10-Q 1 e10-q.txt INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 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 No.) 360 CENTRAL AVENUE, ST. PETERSBURG, FLORIDA 33701 ------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (727) 803-2040 -------------------------------------------------- Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: Class: Outstanding at August 10, 2000: Common Stock, $.01 par value 12,800,261 2 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements...................................................... 1 Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000......................................................... 1 Consolidated Statements of Operations for the three months and six months ended June 30, 1999 and 2000............................... 2 Consolidated Statement of Shareholders' Equity for the year ended December 31, 1999 and the six months ended June 30, 2000............................................................. 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 2000.............................................. 4 Notes to Consolidated Financial Statements................................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders....................... 13 Item 6. Exhibits and Reports on Form 8-K.......................................... 13
The statements contained in this report on Form 10-Q 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 administrative proceedings involving the Company's principal customer; (xiv) uncertainties regarding the market acceptance of the Company's new services;(xv) difficulties in establishing positive name recognition in the marketplace; (xvi) ability to service new unaffiliated customers, including the development and implementation of e-business initiatives; and (xvii) difficulties in achieving expected expense reductions as a result of management initiatives. 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 Item 2 of this report and the risks discussed under the caption "Risk Factors" included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, as filed with the Securities Exchange Commission on March 30, 2000. 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. ii 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30, 1999 2000 ------------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents .................................. $ 4,702,861 $ 4,472,245 Accounts receivable, net ................................... 3,621,714 3,899,146 Due from affiliates ........................................ 2,920,543 3,533,796 Prepaid expenses and other assets .......................... 1,572,976 1,183,999 ----------- ----------- Total current assets .................................. 12,818,094 13,089,186 PROPERTY AND EQUIPMENT, net ................................... 7,225,494 7,917,674 OTHER ASSETS Goodwill, net .............................................. 16,257,663 15,804,833 Customer contracts, net .................................... 1,116,667 1,016,667 Deferred tax assets ........................................ 1,063,366 1,147,907 Capitalized software costs, net ............................ 976,225 1,053,119 Other ...................................................... 33,398 45,233 ----------- ----------- Total assets ......................................... $39,490,907 $40,074,619 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt .......................... $ 481,637 $ 1,044,335 Accounts payable, trade .................................... 990,495 1,947,228 Due to affiliates .......................................... 12,833 60,000 Employee related accrued expenses .......................... 2,294,858 1,917,201 Other accrued expenses ..................................... 1,293,060 948,442 Income taxes payable ....................................... 413,241 182,095 Deferred revenue ........................................... 214,891 177,446 ----------- ----------- Total current liabilities ............................ 5,701,015 6,276,747 LONG-TERM DEBT, less current portion .......................... 219,857 60,809 DEFERRED REVENUE .............................................. 684,915 658,718 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, 12,678,743 and 12,800,261 shares issued and outstanding at December 31, 1999 and June 30, 2000, respectively ........ 126,787 128,002 Additional paid-in capital ................................. 26,810,282 27,199,067 Retained earnings .......................................... 5,948,051 5,751,276 ----------- ----------- Total shareholders' equity ........................... 32,885,120 33,078,345 ----------- ----------- Total liabilities and shareholders' equity ........... $39,490,907 $40,074,619 =========== ===========
The accompanying notes are an integral part of these consolidated statements. 1 4 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------- 1999 2000 1999 2000 ------------ ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) REVENUES Outsourcing services - affiliated ................. $ 12,944,426 $ 9,775,937 $ 22,730,540 $ 18,981,250 Outsourcing services .............................. 1,016,699 1,535,680 4,046,194 3,064,994 Flood zone determination services ................. 4,404,611 4,441,124 9,612,538 8,164,053 Flood zone determination services - affiliated .... 112,272 242,636 194,055 472,639 ------------ ------------ ------------ ------------ Total revenues .............................. 18,478,008 15,995,377 36,583,327 30,682,936 ------------ ------------ ------------ ------------ EXPENSES Cost of outsourcing services ...................... 8,562,226 9,076,570 17,774,901 17,754,076 Cost of flood zone determination services ......... 2,111,891 2,002,329 4,325,325 3,860,858 Selling, general and administrative ............... 2,678,155 2,864,820 4,946,938 5,515,266 Management services from Parent ................... 592,795 475,511 1,198,355 979,048 Depreciation and amortization ..................... 1,398,693 1,445,039 2,731,949 2,752,609 ------------ ------------ ------------ ------------ Total expenses .............................. 15,343,760 15,864,269 30,977,468 30,861,857 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) .............................. 3,134,248 131,108 5,605,859 (178,921) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest income ................................... 101,208 63,106 222,238 130,156 Interest expense .................................. (140,408) (24,989) (480,506) (42,410) ------------ ------------ ------------ ------------ Total other income (expense) ................ (39,200) 38,117 (258,268) 87,746 INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES ...................................... 3,095,048 169,225 5,347,591 (91,175) PROVISION FOR INCOME TAXES ........................... 1,246,600 145,500 2,180,600 105,600 ------------ ------------ ------------ ------------ NET INCOME (LOSS) .................................... $ 1,848,448 $ 23,725 $ 3,166,991 $ (196,775) ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE ................... $ 0.15 $ 0.00 $ 0.26 $ (0.02) ============ ============ ============ ============ Weighted average common shares outstanding ........... 12,678,743 12,800,261 12,213,801 12,787,575 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements. 2 5 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL -------- ----------- ----------- ------------ Balance at January 1, 1999 ................. $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 Payment of earn-out in connection with the acquisition of Colonial Claims (unaudited)..................... 1,215 298,785 -- 300,000 Issuance of stock options to non-employees (unaudited) ............. -- 90,000 -- 90,000 Net loss (unaudited) ................... -- -- (196,775) (196,775) -------- ----------- ----------- ------------ Balance at June 30, 2000 (unaudited) ....... $128,002 $27,199,067 $ 5,751,276 $ 33,078,345 ======== =========== =========== ============
The accompanying notes are an integral part of this consolidated statement. 3 6 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, ------------------------------ 1999 2000 ------------ ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................... $ 3,166,991 $ (196,775) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................. 2,731,949 2,752,609 Loss on disposal of property and equipment .................... 47,485 95,275 Non-employee stock options .................................... -- 90,000 Deferred income taxes, net .................................... 377,411 (84,541) Changes in assets and liabilities: Accounts receivable ......................................... 817,826 (277,432) Income taxes recoverable .................................... 1,148,902 -- Prepaid expenses and other current assets ................... (151,272) 385,059 Other assets ................................................ 101,420 (401,316) Accounts payable, trade ..................................... 198,742 956,733 Employee related accrued expenses ........................... 841,233 (377,657) Other accrued expenses ...................................... (789,443) (44,618) Income taxes payable ........................................ 382,287 (231,146) Deferred revenue ............................................ 110,248 (63,642) ------------ ----------- Net cash provided by operating activities ................. 8,983,779 2,602,549 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Colonial Claims, net of cash acquired ............ 1,092 -- Repayment of acquisition debt ................................... (500,000) -- Payment of dividend to prior Colonial Claims shareholders ....... (670,000) -- Purchases of property and equipment ............................. (1,346,862) (2,670,729) ------------ ----------- Net cash used in investing activities ..................... (2,515,770) (2,670,729) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds received from initial public offering .............. 19,163,897 -- Net borrowings under line of credit ............................. 6,668,322 680,230 Repayment of debt ............................................... (9,526,102) (276,580) Repayment of affiliated notes and interest payable .............. (14,708,420) -- Collection of affiliated note and interest receivable ........... 5,271,406 -- Net repayments to affiliates .................................... (4,995,466) (566,086) ------------ ----------- Net cash provided by (used in) financing activities ...... 1,873,637 (162,436) ------------ ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................................... 8,341,646 (230,616) CASH AND CASH EQUIVALENTS, beginning of period ..................... 1,868,867 4,702,861 ------------ ----------- CASH AND CASH EQUIVALENTS, end of period ........................... $ 10,210,513 $ 4,472,245 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES: Cash paid for interest ........................................... $ 940,922 $ 32,349 ============ =========== Cash paid for income taxes ....................................... $ -- $ 325,000 ============ =========== SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Purchase of net assets of Colonial Claims: Total consideration consists of: Common Stock.......................................... $ 1,700,000 Common Stock payable.................................. 300,000 Cash.................................................. 500,000 Short term obligation................................. 500,000 ------------ $ 3,000,000 ============ Fair value of assets acquired......................... $ 1,846,555 Liabilities assumed................................... 1,478,306 ------------ Net assets............................................ 368,249 Goodwill.............................................. 2,631,751 ------------ $ 3,000,000 ============
The accompanying notes are an integral part of these consolidated statements. 4 7 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of Insurance Management Solutions Group, Inc. and subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q and do not include all of the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal and recurring adjustments necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The accompanying consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission on March 30, 2000. The results of operations for the three months and six months ended June 30, 2000 are not necessarily indicative of the results that should be expected for a full fiscal year. Net Income (Loss) Per Common Share Net income (loss) per common share, which represents both basic and diluted earnings per share ("EPS"), is computed by dividing net income (loss) by the weighted average common shares outstanding. The following table reconciles the numerator and denominator of the basic and dilutive EPS computation:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ----------------------------- 1999 2000 1999 2000 ----------- ----------- ----------- ------------ Numerator: Net income (loss) ................................... $ 1,848,448 $ 23,725 $ 3,166,991 $ (196,775) =========== =========== =========== ============ Denominator: Weighted average number of Common Shares used in basic EPS ................................ 12,678,743 12,800,261 12,213,801 12,787,575 Diluted stock options ............................... -- -- -- -- ----------- ----------- ----------- ------------ Weighted average number of Common Shares and diluted potential Common Shares used in diluted EPS ................................... 12,678,743 12,800,261 12,213,801 12,787,575 =========== =========== =========== ============
For the six months ended June 30, 1999 and 2000, options to purchase 719,000 and 852,750 shares, respectively, of Common Stock were outstanding during the periods 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. Reclassifications Certain prior year balances have been reclassified in order to conform to the current year's presentation. 5 8 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 2. CONTINGENCIES Bankers Insurance Company ("BIC"), a subsidiary of Bankers Insurance Group ("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 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 the Federal Emergency Management Association ("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. The complaint further alleges 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. The suit is currently administratively closed pending an appeal on the preliminary issue of whether the controversy is subject to arbitration. 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 DOL audit, which was completed in June, 2000, resulted in the Company owing approximately $90,000 for the payment of overtime wages owed to certain employees who were previously misclassified as salaried associates. Such expense is included in "Cost of outsourcing services" in the accompanying consolidated statements of operations for the three months and six months ended June 30, 2000. 6 9 The Company is involved in various legal actions arising in the ordinary course of business. Management believes 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, although no assurances can be given in this regard. 7 10 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 3. SEGMENT INFORMATION The following table presents summarized financial information for the Company's reportable segments:
INTERCOMPANY OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED SERVICES DETERMINATIONS AND OTHER TOTALS ------------ -------------- ------------- ------------ THREE MONTHS ENDED JUNE 30, 1999 - (UNAUDITED) Operating revenues - affiliated .. $ 13,070,948 $ 112,272 $ (126,522) $ 13,056,698 Operating revenues - unaffiliated 1,016,699 4,404,611 -- 5,421,310 Operating income ................. 2,375,694 758,554 -- 3,134,248 Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538 Total liabilities ................ 17,007,162 14,292,685 (17,920,360) 13,379,487 THREE MONTHS ENDED JUNE 30, 2000 - (UNAUDITED) Operating revenues - affiliated .. $ 10,031,073 $ 242,636 $ (255,136) $ 10,018,573 Operating revenues - unaffiliated 1,535,680 4,441,124 -- 5,976,804 Operating income (loss) .......... (942,500) 1,073,608 -- 131,108 Identifiable assets .............. 32,376,463 25,577,752 (17,879,596) 40,074,619 Total liabilities ................ 19,039,060 5,836,810 (17,879,596) 6,996,274 SIX MONTHS ENDED JUNE 30, 1999 - (UNAUDITED) Operating revenues - affiliated .. $ 22,953,095 $ 194,055 $ (222,555) $ 22,924,595 Operating revenues - unaffiliated 4,046,194 9,612,538 -- 13,658,732 Operating income ................. 3,486,993 2,118,866 -- 5,605,859 Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538 Total liabilities ................ 17,007,162 14,292,685 (17,920,360) 13,379,487 SIX MONTHS ENDED JUNE 30, 2000 - (UNAUDITED) Operating revenues - affiliated .. $ 19,478,889 $ 472,639 $ (497,639) $ 19,453,889 Operating revenues - unaffiliated 3,064,994 8,164,053 -- 11,229,047 Operating income (loss) .......... (1,757,424) 1,578,503 -- (178,921) Identifiable assets .............. 32,376,463 25,577,752 (17,879,596) 40,074,619 Total liabilities ................ 19,039,060 5,836,810 (17,879,596) 6,996,274
8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain selected historical operating results of the Company as a percentage of total revenues:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ------------------ 1999 2000 1999 2000 ----- ----- ----- ----- REVENUES Outsourcing services .................... 75.6% 70.7% 73.2% 71.9% Flood zone determination services ....... 24.4 29.3 26.8 28.1 ----- ----- ----- ----- Total revenues ...................... 100.0 100.0 100.0 100.0 ----- ----- ----- ----- EXPENSES Cost of outsourcing services ............ 46.4 56.8 48.6 57.8 Cost of flood zone determination services 11.4 12.5 11.8 12.6 Selling, general and administrative ..... 14.5 17.9 13.5 18.0 Management services from Parent ......... 3.2 3.0 3.3 3.2 Depreciation and amortization ........... 7.6 9.0 7.5 9.0 ----- ----- ----- ----- Total expenses ...................... 83.1 99.2 84.7 100.6 ----- ----- ----- ----- Operating income (loss) ................... 16.9 0.8 15.3 (0.6) Interest income ........................... 0.5 0.4 0.6 0.4 Interest expense .......................... (0.8) (0.2) (1.3) (0.1) ----- ----- ----- ----- Income (loss) before provision for income taxes ......................... 16.6 1.0 14.6 (0.3) Provision for income taxes ................ 6.6 0.9 5.9 0.3 ----- ----- ----- ----- Net income (loss) ......................... 10.0% 0.1% 8.7% (0.6)% ===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000 Outsourcing Services Revenues. Outsourcing services revenues decreased $2.6 million, or 19.0%, to $11.3 million for the three months ended June 30, 2000 from $14.0 million for the corresponding period in 1999. The decrease was primarily attributable to revenue generated during the second quarter of 1999 under an affiliated technical support services arrangement. No revenue was generated under this arrangement during the corresponding period in 2000. Additionally, 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. The minimum service fee arrangement was 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. 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 $12.9 million for the three months ended June 30, 1999, would have been $11.1 million in accordance with the terms of the affiliated service agreements as in effect prior April 1, 1999. The amended agreement requiring such minimums expired in December, 1999 and was not subsequently renewed. Additionally, a decline in the volume of auto premium processed on behalf of the Company's affiliated customers contributed to the decrease in outsourcing services revenues during the second quarter of 2000. Partially offsetting these decreases was an increase in outsourcing services revenue generated from flood premium processed on behalf of the Company's affiliated and unaffiliated customers as well as auto claims processed on behalf of the Company's unaffiliated customers. Flood Zone Determination Services Revenues. Flood zone determination services revenues increased $167,000, or 3.7%, to $4.68 million for the three months ended June 30, 2000 from $4.52 million for the corresponding period in 1999. The increase was primarily attributable to flood zone determination services revenues generated from new customers, partially offset by a continued decline in mortgage refinancings and loan originations, which have historically driven the demand for flood zone determinations from the Company's existing customers. 9 12 Cost of Outsourcing Services. Cost of outsourcing services increased $514,000, or 6.0%, to $9.1 million for the three months ended June 30, 2000 from $8.6 million for the corresponding period in 1999. As a percentage of outsourcing services revenues, cost of outsourcing services increased to 80.2% for the three months ended June 30, 2000 from 61.3% for the corresponding period in 1999 primarily as a result of a decrease in dollar amount of outsourcing services revenues and an increase in the cost of outsourcing services during three months ended June 30, 2000 from the corresponding period in 1999. The increase in the dollar amount of cost of outsourcing services was primarily due to staff additions and the use of contract programmers to develop and staff new unaffiliated programs as well as an increase in facilities costs due to the occupancy of the Company's new operating and call center facility, partially offset by a decrease in revenue from the Company's claims catastrophe subsidiary, of which approximately 70.0% of each dollar of revenue is paid to its independent adjusters who adjust the claims on the Company's behalf. Cost of Flood Zone Determination Services. Cost of flood zone determination services decreased $110,000, or 5.2%, to $2.0 million for the three months ended June 30, 2000 from $2.1 million for the corresponding period in 1999. As a percentage of flood zone determination services revenues, cost of flood zone determination services decreased to 42.8% for the three months ended June 30, 2000 from 46.8% for the corresponding period in 1999 primarily as a result of a decrease in the dollar amount of cost of flood zone determination services during the three months ended June 30, 2000 from the corresponding period in 1999. The decrease in the dollar amount of cost of flood zone determination services resulted primarily from a redesign of various production workflows during 1999 that enabled the Company to increase employee productivity and reduce operating expenses, primarily personnel related costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $187,000, or 7.0%, to $2.86 million for the three months ended June 30, 2000 from $2.68 million for the corresponding period in 1999. The increase in selling, general and administrative expenses was primarily attributable to the continued assumption of certain administrative services, including human resources, agency accounting, cash management and legal, that were previously provided to the Company under the management service agreement with BIG. Also contributing to the increase was an estimated lease-break charge for the closure of a satellite office. Management Services from Parent. Management services from Parent decreased $117,000, or 19.8%, to $476,000 for the three months ended June 30, 2000 from $593,000 for the corresponding period in 1999. The decrease was primarily related to the continued assumption of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company under the management service agreement with BIG. Interest Expense. Interest expense decreased $115,000, or 82.2%, to $25,000 for the three months ended June 30, 2000 from $140,000 for the corresponding period in 1999. The decrease was primarily related to the early repayment of most of the Company's debt obligations from the net proceeds received by the Company from its initial public offering in February, 1999. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 Outsourcing Services Revenues. Outsourcing services revenues decreased $4.7 million, or 17.7%, to $22.0 million for the six months ended June 30, 2000 from $26.8 million for the corresponding period in 1999. The decrease was primarily attributable to revenue generated during the second quarter of 1999 under an affiliated technical support services arrangement. No revenue was generated under this arrangement during the corresponding period in 2000. Additionally, 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. The minimum service fee arrangement was 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. 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 $22.7 million for the six months ended June 30, 1999, would have been $20.9 million in accordance with the terms of the affiliated service agreements as in effect prior to April 1, 1999. The amended agreement requiring such minimums expired in December, 1999 and was not subsequently renewed. The decrease was also due to a decrease in the volume of flood and wind damage claims administered by the Company's outsourcing operations during the first six months of 2000 as compared to the same period in 1999. During the first six months of 1999, the Company recognized revenues totaling approximately $3.3 million from the administration of property damage claims resulting from Hurricane Georges, which storm occurred in September 1998. In comparison, the Company recognized revenues of approximately $1.1 million during the first six months of 2000 from the administration of property damage claims 10 13 resulting from Hurricanes Floyd and Irene, which storms occurred during the fourth quarter of 1999. Additionally, a decline in the volume of auto premium processed on behalf of the Company's affiliated customers contributed to the decrease in outsourcing services revenues during the first six months of 2000. Partially offsetting these decreases was an increase in outsourcing services revenues generated from flood premium and auto claims processed on behalf of the Company's unaffiliated customers. Flood Zone Determination Services Revenues. Flood zone determination services revenues decreased $1.2 million, or 11.9%, to $8.6 million for the six months ended June 30, 2000 from $9.8 million for the corresponding period in 1999. The decrease was primarily attributable to the termination of the Company's "life-of-loan" insurance policy, effective April 1, 1999, in which, prior to the termination of the policy, the Company was compensated for performing flood zone re-determinations for certain existing customers. Prior to the termination of the life-of-loan policy, the Company paid an insurance premium for every flood zone determination issued which required life-of-loan tracking. In exchange for the premium, the Company received a fixed amount for every flood zone determination that had to be reissued as a result of a change in the underlying flood zone classification of a property. Also contributing to the decrease in flood zone determination services revenues during the first six months of 2000 as compared to same period in 1999 was a continued decline in mortgage refinancings and loan originations, which have historically driven the demand for flood zone determinations from the Company's existing customers. This decrease was partially offset by flood zone determination services revenues generated from new customers. Cost of Outsourcing Services. Cost of outsourcing services decreased $21,000, or 0.1%, to $17.76 million for the six months ended June 30, 2000 from $17.77 million for the corresponding period in 1999. As a percentage of outsourcing services revenues, however, cost of outsourcing services increased to 80.5% for the six months ended June 30, 2000 from 66.4% for the corresponding period in 1999 primarily as a result of a decrease in dollar amount of outsourcing services revenues during the six months ended June 30, 2000 from the corresponding period in 1999. The decrease in the dollar amount of cost of outsourcing services was primarily attributable to a decrease in revenue from the Company's claims catastrophe subsidiary, of which approximately 70.0% of each dollar of revenue is paid to its independent adjusters who adjust the claims on the Company's behalf. Partially offsetting the decrease in the dollar amount of expenses from the Company's claims catastrophe subsidiary was an increase in costs from the Company's outsourcing subsidiary as a result of increases in personnel costs due to staff additions and the use of contract programmers to develop and staff new unaffiliated programs as well as an increase in facilities costs due to the occupancy of the Company's new operating and call center facility. Cost of Flood Zone Determination Services. Cost of flood zone determination services decreased $464,000, or 10.7%, to $3.9 million for the six months ended June 30, 2000 from $4.3 million for the corresponding period in 1999. As a percentage of flood zone determination services revenues, however, cost of flood zone determination services increased to 44.7% for the six months ended June 30, 2000 from 44.1% for the corresponding period in 1999 primarily as a result of a decrease in the dollar amount of flood zone determination services revenue during the six months ended June 30, 2000 from the corresponding period in 1999. The decrease in the dollar amount of cost of flood zone determination services resulted primarily from a redesign of various production workflows during 1999 that enabled the Company to increase employee productivity and reduce operating expenses, primarily personnel-related costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $568,000, or 11.5%, to $5.5 million for the six months ended June 30, 2000 from $4.9 million for the corresponding period in 1999. The increase in selling, general and administrative expenses was primarily attributable to the continued assumption of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company under a management service agreement with BIG. Also contributing to the increase were severance costs relating to the resignation of an officer during the first quarter of 2000, as well as a lease-break charge for the closure of a satellite office. Management Services from Parent. Management services from Parent decreased $219,000, or 18.3%, to $979,000 for the six months ended June 30, 2000 from $1.2 million for the corresponding period in 1999. The decrease was primarily related to the continued assumption of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company under the management service agreement with BIG. Interest Expense. Interest expense decreased $438,000, or 91.2%, to $42,000 for the six months ended June 30, 2000 from $481,000 for the corresponding period in 1999. The decrease was primarily related to the early repayment of most of the Company's debt obligations from the net proceeds received by the Company from its initial public offering in February, 1999. 11 14 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, 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. In February, 1999, the Company completed an initial public offering 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 ("Offering Proceeds") to the Company of approximately $19.2 million after deducting offering expenses paid by the Company of approximately $1.3 million. The Offering Proceeds, together with funds received from BIG from proceeds made available to BIG by a subsidiary of the Selling Shareholder, were used during 1999 to repay all obligations with BIG and its affiliates and to repay most of the Company's third-party 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 (8.41% at June 30, 2000) 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. As of June 30, 2000, the outstanding balance and available line of credit under the agreement totaled $680,230 and $11,319,770, respectively. 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 its business plan. The Company may enter into such transactions should opportunities present themselves in the future. YEAR 2000 COMPLIANCE During the first six months of 2000, the Company continued its remediation program related to 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 to 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. The Company does not anticipate any remaining costs to address additional Year 2000 Problems to be significant, although no assurances can be given in this regard. ITEM 3. 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. 12 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes to the disclosure set forth under the caption "Item 3. Legal Proceedings" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's 2000 Annual Meeting of Shareholders held on June 1, 2000, one matter was submitted to a vote of shareholders. Robert M. Menke, William D. Hussey and E. Ray Solomon were elected as Directors of the Company for three-year terms expiring in 2003 and David M. Howard was elected as a Director of the Company for a one-year term expiring in 2001. The following table sets forth certain information with respect to the election of directors at the 2000 Annual Meeting of Shareholders:
Shares Name of Nominee Shares Voted For Withholding --------------- ---------------- Authority ----------- Robert M. Menke 11,511,351 26,660 William D. Hussey 11,510,351 27,660 E. Ray Solomon, Ph.D., CLU 11,509,301 28,710 David M. Howard 11,521,651 16,360
The following table sets forth the other Directors of the Company whose terms of office continued after the 2000 Annual Meeting of Shareholders: Name of Director Term Expires ---------------- ------------ Robert G. Menke 2001 Alejandro M. Sanchez 2001 David K. Meehan 2002 Daniel J. White 2002 John A. Grant, Jr. 2002 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits EXHIBIT NO. DESCRIPTION ---------- ----------- 10.1 Insurance Administration Services Agreement, effective as of May 3, 2000, by and between Insurance Management Solutions, Inc. and Reliance Insurance Company 10.2 Insurance Administration Services Agreement, effective as of June 30, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holdings, Inc. 10.3 Development Services Agreement, effective as of June 30, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holdings, Inc. 10.4 Insurance Administration Services Agreement, effective as of June 22, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holdings, Inc. 27.1 Financial Data Schedule (for SEC use only) a) Reports on Form 8-K None 13 16 SIGNATURES Pursuant to the requirements 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. Date: August 14, 2000 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. (Registrant) By: /s/ DAVID M. HOWARD ------------------------------------ David M. Howard President and Chief Executive Officer (Principal Executive Officer) By: /s/ CHRISTOPHER P. BREAKIRON ------------------------------------ Christopher P. Breakiron Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 14 17 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 - Insurance Administration Services Agreement, effective as of May 3, 2000, by and between Insurance Management Solutions, Inc. and Reliance Insurance Company 10.2 - Insurance Administration Services Agreement, effective as of June 30, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holding, Inc. 10.3 - Development Services Agreement, effective as of June 30, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holding, Inc. 10.4 - Insurance Administration Services Agreement, effective as of June 22, 2000, by and between Insurance Management Solutions, Inc. and Instant Insurance Holding, Inc. 27.1 - Financial Data Schedule (for SEC use only) 15