenant of the amount of the adjusted Monthly Rent, in writing, prior to the effective date of such adjustment. Tenant agrees to pay the adjusted Monthly Rent, regardless of whether or when Landlord provides such notice. Tenant agrees to pay to Landlord as Additional Rent Tenant's pro-rata share of any and all increases in real estate taxes and assessments levied against the Property in which the Premises are located over the real estate taxes and assessments due and payable on the Property at the commencement of this Lease. Tenant's pro-rata share shall be based on the area in the Premises compared to the rentable area in the Building subject to the applicable assessment. Payment of Tenant's pro-rata share shall be paid to Landlord within 30 days after Tenant receives written notice from Landlord of any amount due. 2 of 9 3 7. ORDINANCES AND REGULATIONS: Tenant shall comply promptly, at Tenant's sole cost and expense, with all current and future laws, codes, ordinances, rules and regulations of any municipal, county, state, federal or other governmental authority, applicable to Tenant's use or occupancy of the Premises, and shall comply with the requirements of all of Landlord's policies of insurance at any time in force with respect to the Building in which the Premises are located. Tenant agrees for itself and for its subtenants, employees, agents, and invitees to comply with the "Rules and Regulations" of the Building. Landlord has no knowledge that any hazardous substances defined in "Rules and Regulations" or petroleum products, other than small quantities of typical cleaning and office equipment supplies, are located on or within the Premises or common areas within the building in which the Premises are located. To Landlord's knowledge, there are no hazardous substances or Petroleum products disposed of on or in the Property which, if present, would materially or adversely affect Tenant's use or enjoyment of the Premises, common areas of the Building, or common parking areas serving the Building. To Landlord's knowledge, there is no existing environmental condition caused by hazardous substances affecting the Premises, common areas, or parking areas which would adversely or materially affect Tenant's use and enjoyment of the Premises. Landlord and Tenant agree each will use and dispose of all hazardous materials and petroleum products in compliance with applicable laws, and each agrees to indemnify and hold the other harmless from any actual loss suffered due to the other's failure to properly dispose of hazardous materials and petroleum products. 8. SIGNS: Tenant shall place no signs or advertising matter on the exterior or interior of the Building or at any other location on the Property other than within the Premises. Initial placement of Building standard directional and identification signage shall be provided by Landlord and shall be limited to Tenant directory of the Building and individual Tenant entry suite identification signage and subsequent modification shall be at Tenant's expense. 9. SERVICES: Landlord shall provide, at Landlord's expense and according to its customary standards: (a) water from regular Building fixtures; (b) electricity for normal business usage excluding computer rooms; (c) janitorial services five times per week; (d) non-exclusive parking proximate to the Building. Landlord, at its expense in accordance with its customary standards, shall provide heating and cooling (HVAC) of the Premises Monday through Friday, 8:00 a.m. to 5:00 p.m., excluding national holidays. HVAC at other times may be provided, at the sole cost and expense of Tenant, paid as Additional Rent, according to the HVAC Access Fee Per Hour/Unit provided in Section 1C. Other Tenant requested services may be provided by Landlord at sole cost and expense of Tenant, paid as Additional Rent including maintenance or replacement of non-standard items defined in the "Rules and Regulations" of the Building. Landlord shall not be liable for damages for failure to furnish any service in a timely manner due to any causes described in Sections 12 and 13, or as a result of Unforeseen Causes. Any failure or delay as a result of these reasons shall not be considered an eviction or disturbance of Tenant's quiet enjoyment, use or possession of the Premises. 10. ALTERATIONS: Tenant accepts the Premises as being in good repair and condition, and Tenant shall maintain the Premises in good repair and condition, reasonable use, wear and tear excepted. Tenant shall not make any alterations, additions or improvements to the Premises without Landlord's prior written consent and shall permit no lien or claim for lien of a mechanic, laborer, or supplier or any other lien to be filed against the Property arising out of work performed, or alleged to have been performed by, or at the direction of, or on behalf of Tenant. The interest of Landlord in the Property shall not be subject to liens for improvements made by Tenant or by persons claiming by, through or under it, and Tenant agrees it shall notify any person making any improvements on its behalf of this provision. Upon request of Landlord, Tenant will execute a short form of this Lease which may be recorded which states that the terms of this Lease expressly prohibit any liability to Landlord or its Property for any improvements made by, through or under Tenant. 11. RIGHT OF ENTRY: Landlord and its agents shall have the right, at all reasonable times during the Term of this Lease, to enter and inspect the Premises and to make repairs and alterations Landlord deems necessary, with reasonable notice, except in cases of emergency. In such cases, no notice shall be required. Landlord has the right to show the Premises to prospective tenants during the last 90 days of the Lease Term or at any time after a Lease cancellation notice is received. Landlord shall have the right at all times to alter, renovate, and repair portions of the Building which do not include the Premises, notwithstanding any temporary inconvenience or disturbance to Tenant. 3 of 9 4 12. DESTRUCTION OF PREMISES: If a fire or other casualty (collectively, "Casualty") which damages the Premises or the Building occurs and materially affects the use of the Premises, Landlord shall determine whether the Premises are rendered substantially untenable and make an initial estimate of the time needed to complete necessary repairs to the Building and Premises. Within 10 business days after the Casualty, Landlord shall notify Tenant in writing of Landlord's determinations ("Landlord's Notice") as follows: A. If Landlord's Notice states that the Premises are rendered substantially untenable by the Casualty and Landlord's initial estimate -of the time needed for repair exceeds 120 days, Landlord or Tenant may, by written notice, terminate this Lease as of the date of the Casualty. If Landlord's Notice states that the Premises are rendered substantially untenable by the Casualty but Landlord's initial estimate of the time needed for repairs is 120 days or less, Landlord will proceed with the restoration of the Premises and Building as set forth in 12D below. Landlord will use reasonable efforts to make other office space owned by Landlord available to Tenant for the operation of Tenant's business or to make other alternate arrangements which are suitable to Tenant during the time the Premises are being restored. If the work is not completed within 120 days or alternate arrangements are not provided, Tenant may terminate this Lease as of the date of the Casualty by providing written notice to Landlord, given no later than 120 days after the date of the Casualty. B. If Landlord's notice states that the Premises are still substantially tenable after the Casualty, then neither Landlord nor Tenant shall have the right to terminate this Lease. C. Either party may terminate this lease if the Casualty occurs within the last six months of the Lease and Landlord's estimate of the time needed to repair the damage caused by the Casualty exceeds 20% of the remaining term of the Lease. D. Written notice of Landlord's or Tenant's election to terminate the Lease pursuant to 12A and 12C above will be given by the 15th business day after the date of the Casualty. Unless the Lease is terminated, Landlord will repair the Premises and Building (other than leasehold improvements installed by Tenant and personal property) to substantially the same condition as existed immediately prior to the Casualty. Tenant shall relocate, at Tenant's expense, all personal property from the Premises prior to and during the repairs. E. If the Premises are damaged by Casualty and the Lease is not terminated, the Rent shall abate for that part of the Premises which is rendered untenable and not occupied by Tenant on a per-diem and proportionate area basis from the date of the Casualty until the date on which Landlord has substantially completed the required work. If Landlord makes other space available to Tenant, Rent for the substitute Premises shall be payable as mutually agreed by both parties. 13. CONDEMNATION: If all or part of the Building is taken or condemned by any authority for any public use or purpose (including a deed given in lieu of condemnation), which renders the Premises substantially untenable, this Lease shall terminate as of the date title vests in such authority, and the Rent shall be apportioned as of such date. If any part of the Building is taken or condemned but the Premises are still substantially tenable (including a deed given in lieu of condemnation), this Lease shall not terminate. If the taking reduces the leased area in the Premises, Rent shall be equitably reduced for the period of such taking by an amount which bears the same ratio to the Rent then in effect as the Leased Area so taken or condemned bears to the Leased Area set forth in Section 1B. Landlord, upon receipt and to the extent of the award in condemnation or proceeds of sale, shall make necessary repairs and restorations (exclusive of leasehold improvements and personal property installed by Tenant) to restore the Premises remaining to as near their former condition as circumstances will permit, and to the Building and the Property to the extent necessary to constitute the portion not so taken or condemned as complete. Landlord shall be entitled to receive the entire price or award from any sale, taking or condemnation without any payment to Tenant. Tenant shall have the right separately to pursue against the condemning authority an award in respect to the loss, if any, to leasehold improvements paid by Tenant without any credit or allowance for Landlord and for any loss for injury, damage, or destruction of Tenant's business resulting from such taking. Under no circumstances shall Tenant seek or be entitled to any compensation for the value of its leasehold estate which Tenant hereby assigns to Landlord, except to retain at least those sums necessary (or in part) to relocate its personnel and equipment. 4 OF 9 5 14. ASSIGNMENT AND SUBLEASE: tenant may, with landlord's prior written consent, which will not be unreasonably withheld. sublease the premises, or assign or transfer or permit the transfer of this lease or the interest of tenant in the lease, in whole or in part. If tenant desires to assign this lease or to enter into any sublease of the Premises, Tenant shall deliver written notice of such intent to Landlord together with a copy of the proposed assignment or sublease at least 30 days prior to the effective date of the proposed assignment or commencement date of the term of the proposed sublease. Any approved sublease shall be expressly subject to the terms and conditions of this Lease. In the event of any approved sublease or assignment, Tenant shall not be released or discharged from any liability, whether past, present, or future, under this Lease, including any renewal term of this Lease, and if the sublease or assignment provides for Rent in excess of the Rent payable to Landlord under the terms of this Lease, 50% of the difference between the Rent payable by the assignee or subtenant and the Rent payable to Landlord under the terms of this Lease shall be paid to Landlord in consideration of its consent to the assignment or sublease. An assignment shall be considered to include a change in the majority ownership or control of Tenant if Tenant is a corporation whose shares of stock are not traded publicly, or, if Tenant is a partnership, a change in the general partner of the partnership or a change in the persons holding more than 50% interest in the partnership, or a change in majority ownership or control of any general partner of the partnership. Tenant shall not mortgage, pledge or hypothecate its leasehold interest without Landlord's prior written consent, which may be withheld at Landlord's sole discretion. 15. SUBORDINATION, ATTORNMENT, AND ESTOPPEL: This Lease and the rights of Tenant are expressly subject and subordinate to the lien and provisions of any mortgage, deed of trust, deed to secure debt, ground lease, assignment of leases, or other security instrument or operating agreement (collectively a "Security Instrument") now or hereafter encumbering the Premises, Building, Property, or any part thereof, and all amendments, renewals, modifications and extensions of and to any such Security Instrument and to all advances made or hereafter to be made upon such Security Instrument. Tenant shall, within 7 days after receipt of written notice by Landlord, execute and deliver such further instruments, in such form as may be required by Landlord or any holder of a proposed or existing Security Instrument, subordinating this Lease to the lien of any such Security Instrument as may be requested in writing by Landlord or holder from time to time. In the event of the foreclosure of any such Security Instrument by voluntary agreement or otherwise, or the commencement of any judicial action seeking such foreclosure, Tenant, at the request of the then Landlord, shall attorn to such mortgagee or purchaser in foreclosure. *Tenant agrees to execute and deliver at any time upon request of such mortgagee, purchaser, or their successors, any instrument to further evidence such attornment. *Subject to Landlords commercially reasonable efforts to obtain a Subordination and Non-Disturbance Agreement from the Lender or mortgage-holder of the Building, Tenant shall, within 7 days of receipt of written notice by Landlord, deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect, or, if there have been modifications, that this Lease, as modified, is in full force and effect; providing a true, correct and complete copy of the Lease and any and all modifications of the Lease; the amount of each item of the Rent then payable under this Lease and the date to which the Rent has been paid; that Landlord is not in default under this Lease or, if in default, a detailed description of such default; that Tenant is or is not in possession of the Premises, as the case may be; and containing such other information and agreements as may be reasonably requested. Landlord will use commercially reasonable efforts to obtain a Subordination and Non-Disturbance Agreement from the Lender or mortgage-holder of the Building. All costs relating to the securing of this agreement shall be a direct cost paid for by Tenant. 16.* WAIVER AND INDEMNIFICATION: Landlord agrees to indemnify and hold harmless Tenant, and its respective agents and employees, from and against any and all liabilities, claims, demands, costs and expenses of every kind and nature, arising from any injury or damage (including death) to any person or property sustained in or about the Building proximately caused by the gross negligence or willful act or omission of Landlord; provided, however, Landlord's obligations under this section shall not apply to injury or damage resulting from the gross negligence or willful act or omission of tenant, or its agents or employees. Tenant agrees to indemnify and hold harmless Landlord and its agents and employees, from and against any and all liabilities, claims, demands, costs, and expenses of every kind and nature, including those arising from any injury or damage (including death) to any person or property sustained in the Premises, or resulting from the failure of Tenant to perform its obligations under this Lease; provided, however, Tenant's obligations under this section shall not apply to injury or damage resulting from the gross negligence or willful act of Landlord or its agents or employees. To the full extent permitted by law, Tenant hereby releases and waives all claims against Landlord and its agents, employees, officers, 5 of 9 6 directors, and independent contractors, for injury or damage to person, property or business sustained in or about the Property, Building, or Premises by Tenant, other than damage proximately caused by the gross negligence or willful act of Landlord or its agents or employees. Tenant shall obtain and keep in force during the Term of this Lease, including any extension and renewal, comprehensive general liability insurance, including contractual liability coverage, insuring Tenant against any liability arising out of the use, occupancy or maintenance of the Premises. and all areas appurtenant thereto. Such policy shall provide minimum limits of one million dollars for damage to property or for death or injury to any one person in any one accident and shall name Landlord as an additional insured. Landlord shall not be responsible or liable to Tenant for any event, act or omission to the extent covered by insurance maintained or required to be maintained by Tenant with respect to the Premises and its use and occupancy thereof (whether or not such insurance is actually obtained or maintained). At the request of Landlord, Tenant shall from time to time cause its insurers to provide effective waivers of subrogation for the benefit of Landlord and its agents or employees and insurers, in a form reasonably satisfactory to Landlord. Landlord shall cause each insurance policy carried by Landlord insuring the Premises against loss by fire and causes covered by standard extended coverage, and Tenant shall cause each insurance policy carried by Tenant insuring the Premises and its fixtures and contents against loss by fire and causes covered by standard extended coverage, to be written in a manner so as to provide that the insurance company waives all right of recovery by way of subrogation against Landlord or Tenant in connection with any loss or damage covered by any such policies. Neither party shall be liable to the other for any loss or damage caused by fire or any of the risks enumerated in standard extended coverage insurance. Landlord and Tenant agree to indemnify and hold harmless the other from and against any and all costs and expenses of every kind or nature incurred by the indemnified party as a result of injuries to third parties. their person or property, proximately caused either by the indemnifying party's failure to perform its obligations under this Lease or the negligent act or willful misconduct of the indemnifying party. Notwithstanding the foregoing language, no party shall be obligated to indemnify another party for its contributing negligence or willful misconduct. 17. RELOCATION: This Paragraph has been left blank intentionally. 18. DEFAULT: Each of the following shall constitute an event of default by Tenant: (a) Tenant fails to pay any installment of Rent or Additional Rent before the same becomes delinquent; (b) Tenant fails to observe or perform its obligations under Section 4 and such violation continues for more than 24 hours after notice or Tenant fails to observe or perform any of the covenants, conditions or provisions of this Lease other than the payment of any installment of Rent or Additional Rent, and fails to cure such default within 15 days after written notice from Landlord; (c) Tenant fails a second time to observe or perform any of the covenants, conditions or provisions of this Lease other than the payment of any installment of Rent or Additional Rent after written notice of a prior failure; (d) a petition is filed by or against Tenant or Guarantor to declare Tenant or Guarantor, as the case may be, bankrupt or to seek relief for Tenant or Guarantor under any chapter of the Bankruptcy Code, as amended, or under any other law imposing a moratorium on, or granting debtor's relief with respect to. the rights of creditors; (e) Tenant or any Guarantor becomes or is declared insolvent by law or Tenant or any Guarantor makes an assignment for the benefit of creditors; (f) a receiver is appointed for Tenant or Tenant's property or for any Guarantor or any of Guarantor's property; or, (g) interest of Tenant in this Lease is levied upon under execution or other legal process. Upon the occurrence of an event of default by Tenant, Landlord, at its option, without further notice or demand to Tenant, may in addition to all other rights and remedies provided herein, at law or in equity: A. Terminate this Lease and Tenant's right of possession of the Premises, and recover all damages to which Landlord is entitled herein, at law and in equity, specifically including, without limitation, all Landlord's expenses of reletting (including repairs. alterations, improvements, additions, decorations, legal fees and brokerage commissions). B. Terminate Tenant's right of possession of the Premises without terminating this Lease, in which event Landlord may, but shall not be obligated to, relet the Premises, or any part thereof, for the account of Tenant, for rent, term and conditions acceptable to Landlord. For the purposes of any reletting of the Premises, Landlord is authorized to redecorate, repair, alter and improve the Premises to the extent necessary or desirable in Landlord's judgement. For any period during which the Premises have not been relet, Tenant shall pay Landlord monthly on the first day of each month during the period that Tenant's right of possession is terminated, a sum equal to the amount of Rent due under this Lease for such month. If and when the Premises are relet and a sufficient sum is not realized after payment 6 of 9 7 of all Landlord's expenses of reletting (including repairs, improvements, additions, decorations, legal fees and brokerage commissions) to satisfy the payment of rent due for any month, Tenant shall pay to Landlord any deficiency monthly upon demand. If Landlord elects to terminate Tenant's right to possession only without terminating this Lease, Landlord may, at its option, enter into the Premises, remove Tenant's signs and other evidences of tenancy, and take possession provided that such entry and possession shall not terminate this Lease or release Tenant, in whole or in part, from Tenant's obligation to pay the Rent for the full Term or from any other obligation of Tenant. In the event of any legal action under this Section 18, the prevailing party shall be entitled to recover its costs and reasonable attorney's fees, both at trial and on appeal. 19. SURRENDER OF PREMISES: Upon expiration, termination or default of this Lease, Tenant shall surrender and vacate the Premises immediately and deliver possession to Landlord in a clean, good, and tenable condition, except for: (a) damage beyond the control of Tenant; (b) reasonable use; (c) ordinary wear and tear. Charges incurred by Landlord for removal of boxes and debris left in Premises which exceed normal janitorial costs shall be at the expense of Tenant. No personal property shall be removed from the Premises unless Tenant has fulfilled all Lease obligations. If there are no amounts owed by Tenant, any movable trade fixtures, personal property and all telephone, communication and data lines and cables owned, installed or caused to be installed by Tenant in the Premises or in the plenum of the Building shall be removed by Tenant. All items authorized to be removed but subsequently not removed shall, at Landlord's option, be presumed to have been abandoned by Tenant, and title thereto shall pass to Landlord, or Landlord may, at its option, either store or dispose of these items at Tenant's expense. If any improvements are made by Tenant, with or without Landlord's approval, Tenant will, at its expense and upon request by Landlord, restore the Premises to their original condition. 20. HOLDING OVER: If Tenant, or any assignee or sublessee of Tenant, shall continue to occupy the Premises after the termination or expiration of this Lease without the prior written consent of Landlord, such tenancy shall be a Tenancy at sufferance. During the period of any holdover tenancy by Tenant, or any assignee or sublessee, Landlord, by notice to Tenant, may adjust the Rent by 200% or to an amount equal to the maximum allowed by law. Acceptance by Landlord of any Rent after termination shall not constitute a renewal of this Lease or a consent to such holdover occupancy, nor shall it waive Landlord's right of re-entry or any other right contained in this Lease or provided by law. 21. AUTOMATIC RENEWAL: This Paragraph has been left blank intentionally. 22. SECURITY DEPOSIT: As security for the performance of its obligations under this Lease, Tenant, upon its execution of this Lease, has paid to Landlord a security deposit ("Security Deposit") in the amount stated in Section 1C. The Security Deposit may be applied by Landlord to cure or partially cure any default of Tenant, and upon notice by Landlord of application, Tenant shall replenish the Security Deposit in full by promptly paying to Landlord the amount so applied. Landlord shall not pay interest on the Security Deposit. The Security Deposit shall not be deemed an advance payment of Rent or a measure of damages for any default by Tenant, nor shall it be a bar or defense to any action which Landlord may at any time commence against Tenant. If Tenant has fulfilled all terms and conditions of this Lease including the payment of Rent and returns Premises to Landlord in accordance with Section 19, then Landlord will refund the Security Deposit within 45 days of Lease Expiration Date, Landlord may retain any or all of the Security Deposit to repair any damage to Premises caused by Tenant or remove any abandoned personal property including all communication and data lines. 23. LIMITATION OF LANDLORD'S LIABILITY: As used in this Lease, "Landlord" shall mean the entity herein named as such, and its successors and assigns. No person holding Landlord's interest under this Lease (whether or not such person is named as "Landlord") shall have any liability after such person ceases to hold such interest. except for any liability accruing while such person held such interest, No principal, officer, employee, or partner (general or limited) of Landlord shall have any personal liability under any provision of this Lease. If Landlord defaults in the performance of any of its obligations under this Lease or otherwise, Tenant shall look solely to Landlord's interest in the Building and not to the other assets of Landlord or the assets, interest, or rights of any principal, officer, employee, or partner (general or limited) for satisfaction of Tenant's remedies. 7 of 9 8 24. ENCUMBRANCES ON LANDLORD'S TITLE: Upon request of Landlord, Tenant will promptly release or modify, or cause to be released or modified at Tenant's expense, any financing statement given by Tenant to a third party, any notice of commencement filed by Tenant with respect to work on the Premises, or any other recorded document filed by or on account of Tenant ("Document"), which, in Landlord's sole opinion, adversely affects, clouds, or otherwise encumbers Landlord's title to any part of the Building or Property, so that the Document shall not encumber any portion of the Building or Property other than Tenant's leasehold interest in the Premises. Tenant's obligations in this *Section shall survive termination of this Lease. 25. NOTICES: For the purpose of any notice or demand under this Lease, the parties shall be served by overnight delivery, personal delivery or certified or registered mail, return receipt requested, addressed to the other party at the address in Section 1E or such other addresses designated in writing by Landlord or Tenant. Any notice shall be effective when delivered. 26. SUCCESSOR AND ASSIGNS: This Lease shall bind and inure to the benefit of the successors, assigns, heirs, executors, administrators, and legal representatives of the parties. In the event of the sale, assignment, or transfer by Landlord of its interest in the Building or in this Lease (other than a collateral assignment to secure a debt of Landlord prior to enforcement) to a successor in interest who expressly assumes the obligations of Landlord, Landlord shall be released and discharged from all of its covenants and obligations, except such obligations as Landlord shall have accrued prior to any such sale, assignment or transfer; and Tenant agrees to look solely to such successor of Landlord for performance of such obligations. Any securities or funds given by Tenant to Landlord to secure performance by Tenant of its obligations may be assigned by Landlord to such successor of Landlord and, upon acknowledgment by such successor of receipt of such security and its assumption of the obligation to account for such security in accordance with the terms of the Lease, Landlord shall be discharged of any further obligation. Landlord's assignment of the Lease or of any or all of its rights shall in no manner affect Tenant's obligations. Landlord shall have the right to freely sell, assign or otherwise transfer its interest in the Building and/or this Lease. 27. MISCELLANEOUS: When the consent of either Landlord or Tenant is required before the other party acts, both will make reasonable decisions honestly, equitably, suitably and in an ordinary and usual manner that is fit and appropriate to the end in view. The reasonable decisions by Landlord and Tenant will apply to all terms and conditions set forth in this Lease. This Lease, the Exhibits, the Riders and Incorporated Addenda contain the entire agreement between Landlord and Tenant and there are no other agreements, either oral or written. This Lease shall not be modified or amended except by a written document signed by Landlord and Tenant which specifically refers to this Lease. The captions in this Lease are for convenience only and in no way define, limit, construe or describe the scope or intent of the provisions of this Lease. No waiver of any covenant or condition of this Lease by either party shall be deemed to imply or constitute a further waiver of any other covenant or condition of this Lease. This Lease is construed in accordance with the laws of the state in which the Building is located. If any provision of this Lease or Amendment is invalid or unenforceable in any instance, such invalidity or unenforceability shall not affect the validity or enforceability of any other provision, or such provision in any circumstance not controlled by such determination. Tenant shall on demand pay or reimburse Landlord for payment of Landlord's reasonable attorney's fees, expenses and court costs in negotiation, at trial, and on appeal incurred by Landlord or in connection with any action or proceeding arising out of or occassioned by any lien or claim of lien on the Premises, or the Building. In the event of any Legal action, the prevailing party shall be entitled to recover its costs and reasonable attorney's fees, both at trial and on appeal. Common Areas mean all areas, improvements, space or equipment (owned or controlled by Landlord) in or at the Property, provided by Landlord for the common or joint use and benefit of tenants and invitees. Landlord may add to or reduce or otherwise modify Common Areas at any time. Except as specifically designated in this Lease, neither this Lease nor any memorandum of this Lease may be recorded or filed for record in any public records without the separate express written consent, in recordable form, of Landlord. 8 of 9 9 28. RADON DISCLOSURE: Radon is a naturally occurring radioactive gas which, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. Tenant acknowledges this disclosure by signing this Lease. 29. RIDERS & ADDENDA: All Riders and Addenda contained in or attached to this Lease shall be deemed to be a part of and are incorporated in this Lease by reference. See attached Rider Paragraph(s) 1 through 9. 10 KOGER LEASE RIDER This Rider is attached to and made a part of the lease dated SEPT 27, 1999 by and between KOGER EQUITY. INC., a Florida Corporation ("Landlord") with its principal office at 8880 Freedom Crossing Trail, Jacksonville, FL 32256, and INSURANCE MANAGEMENT SOLUTIONS GROUP, INC., a Corporation organized and existing under the laws of the State of Florida, ("Tenant") with its principal office at 360 Central Avenue. Suite 100, St. Petersburg, Fl. 1. RENT ABATEMENT: Rental payment of $44,324.56 shall be abated for the first month of the Lease term only. Full monthly Rent payments shall commence the second month of the Lease term and shall continue through the remainder of the Lease Term as outlined in the Lease. No Rent abatement shall apply to renewal terms. All other terms and provisions of this Lease shall remain in full force and effect during the Rent abatement period and thereafter. 2. LETTER OF CREDIT: If a Security Deposit is not provided by Tenant as described in Paragraph 1, Item C, as security for the obligations of Tenant under this Lease, Tenant shall establish with a financial institution reasonably acceptable to Landlord and provide to Landlord within five (5) days after the execution of this Lease, a clean sight draft irrevocable Letter of Credit (the "LC") in the amount of $45.000.00, in a form reasonably acceptable to Landlord. The "LC" shall be presentable at a financial institution located in the St. Petersburg, Florida area. The "LC" shall have an expiration of not earlier than two (2) months after the end of the initial Lease term, provided, however, that in the event the "LC" has an expiration which is earlier than such date, Tenant shall provide a replacement "LC" to Landlord which conforms to the terms contained herein not less than thirty (30) days prior to the expiration of such "LC". The "LC" shall provide that Landlord shall be entitled to draw on the "LC" upon presentation of Landlord's sight draft, without requirement of evidence or verification of Landlord's right to draw thereon under this Lease. In addition to the other remedies provided here, in the event of a default by Tenant which is not cured within the applicable curative period, if any, Landlord may draw upon the "LC" to compensate Landlord for any damages suffered by Landlord, including, but not limited to, the unamortized cost of the leasehold improvements constructed by Landlord. 3. OPTION TO RENEW: Tenant shall have the Option to Renew this Lease for one (1) successive lease term of five (5) years by providing Landlord one hundred twenty (120) days advance written notice of such intent, provided Tenant is not in default as of the date of notice and is occupying the Premises on the date renewal commences. The rental rate for said renewal term shall be negotiated in good faith between Landlord and Tenant based upon the current market rates for similar buildings within the Gateway/North Pinellas area at the time of said renewal. 1 of 7 11 4. OPTION TO CANCEL: If Tenant is not in default under the terms of this Lease, Tenant shall have the one-time right to terminate this Lease Agreement on, and only on the expiration of the thirty-seventh (37th) month of the Lease Term ("Modified Expiration Date") by providing Landlord ninety (90) days advance written notice of such intent, accompanied by the cancellation fees as described below (plus sales tax). Landlord and Tenant acknowledge that the termination notice presented without the Cancellation Fees will not be considered a valid notice. Cancellation Fees: Two (2) years of Unamortized Tenant Improvements: $171,738.00 ($329.000.00 x .261 (11% ann. constant) = $85,869/year. Three (3) months Rent $145,303.98 ($45.266.04 plus $3,168.62 sales tax = $8,434.66 x 3 months). In the event additional Tenant Improvements are required and are amortized over the Lease Term as described in Paragraph 5 of this Lease Rider, then the Cancellations Fees described herein shall be adjusted accordingly. The Cancellation Fee is in addition to Rent payments and includes, but is not limited to, unamortized cost of Tenant Improvements and Rent concessions. Tenant agrees to continue to pay Rent through the effective date of the termination of this Lease Agreement. Upon receipt of proper notice and all monies due and payable, this Lease shall terminate on the effective date of cancellation. 5. RIGHT OF FIRST REFUSAL: Provided that Tenant is not in default of any terms and conditions of this Lease, Tenant shall have the First Right of Refusal to lease all remaining office space in the Gilchrist Building that may become available during the initial term of this Lease. Landlord agrees to notify Tenant of its intent to lease all or a portion of said space, and will provide Tenant with said notice the terms by which the space can be leased by Tenant. Tenant shall have ten (10) days from receipt of said notice to accept or reject the lease terms and square footage specified in Landlord's notice. In the event the space is rejected, this Right of First Refusal shall terminate for that specified space. 6. TENANT IMPROVEMENTS: Landlord shall provide Insurance Management Solutions Group, Inc. building standard materials to finish the leased space in accordance with the plans and specifications to be mutually agreed upon up to the sum of $10.00 per usable square foot, or $329,000.00. All costs of occupancy shall be considered as a Tenant Improvement expense including design and architectural/engineering fees, permit fees, supervision, etc. Any costs related to required Improvements that exceeds the above referenced Allowance shall be amortized as follows: - - Additional $2.00 per usable square foot at 8% - - Any Improvement costs over $12.00 per usable square foot at 12%. Amortized Tenant Improvement Costs shall not exceed $14.00 per usable square foot. Insurance Management Solutions Group, Inc. shall deserve the right to seek competitive bids to be delivered and reviewed by Landlord under Landlord's supervision and deadlines. It is understood by Tenant, that in the event Tenant elects to hire a General Contractor to complete the Tenant Improvements, Tenant will execute Landlord's "General Conditions of Lessee's Construction Agreement", comply with all deadlines and Landlord shall be entitled to construction plan review and supervision fees. Landlord, as a General Contractor, will additionally seek competitive bids from sub-contractors which will be made available for Tenant's review and consideration. It shall be further understood that, subject to causes or events beyond the control of Tenant, in the event Tenant's possession of the Lease Premises shall be delayed in such substantial completion as a result of: (1) Tenant's failure to comply with the mutually agreed upon deadlines relating to design layout, Construction Document approval, Finish selections and construction bids; (ii) Tenant's changes in plans; or (iii) the performance or completion by a party employed by Tenant, the Commencement Date of this Lease shall not be altered but shall remain in full force and effect. 2 of 7 12 7. SIGNAGE: Exterior monument or signage on the building is available subject to local codes and review and approval by Landlord. Costs relating to design, installation and maintenance of Tenant signage shall be at Tenant's sole expense. 8. HVAC: Insurance Management Solution Group shall be provided HVAC during normal business hours of 8:00 a.m. to 7:00 p.m. (Monday through Friday) excluding national holidays. This represents an additional credit of 2 hours of HVAC per business day. Conditioned "After Hours" air is available to Tenant through the use of override controls or pre-programming through the Koger Management Office. Tenant cost for "after hours" conditioned air shall be $4.00 per "unit hour" plus tax. This charge will be invoiced to Tenant monthly. 9. PARKING: It is understood that Tenant's parking requirements exceeds the number of on-site spaces provided for in the Lease by 2 spaces/1,000 square feet. In the event such additional parking requirements inconvenience tenants of the Gilchrist Building or of the adjacent buildings (to be determined at Landlord's sole discretion), then Landlord may designate remote parking spaces for these additional vehicles within the Koger Center. Landlord shall use its best efforts to provide these remote parking spaces within the adjacent building parking lots. Spaces may be identified by Landlord for Insurance Management Solutions Group and/or other tenants in the Gilchrist Building and they may be re-designated from time to time by Landlord. Unauthorized vehicles may be removed at vehicle owner's expense. If, at Landlord's reasonable discretion, controlled access is determined to be necessary, controlled access will be installed, and the cost of implementation of same will be bourne by Tenant. Landlord will consult with Tenant to develop a mutually agreeable plan. Landlord agrees to seek ' three (3) bids and exercise best efforts to accomplish the controlled access at the lowest cost possible. * for a total parking requirement of seven (7) spaces per 1,000 square feet. 3 of 7 13 THE KOGER CENTER Serving The Office Space St. Petersburg, Florida Needs Of Corporate America Gilchrist Building [FLOOR PLAN] EXHIBIT "A" 801 94th Avenue North St. Petersburg, Florida 33702 4 of 7 14 REGISTRATION AND COMMISSION AGREEMENT This agreement dated SEP 27 1999 by and between KOGER EQUITY, INC. ("Owner"), with its principal office at 8880 Freedom Crossing Trail, Jacksonville, Florida 32256 and FLORIDA BUILDERS, INC., 360 Central Avenue, St. Petersburg, Florida 33701 (Federal I.D. #59-1887280), Real Estate Broker ("Broker"), a licensed real estate broker in the State of Florida. 1. ACKNOWLEDGMENT Owner is the owner of a certain building in the office center known as Koger Center St. Petersburg ("Center"). Owner agrees that Broker has introduced INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. to Owner as a prospective Tenant of a building or buildings in the Center owned by Owner ("Property"). Upon receipt of a written authorization signed by Tenant designating Broker as its sole representative with respect to a lease of premises within the Center ("Representation Letter"), and upon the satisfaction of all conditions stated in this Agreement, Owner agrees to pay the Commission described below to Broker which Commission shall be payable only if (but not otherwise) a lease is executed between Owner and Tenant during the period commencing with the date first above written and ending the 30th day of September, 1999. 2. COMMISSION Owner agrees to pay to Broker a Commission of three percent (3%) of the total "Monthly Base Rent" set forth in the Lease Agreement executed hereafter by Owner and Tenant, for the initial Term of the Lease only ("Commission"). The Commission shall be computed based on the Monthly Base Rent and shall exclude any and all other charges whatsoever (other than the Monthly Base Rent) due from or paid by Tenant under the Lease, which other charges may include, but are not limited to, the following: additional rental pursuant to escalations, CPI Rent Adjustments, sales tax, service tax, real estate tax, or other tax based on leases or rents or operating expense provisions, other pass-through items of expense, if any, additional rentals for special tenant service over building standard, amortization of special leasehold improvements, cancellation/penalty payments for termination rights, interest and late charges (each of which are called "Additional Rent" in the Agreement.) In the event of a sale, assignment, or transfer by Koger Equity, Inc. ("Koger") of its interest in the Building or in this Lease to a successor in interest who assumes the commission obligations of Koger hereunder, Koger shall be released or discharged from any and all commission obligations hereunder and the Broker agrees to look solely to such successors and assigns of Koger for the payment of any commissions after the date of transfer. 3. METHOD OF PAYMENT OF COMMISSION The Commission will be paid by Owner as follows: 50% of the Commission will be paid within 45 days of a fully executed Lease Agreement and receipt of an invoice from Broker to Owner. Additional 50% of the Commission will be paid 45 days after tenant occupancy, payment of security deposit, if applicable, payment of first months rent and receipt of invoice from Broker to Owner. 5 of 7 15 4. EXPANSION A Commission of two percent (2%) of Total Monthly Base Rent (excluding Additional Rent) attributable to an expansion of the leased premises for the initial Term (or such lesser term as may be agreed to by Owner and Tenant) only will be paid to Broker if Tenant expands during the initial Term of this Lease (excluding renewals and extensions), delivers its Representation Letter to Owner naming Broker as its exclusive representative for such purpose, and retains the Broker as its agent to negotiate the expansion. If the initial Lease grants the Tenant an expansion option and the Tenant exercises this option without additional negotiations required between Owner and Tenant, the Broker shall be paid such commission subject to the terms of the Agreement. If the provisions of the expansion option are altered or revised, the Broker must be actively involved in the negotiations to receive such commission, subject to Section 10 of this Agreement. Such commission will not be paid unless: (a) the Broker delivers the Representation Letter signed by Tenant to Owner and actively participates in the negotiations or (b) the expansion option is specifically provided in the Lease and exercised without negotiations. Commission paid as a result of an expansion shall be paid, subject to the terms hereof, including section 6 below, by the method of payment selected in section 3 above or such other method mutually agreed to by Owner and Broker. In the event of a sale, assignment, or transfer by Koger Equity, Inc. ("Koger") of its interest in the Building or in this Lease to a successor in interest who assumes the commission obligations of Koger hereunder, Koger shall be released or discharged from any and all commission obligations hereunder and the Broker agrees to look solely to such successors and assigns of Koger for the payment of any commissions after the date of transfer. 5. CANCELLATION If the Tenant or Owner has the right to cancel the lease at anytime subsequent to the commencement of the term but prior to the expiration date set forth in the lease, the Broker shall initially be paid a Commission based on the aggregate rental for the nocancellable portion of the term. Thereafter, the Commission will be paid on the remainder of any noncancellable term, pursuant to the payment schedule provided herein. If the cancellation privilege is perpetual, Commissions will be paid quarterly, in arrears, after receipt of rental and invoice from Broker to owner. 6. MISCELLANEOUS * Subject to Section 10 of this Agreement, *Owner shall make a final determination whether or not Broker "actively participates in negotiations" under sections 4 and 5 above. Broker agrees that Broker's right to a commission where Broker's "active participation in negotiations" are required shall be determined by owner in Owner's reasonable discretion. This Agreement shall be governed, interpreted and enforced under the laws of the state in which the Property is located. 7. AGREEMENT This agreement constitutes the entire agreement between Owner and Broker and supersedes all prior discussions, negotiation, and agreements whether oral or written. No amendment, alteration, cancellation or withdrawal of this agreement shall be valid and binding unless made in writing and signed by both Owner and Broker. Owner reserves the right to negotiate and contract with other principals and brokers pertaining to the property without incurring any liability to Broker or Tenant. Nothing in this Agreement shall restrict or limit Owner's rights in such regard. 6 of 7 16 10. For so long as a) ownership of Broker is held by Robert M. Menke, principal and founder of Broker, b) Bankers Insurance Group, Inc. is the majority owner of Insurance Management Solutions Group, Inc., and c) Insurance Management Solutions Group, Inc. designates Broker as its sole and exclusive real estate broker representative with regard to any and all real estate dealings, arrangements, and transactions for Insurance Management Solutions Group's leasehold interests in the property located at 801 94th Avenue North, Suite 200, St. Petersburg, Pinellas County, Florida 33702, also known as the "Gilchrist Building," then the requirement of active involvement in negotiations of Broker shall be deemed to have been satisfied. 8. TERM This agreement shall expire on the date stated in section 1 above, but such expiration shall not affect Brokers right to a commission with respect to leases fully executed and delivered by Owner and Broker's registered prospect before such expiration. Broker waives and releases any other rights to a commission from Owner with respect to the Tenant and agrees that Brokers right to a commission, if any, shall be governed solely by this Agreement. 9. EFFECTIVE DATE The Owner and Broker have executed or caused to be executed this agreement as of the date set forth above. Signed, sealed and delivered in the presence of: Owner: KOGER EQUITY, INC. Witness: [ILLEGIBLE] By: /s/ Thomas C. McGeachy - ------------------------------ --------------------------------- Thomas C. McGeachy Witness: Vice President - ------------------------------ Koger Equity, Inc. Owner: FLORIDA BUILDERS, INC. Witness: /s/ Janice E. Goodall By: /s/ [ILLEGIBLE] - ------------------------------ --------------------------------- [ILLEGIBLE] Witness: [ILLEGIBLE] President - ------------------------------ 7 of 7 EX-10.108 3 LEASE AGREEMENT DATED DECEMBER 5, 1998 1 Exhibit 10.108 COMMERCIAL LEASE AGREEMENT THIS COMMERCIAL LEASE AGREEMENT, made and entered into the 5th day of December, 1998, by and between BRONKEN-MEYERS, LLC, of 303 WINTERGREEN LANE, BOZEMAN, MONTANA 59715, hereinafter referred to as "Landlord", and INSURANCE MANAGEMENT SOLUTION, INC., OF 360 CENTRAL, ST. PETERSBURG, FLORIDA, hereinafter referred to as "Tenant"; W I T N E S S E T H In consideration of the agreements hereinafter set forth, Landlord does hereby lease and let to Tenant, and Tenant does hereby lease from Landlord the leased premises, hereinafter described, for the period, at the rental and upon the terms and conditions set forth below. 1. LEASED PREMISES The Leased premises shall consist of four thousand three (4,003) rentable square feet, being a portion of that certain building located at Valley Commons Business Park, Building #2, Bozeman, Montana (see Exhibit "A"). 2. PLAN OF LEASED PREMISES A building will be constructed by Landlord, with Tenant's space as located on Exhibit "A", in accordance with applicable building codes and regulations and with the building plans and specifications which do now, or will, incorporate the agreement of Landlord and Tenant as to the floor plans and layout of the leased PAGE 1 2 space, which plans and specifications when completed shall be initialed by the parties and become a part of this Lease. Landlord shall provide and pay for interior improvements as described on Exhibit "B" attached hereto and incorporated herein. 3. COMMENCEMENT AND TERM OF LEASE The initial term of this Lease shall be for a period of three years commencing on December 15th, 1998. The lease will terminate on the last day of the 36th month after the Lease commencement date, unless extended by the exercise of the option herein set forth. Any holding over with the consent of the Landlord after the original term, if not extended, of the Lease or after any renewal term shall be deemed a month-to-month tenancy, terminable upon thirty days notice, subject to the other terms of this lease. 4. RENT AND OPTION TO RENEW a. The Tenant shall pay the sum of twelve and no/100 dollars ($12.00) per rentable square foot per year rent (base rent) for the first year of the three year term. Each year's rent shall be divided into twelve equal monthly payments and each monthly payment shall be paid in advance on the first day of each and every month. Beginning with year two (2) of the lease term, and during each year of the lease term and any extensions thereafter, the base rent PAGE 2 3 shall increase annually by four percent (4%) or by an amount equal to the increase in the consumer price index (CPI), whichever is less. b. Tenant shall pay said monthly rent in said amounts in advance commencing on the commencement date, subject to proration for a partial month, and on the first day of each and every month thereafter during the term of this Lease. c. As additional rent, Tenant shall pay its proportionate share of all taxes, insurance (including the insurance mentioned in paragraph 12(b)), assessments, operating expenses and common area maintenance and repair expenses associated with its tenancy, including, but not limited to, HVAC, plumbing, electrical and lighting for the common areas and the premises. The amount of additional rent shall be adjusted in accordance with actual costs and a prorata amount shall be billed monthly. Tenant's prorata share is equal to 26.8%. d. If Tenant is not in default, Tenant shall have the option, exercisable by a notice in writing to Landlord no later than six (6) months prior to the end of the original term of this Lease, to extend such term for two additional one year periods upon the same terms and conditions as contained herein, provided however, the rent for the next two additional one year terms shall be established in accordance with the following paragraph. If this option is exercised, the new base rent for the PAGE 3 4 extended one year term shall be equal to 100% of the previous years rent plus an amount equal to the increase in the Consumer Price Index (CPI) not to exceed 4%. e. Tenant shall pay a late fee of five percent (5%) of any rent payment that is not paid on or before the 10th of each month. 5. RENT AND SECURITY DEPOSIT Based upon Tenant's representation of its financial condition, Landlord shall not require a security deposit. 6. USE Tenant agrees to use the premises for general office and related uses. Any other use requires the prior written consent of the Landlord. 7. COMPLIANCE WITH PUBLIC AUTHORITIES Tenant agrees, at Tenant's cost, to comply with all applicable municipal, County, State and Federal laws and regulations now in force or which may hereafter be enforced concerning Tenant's particular use of the leased premises. It is understood, however, the Landlord is responsible for building modifications required by governmental agencies. 8. INDEMNITY Tenant assumes all risk of injury or damages to persons or property within the leased premises and shall hold Landlord harmless and indemnify Landlord against any claim, damage, suit or demand for injury to persons or property resulting from the use of PAGE 4 5 the leased premises by Tenant, their agents, employees or business invitee, or the operation of Tenant's business. However, Tenant shall not be liable for acts or omissions of Landlord or its agents, servants, or employees. Tenant shall not be liable for any acts or omissions of Landlord or its contractors, employees or agents arising out of or in connection with any structural defects of the leased premises or the building and improvements upon or adjacent to the leased premises. 9. TENANT'S ALTERATIONS Tenant shall be responsible for the interior improvements, after occupancy by Tenant, and except for the installation and location of signs, equipment, counters and other removable trade fixtures, and except as herein mentioned, Tenant shall neither make any alteration on or additions to the leased premises nor make any agreement or contract therefore without first obtaining Landlord's prior written consent, which said consent shall not be unreasonably withheld. All alterations, additions or improvements made by Tenant to or upon the leased premises, (except signs, equipment, counters, other removable trade fixtures and interior decorations which shall remain the property of Tenant and removable by them) shall at once, when made or installed, be deemed to have attached to the freehold and become Landlord's property. At the termination of this Lease, and without notice, Tenant shall immediately remove all their property. If Tenant fails to do PAGE 5 6 so, Landlord may (upon notice) remove and store the same at Tenant's expense. Tenant will promptly reimburse Landlord for the expense of such removal and storage, upon receiving Landlord's statement. If tenant fails to pay for such expense within ten (10) days of receiving Landlord's statement therefore, Landlord may sell Tenant's said property to pay such expenses and any other amounts owing to Landlord by Tenant. It is further agreed that anything remaining upon or removed from the leased premises thirty days after the termination of this Lease shall become the property of Landlord, at Landlord's option, subject to the rights reserved to Landlord in this Lease hereinbefore set forth. 10. REPAIR AND MAINTENANCE At their expense, Tenant shall keep the interior of the leased premises in good condition and repair. If Tenant refuses or neglects to commence or complete such repairs promptly and adequately, Landlord may, but shall not be required to do so, make or complete the repairs; and Tenant shall pay the cost thereof to Landlord upon demand. Tenant shall be responsible and pay for any damages to the interior or exterior of the premises caused by Tenant, his employees, agents and business invitees. Except as herein set forth, Landlord shall repair structural defects and exterior damages to the leased premises and shall keep PAGE 6 7 the foundation, exterior walls and roof in good order and repair. However, in the event of window or door breakage caused by burglary or vandalism, or by Tenant, his employees, agents or business invitees, Tenant shall repair the damages. If any damage is covered by either Landlord's or Tenant's insurance, then the proceeds from the insurance shall be used to make the repairs. Tenant shall be responsible for the regular and annual maintenance of the floor, ceiling and wall coverings in their leased space and for replacement of light bulbs and annual repair and maintenance of plumbing, heating air conditioning, and electrical fixtures. Landlord shall be responsible for the repair, maintenance and replacement of the exterior and the structural, plumbing, heating, air conditioning and electrical systems to the fixtures. However, Landlord shall not be required to repair damage which results from the acts or negligence of Tenant, his agents, business invitees, or employees. 11. CLEANLINESS AND WASTE Tenant shall keep the leased premises in a neat, clean and sanitary condition, free from waste and debris. Tenant shall not allow any hazardous substances to be deposited or remain in or about the leased premises. Tenant shall not allow hazardous or legally prohibited liquids or solids to be placed in the sewer system or in the grounds in the area of the leased premises. Tenant shall pay its proportionate share of the cost to maintain PAGE 7 8 and repair building mechanical systems, including but not limited to, HVAC, plumbing, electrical and lighting for the common area and the premises, after all warranties have been exhausted. At the termination of this Lease, Tenant shall clean and repair any and all soiling and/or damages to the leased premises, including marks, scratches, holes, dirt and grease, and damages to the walls, floors, floor coverings, ceilings and fixtures, normal wear and tear excepted. 12. INSURANCE (a) Liability Insurance. Tenant shall hold Landlord harmless from any and all claims, damages, suits, demands or causes of action resulting from injuries to persons or properties and arising therefrom or out of the use, occupancy or condition of the leased premises for which Tenant is responsible for maintaining and repairing, and shall carry, maintain and deposit proof with Landlord of public liability insurance in such form and with such companies as shall be reasonably satisfactory to Landlord in the amount of at least ONE MILLION AND N0/100 ($1,000,000.00), naming or insuring Landlord, as Landlord's interest may appear, against liability for personal or property damages caused or occurring on or about the leased premises or caused by Tenant, their agents, employees or business invitees. Tenant shall, at least annually, furnish Landlord with certificates or other documentation evidencing such insurance. PAGE 8 9 (b) Public Liability, Fire and Casualty Insurance. Landlord shall maintain fire and standard casualty insurance upon the building, including the leased premises and Public Liability Insurance on the common areas outside the leased premises. If Tenant's use increases the fire insurance on the premises, then Tenant agrees to pay the difference in the premium. Tenant shall maintain their own insurance upon their own property, inventory, equipment, leasehold improvements and trade fixtures owned or claimed by them. 13. LIENS Tenant shall not permit any lien to be attached to the leased premises by reason of any act or omission on their part and agrees to save and hold Landlord harmless from or against such lien or claim of lien. If any lien does attach and any claim of lien is made and shall not be released within fifteen days after notice from Landlord to Tenant to release the same, Landlord, at its option, may pay and discharge the same. In this case, the amount paid by Landlord shall be added to and become part of the next succeeding installment of rent, shall be deemed rent payable hereunder, and shall bear interest at the rate of twelve percent (12%) from the date advanced by Landlord until paid; provided, however, if Tenant desires in good faith to contest the validity of any such lien, they may do so and in such event Landlord shall not discharge the PAGE 9 10 lien and assess additional rent until the validity of the lien is legally established. However, if Landlord's mortgagee legally requires and demands that the lien be released or paid, Tenant shall, upon demand, cause the lien to be released by furnishing bond or otherwise. 14. RIGHTS ON DEFAULT. Occurrence of one or more of the following events shall constitute an event of default: (a) If Tenant shall fail or neglect to pay the rent when due, or shall fail to pay any other money required to be paid, by Tenant, and such default(s) shall continue for a period of ten (10) days following written notice, delivered by Landlord to Tenant, advising of the default; or, (b) If Tenant shall default in the performance of any other obligation or duty of Tenant under this Lease, or if Tenant shall commit waste or allow a nuisance to exist on the leased premises, and default shall continue for a period of thirty (30) days following written notice given after such default, unless within said thirty (30) days Tenant shall cure such default, or if such default cannot be cured within thirty days, Tenant shall, within said thirty day period, commence to cure such default and shall thereafter continue to use reasonable due diligence in the curing thereof; or, PAGE 10 11 (c) If tenant ceases to use the leased premises in the manner herein set forth, or closes the business for a period of sixteen days or more, or vacates or abandons the leased premises. If an event of default occurs, then Landlord, without further notice to Tenant, shall have, consistent with applicable law, any one or more of the following remedies at Landlord's election: (i) Landlord shall have the immediate right to terminate and cancel Tenant's rights under this Lease and re-enter, recover and resume possession of the leased premises. Tenant shall yield up quiet and peaceful possession to Landlord and Tenant shall forfeit their rights under this Lease. (ii) Landlord may continue to assert the validity of the Lease, take possession of the leased premises pursuant to applicable law, (including unlawful detainer or action for possession), and re-let the leased premises, or any part thereof, for such term or terms, (which may be for a term extending beyond the term of this Lease), at such rent and upon such terms and conditions as Landlord may, in its sole discretion, deem advisable, provided Landlord agrees to proceed in a commercially reasonable manner in reletting the premises. PAGE 11 12 Upon such re-letting, tenant shall immediately be liable to pay to Landlord the reasonable costs and expenses of such re-letting, (including reasonable agents', or brokers', commissions and attorney's fees for the new lease), the reasonable costs and expenses of any alterations or repairs reasonably required to be made to the leased premises to make it rentable, and shall be liable to pay to Landlord the amount, if any, by which the rental required to be paid by Tenant in this Lease for the period of such re-letting, (up to, but not beyond, the term of this Lease), exceeds the amount agreed to be paid by the new tenant as rent for the leased premises for such period of re-letting. If Landlord cannot re-let the premises for the entire balance of Tenant's term, Tenant shall be liable to pay Landlord for the balance of the rental required by this Lease. No such termination, unlawful detainer action, re-entry or taking of possession of the leased premises by Landlord shall be construed as an election on their part to terminate Tenant's other obligations under this Lease unless a written notice of such intention be given to Tenant. (iii) In the event of any termination of this Lease and upon the expiration of the term thereof, PAGE 12 13 Tenant shall yield up quiet, immediate and peaceful possession to Landlord. (d) Throughout the term of this Lease, Landlord, without prejudice to any statutory lien, shall have and is hereby granted a security interest and a lien upon Tenant's furniture, fixtures, equipment, inventory, and leasehold improvements installed and maintained by Tenant in and upon the leased premises for the amount of any unpaid rent or other sums due from Tenant hereunder. The Landlord's lien shall be subordinate to liens given by Tenant to secure financing for the Tenant's business. Upon any default hereunder, and upon Tenant's failure to cure the default within the time periods herein set forth, and in the event Landlord so elects, and subject to the rights of prior lien holders, Landlord shall have the right and privilege to take possession of all of said property in the leased premises and may keep the same on the leased premises and/or remove the same therefrom for storage in such place as may be selected by Landlord, at Tenant's risk and expense, in accordance with such lien and any rights Landlord may possess against Tenant's property. (e) Tenant recognizes and agrees that the rent required to be paid by Tenant hereunder is independent of all other covenants and agreements herein contained. If Landlord shall commence any proceeding for nonpayment of any rent to which PAGE 13 14 Landlord may be entitled or for breach of this Lease or for termination of this Lease by reason of Tenant's failure to timely cure a default, Tenant agrees that if Tenant does not pay the rent due hereunder during the pendency of the action or deposit the same with the Court, the Court shall immediately return possession of the leased premises to Landlord to enable Landlord to immediately rent the leased premises to third parties. 15. TENANT'S POSSESSION Landlord covenants with Tenant that upon paying the rent and performing the terms, covenants and agreements in this Lease set forth, Tenant shall, at all times during the term or any extension of the term hereof, be entitled peacefully and quietly to have, hold and enjoy the leased premises. However, Tenant agrees to allow Landlord, or its agents, reasonable access to show the premises to prospective buyers or lenders; or to prospective tenants if Tenant's lease will be expiring within three months. 16. WAIVER No waiver of any breach of any agreement, term, covenant, or condition of this Lease shall be construed to be a waiver of any preceding or succeeding breach of the same or any other agreement, term, condition or covenant. 17. SERVICE OF NOTICE Any notice required to be given by one party to the other PAGE 14 15 shall be in writing and must be personally served upon a party or served by registered or certified mail, postage prepaid, through the United States Postal Service, and addressed to the respective parties at the following addresses: LANDLORD: BRONKEN-MEYERS, LLC 303 WINTERGREEN LANE BOZEMAN, MT 59715 TENANT: INSURANCE MANAGEMENT SOLUTION, INC. 360 CENTRAL AVENUE ST. PETERSBURG, FL 33701 ATTENTION: G. KRISTIN DELANO Either party may change the above addresses by giving written notice to the other party and notice shall be effective upon mailing in the same manner as above set forth or upon personal delivery. If a party's address is changed without such written notice, notice may be addressed to a party's last known address. 18. RIGHT OF FIRST REFUSAL During the period of this Lease, if Tenant is not in default, Tenant shall have a right of first refusal to lease other available space in the upper level of Building #2 of Valley Commons Business Park, Bozeman, Montana. Upon the execution of a letter of intent by a prospective tenant of any other available space in the upper level of building #2 of Valley Commons Business Park, Bozeman, Montana, the Landlord shall deliver a copy of said letter of intent to the Tenant by certified mail, return receipt requested, to Tenant's address as herein stated (or later changed in writing). PAGE 15 16 Tenant shall have three (3) business days from receipt of said letter of intent within which to exercise its option to rent said space under the terms of the letter of intent. If tenant does not expressly exercise their option within the said three (3) business days, the Landlord shall be free to rent to the new prospective tenant. 19. LANDLORD - TENANT The relationship between the parties hereto is that of Landlord and Tenant and nothing herein contained shall be construed or interpreted so as to make their relationship otherwise. 20. CONDITION OF LEASED PREMISES Upon Tenant taking possession of the leased premises, Tenant shall inspect the same and advise Landlord within fifteen (15) days of any defects which might reasonably be discovered upon an inspection. Landlord shall promptly repair or correct these defects. If Tenant does not give Landlord notice of any such defects within said fifteen (15) day period, Tenant shall have been deemed to acknowledge receipt of the leased premises in good condition and repair and in all respects satisfactory and acceptable to Tenant. 21. TENANT'S NOTICE TO LANDLORD OF SUBSEQUENT DEFECTS OR DAMAGES AND LANDLORD'S RIGHT TO INSPECT Upon discovery, Tenant shall immediately notify Landlord of any subsequent damages, defects or conditions occurring upon the PAGE 16 17 premises which may, if continued, further damage the leased premises, (such as water leaks, plumbing or electrical problems, heating failures and the like). Landlord and its agents shall have reasonable access to the leased premises at reasonable times to ascertain whether the premises are in good repair and to make reasonable repairs or maintenance which Landlord may be required to make or feel desirable. 22. UTILITIES Tenant shall timely pay for the water, electricity, gas, and telephone and other utilities used at the leased premises, including any hook-up charges. 23. SUSPENSION OF LEASE IN CASE OF FIRE, CASUALTY OR PUBLIC Landlord and Tenant agree that if, during the term of this Lease the leased premises shall be injured or destroyed by fire or other casualty or condemned or rendered untenantable by public authority, so as to render the leased premises unfit for occupancy, to such an extent that the premises cannot be repaired or replaced with reasonable diligence within ninety days from the happening of such injury or act, then either Landlord or Tenant may terminate this Lease as of the date of such damage or act by written notice delivered to the other within fifteen days from the occurrence. Tenant shall immediately surrender the leased premises and all PAGE 17 18 interest therein to Landlord and Tenant shall pay rent only to the time of the said damage or act. If the leased premises can be restored within ninety (90) days from the happening of the damage or act and if Landlord, within fifteen (15) days from the occurrence, elects, in writing, to repair and restore the premises within the said ninety days from the happening of the damage or act, then this Lease shall not end or terminate on account of such injury or act. However, the rent shall not run or accrue after injury and during the process of repairs, except only that Tenant shall, during such time, pay a prorated portion of such rent apportioned to that portion of the leased premises which are in condition for occupancy and can be effectively used or may actually be occupied by Tenant during such repairing periods. If, however, the leased premises shall be damaged, but Tenant can use the leased premises to their fullest extent, then Landlord shall repair the same with reasonable promptness. In this case, the rent shall not cease or be abated during such repairing. All equipment, appliances, fixtures, improvements or betterments placed by Tenant on the leased premises which shall be damaged or destroyed in any of the events aforementioned shall be repaired and replaced by Tenant at their own expense and not at the expense of Landlord. PAGE 18 19 Except as herein set forth, Landlord shall not be held to account for any damages to Tenant attributable to fire, acts of God or any failure or defect in the premises not reasonably attributable to the intentional or negligent acts or omissions of Landlord or its agents and employees; provided, however, Tenant shall immediately report any failure or defect to Landlord who shall repair or correct such defects with reasonable diligence. 24. SUBORDINATION Notwithstanding anything herein to the contrary, Tenant agrees this Lease is and shall be subordinate to any mortgage, trust indenture or other instrument of security which shall have been or shall be placed against the land and buildings of which the leased premises forms a part; and said subordination is hereby made effective without any further act by Tenant. Tenant agrees that at any time, or from time to time, upon request by landlord, they will execute and deliver any instruments, releases, estoppel certificates or other documents that may be required in connection with the subjecting and subordinating of this Lease to the lien of any of said mortgages, trust indentures or other instruments of security. If there is more than one instrument, release, estoppel certificate or other such documents requested in any Lease year, and if legal fees are involved on the part of the Tenant to review such documents, the Landlord will reimburse Tenant for its legal fees to the extent such are reasonable and standard fees for such review. PAGE 19 20 25. PARKING LOT The Tenant understands that the parking lot in front of the building is jointly owned by all of the owners of Valley Commons Business Park and that there are no designated parking spots. Tenant understands that the use of the parking lot is shared with the owners and tenants of Valley Center Business Park and that the minimum number of parking spots is set by City Code. 26. SIGNS Landlord and Tenant shall mutually agree upon the design and location of Tenant's sign. The sign shall be of professional quality and of similar quality and size as the signs of the other Tenants and shall comply with all applicable state, county or local laws, city ordinances and zoning. The design of the sign shall be submitted to Landlord prior to the placement for approval and such approval shall not be unreasonably withheld. 27. WAIVER OF SUBROGATION Notwithstanding anything herein to the contrary, Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective officers, agents and employees, from any and all claims or demands for damages, loss, expense or injury to the leased premises, or to the furnishings, fixtures, equipment or inventory or other property of either Landlord or Tenant in, about or upon the leased premises, as the case may be, caused by or result from PAGE 20 21 perils, events or happenings which are covered by the insurance carried by the respective parties and in force at the time of any such loss; provided, however, that such waiver shall be effective only to the extent and amount permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby, or the expense of such insurance is not thereby increased. 28. ASSIGNABILITY AND SUBLEASING Tenant shall have the right to sublease or assign all or a portion of the premises during the Lease term, subject to Landlord's approval which shall not be unreasonably withheld or delayed. 29. SUCCESSORS AND ASSIGNS Subject to the provisions of the preceding Paragraph, entitled "Assignability and Subleasing", this Lease shall be binding upon and inure to the benefit of the respective parties, their successors and assigns. 30. ALL AGREEMENTS CONTAINED HEREIN This Lease contains all of the agreements of the parties relating to the subject matter; and it supersedes and cancels all prior written or oral agreements between them with reference to the real property, including all improvements thereon. 31. TIME It is mutually agreed by and between the parties that TIME IS OF THE ESSENCE OF THIS LEASE. PAGE 21 22 32. HEADINGS The headings and titles of sections and paragraphs of this Lease are inserted merely for convenience and are not to be used in the constructions thereof. 33. ATTORNEY'S FEES AND COSTS If either party defaults in its performance, the defaulting party agrees to pay, on demand, the other party's reasonable attorney's fees and costs for the preparation and serving of the written notices of default and in the enforcement of this Lease, including legal actions. IN WITNESS WHEREOF, the parties hereto have hereunto set their hands the day and year first above written. LANDLORD--------- BRONKEN-MEYERS, LLC By: /s/ [ILLEGIBLE SIGNATURE] ----------------------------------- By: ----------------------------------- TENANT----------- INSURANCE MANAGEMENT SOLUTIONS, INC. By: /a/ S. KYLE MOLL ----------------------------------- S. KYLE MOLL, VICE PRESIDENT & CIO PAGE 22 23 EXHIBIT A UPPER LEVEL FLOOR PLAN (LOT 2) [FLOOR PLAN] LANDLORDS WORK: (1) CONSTRUCT INTERIOR WALLS PER DESIGN (2) PAINT & CARPET (3) DROP CEILING, LIGHTING, ELEC, SINK & CABINET (4) HVAC 24 MARTEL CONSTRUCTION, INC. MAIN OFFICE BIG FORK OFFICE 1203 S. CHURCH AVENUE - P.O. BOX 308 305 HIGHWAY 83 BOZEMAN, MONTANA 59771-0305 BIGFORK, MONTANA 59911 (406) 588-8565 - FAX (406) 588-8045 (406) 837-1053 - FAX (406) 837-1088 FACSIMILE REQUEST AND COVER SHEET EXHIBIT B To: Steve Olson Date: 9-21-98 --------------------------------- -------------------- --------------------------------- -------------------- Attention: Fax No: 763-5351 --------------------------------- -------------------- Project: U.C. LOT #2 --------------------------------------------------------------------- RE: SPACE ALLOTMENTS --------------------------------------------------------------------- Number of documents transmitted including this cover sheet 1 --------------------- Hard copy to follow: YES NO -- --------------------- --------------------- From: -------------------------------------------------------------------------- Message: TOTAL BLDG AREA - 16,570 S.F. 1st - 8403* 2nd - 8167* ----------------------------------------------------------------------- UNIT A - ACTUAL - 1675* ADD COMMON 652* : 2327 S.F. - ------------------------------------------------------------------------------- UNIT B - " 1260* " " 500* : 1760 S.F. - ------------------------------------------------------------------------------- UNIT C - " 1475* + 39* HALLWAY + " 593* : 2107 S.F. - ------------------------------------------------------------------------------- UNIT D - " 1550* + 39* " + " 620* : 2209 S.F. - ------------------------------------------------------------------------------- TOTALS - 6038* 2326* : 8403 S.F. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNIT E - ACTUAL - 1360* ADD COMMON 505* : 1865 S.F. - ------------------------------------------------------------------------------- UNIT F - " 1600* " " 594* : 2194 S.F. - ------------------------------------------------------------------------------- UNIT G - " 1565* + " 581* : 2146 S.F. - ------------------------------------------------------------------------------- UNIT H - " 1275* + 215* STORAGE + " 472* : 1962 S.F. - ------------------------------------------------------------------------------- TOTALS - 6015* 2152* : 8167 S.F. - ------------------------------------------------------------------------------- Please respond by --------------------- cc: --------------------- ------------------------------ Signed --------------------- --------------------- --------------------- If you do not receive all the documents, please call (406) 586-8585 COMMERCIAL . . . INSTITUTIONAL . . . INDUSTRIAL EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) INSURANCE MANAGEMENT SOLUTION GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-K. YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 4,702,861 0 3,621,714 0 0 12,818,094 14,719,621 (7,494,127) 39,490,907 5,701,015 0 0 0 126,787 32,758,333 39,490,907 0 71,329,093 0 65,140,770 349,680 0 809,383 5,728,620 2,533,560 0 0 0 0 3,195,060 .26 .26
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