10-Q 1 g69116e10-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 March 31, 2001 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: Common Stock, $.01 par value Outstanding at May 11, 2001: 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, 2000 and March 31, 2001........................................................ 1 Consolidated Statements of Operations for the three months ended March 31, 2000 and 2001............................................. 2 Consolidated Statement of Shareholders' Equity for the year ended December 31, 2000 and the three months ended March 31, 2001............................................................ 3 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 2001...................................... 4 Notes to Consolidated Financial Statements................................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................... 10 Item 5. Other Information......................................................... 10 Item 6. Exhibits and Reports on Form 8-K.......................................... 11
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 litigation and administrative proceedings involving the Company's principal customer; (xiv) uncertainties regarding the market acceptance of the Company's new services;(xv) the ability to establish positive name recognition in the market place; (xvi) the ability to develop new technological solutions for current and prospective customers; (xvii) changes in existing service agreements; (xviii) the ability to obtain new customers and retain existing customers; (xix) the ability to obtain third-party information technology outsourcing services on a timely basis and at reasonable costs; and (xx) the ability to achieve 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, 2000, as filed with the Securities Exchange Commission on April 17, 2001. 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, MARCH 31, 2000 2001 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents ......................................... $ 5,192,161 $ 5,599,118 Accounts receivable, net .......................................... 3,789,288 3,117,734 Due from affiliates ............................................... 2,615,699 3,329,289 Prepaid expenses and other assets ................................. 1,573,037 1,488,479 ------------ ------------ Total current assets ......................................... 13,170,185 13,534,620 PROPERTY AND EQUIPMENT, net .......................................... 9,116,552 9,798,787 OTHER ASSETS Goodwill, net ..................................................... 15,352,001 15,125,586 Customer contracts, net ........................................... 916,667 866,667 Deferred tax assets, net .......................................... 682,081 682,081 Capitalized software costs, net ................................... 1,044,846 955,776 Other ............................................................. 483,216 427,961 ------------ ------------ Total assets ................................................ $ 40,765,548 $ 41,391,478 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt ................................. $ 219,857 $ 140,877 Accounts payable, trade ........................................... 2,370,825 2,570,526 Due to affiliates ................................................. -- 10,649 Employee related accrued expenses ................................. 1,693,823 2,045,206 Other accrued expenses ............................................ 2,008,201 1,800,367 Income taxes payable .............................................. 557,676 735,685 ------------ ------------ Total current liabilities ......................................... 6,850,382 7,303,310 DEFERRED REVENUE ..................................................... 802,578 778,015 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, 12,800,261 shares issued and outstanding at December 31, 2000 and March 31, 2001 ............................ 128,002 128,002 Additional paid-in capital ........................................ 27,545,901 27,590,901 Retained earnings ................................................. 5,438,685 5,591,250 ------------ ------------ Total shareholders' equity .................................... 33,112,588 33,310,153 ------------ ------------ Total liabilities and shareholders' equity .................... $ 40,765,548 $ 41,391,478 ============ ============
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 MARCH 31, ------------------------------ 2000 2001 ------------ ------------ (UNAUDITED) REVENUES Outsourcing services - affiliated .................. $ 9,205,313 $ 9,363,252 Outsourcing services ............................... 1,529,314 1,219,534 Flood zone determination services .................. 3,722,929 4,294,168 Flood zone determination services - affiliated ..... 230,003 218,711 ------------ ------------ Total revenues ............................... 14,687,559 15,095,665 ------------ ------------ EXPENSES Cost of outsourcing services ....................... 8,677,506 8,173,780 Cost of flood zone determination services .......... 1,858,529 2,034,394 Selling, general and administrative ................ 2,650,446 2,851,590 Management services from Parent .................... 503,537 370,556 Depreciation and amortization ...................... 1,307,570 1,366,151 ------------ ------------ Total expenses ............................... 14,997,588 14,796,471 ------------ ------------ OPERATING INCOME (LOSS) ............................... (310,029) 299,194 ------------ ------------ OTHER INCOME (EXPENSE): Interest income .................................... 67,050 61,572 Interest expense ................................... (17,421) (2,501) ------------ ------------ Total other income (expense) ................. 49,629 59,071 INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES ....................................... (260,400) 358,265 PROVISION (BENEFIT) FOR INCOME TAXES .................. (39,900) 205,700 ------------ ------------ NET INCOME (LOSS) ..................................... $ (220,500) $ 152,565 ============ ============ NET INCOME (LOSS) PER COMMON SHARE .................... $ (.02) $ .01 ============ ============ Weighted average common shares outstanding ............ 12,774,889 12,800,261 ============ ============
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 December 31, 1999 ..................... $126,787 $ 26,810,282 $ 5,948,051 $ 32,885,120 Issuance of Common Stock in connection with earn-out computation for Colonial Claims ............................. 1,215 298,785 -- 300,000 Non-cash compensation expense related to phantom stock plans ......................... -- 338,200 -- 338,200 Compensation expense related to stock options issued to non-employees ........... -- 98,634 -- 98,634 Net loss ....................................... -- -- (509,366) (509,366) -------- ------------ ------------ ------------ Balance at December 31, 2000 ..................... 128,002 27,545,901 5,438,685 33,112,588 Compensation expenses related to stock options issued to non-employees (unaudited) ................................. -- 45,000 -- 45,000 Net income (unaudited) ......................... -- -- 152,565 152,565 -------- ------------ ------------ ------------ Balance at March 31, 2001 (unaudited) ............ $128,002 $ 27,590,901 $ 5,591,250 $ 33,310,153 ======== ============ ============ ============
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
THREE MONTHS ENDED MARCH 31, ------------------------------ 2000 2001 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...................................................... $ (220,500) $ 152,565 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ........................................ 1,307,570 1,366,151 Loss on disposal of property and equipment ........................... 57,439 52,207 Deferred income taxes, net ........................................... 7,700 -- Non-employee stock options ........................................... -- 45,000 Changes in assets and liabilities: Accounts receivable ................................................ 3,135 671,554 Prepaid expenses and other current assets .......................... 189,095 (52,739) Other assets ....................................................... (301,031) 76,070 Accounts payable, trade ............................................ 219,296 199,701 Employee related accrued expenses .................................. 274,199 351,383 Other accrued expenses ............................................. (151,541) (207,834) Income taxes payable ............................................... (368,887) 178,009 Deferred revenue ................................................... (69,909) (24,563) ------------ ------------ Net cash provided by operating activities ........................ 946,566 2,807,504 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .................................... (1,209,954) (1,689,736) Collection of note receivable .......................................... -- 71,110 ------------ ------------ Net cash used in investing activities ........................ (1,209,954) (1,618,626) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit .................................... 114,561 -- Repayment of debt ...................................................... (137,713) (78,980) Net repayments to affiliates ........................................... (69,704) (702,941) ------------ ------------ Net cash used in financing activities .................................. (92,856) (781,921) ------------ ------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................................ (356,244) 406,957 CASH AND CASH EQUIVALENTS, beginning of period ............................ 4,702,861 5,192,161 ------------ ------------ CASH AND CASH EQUIVALENTS, end of period .................................. $ 4,346,617 $ 5,599,118 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES: Cash paid for interest .................................................. $ 17,421 $ 2,501 ============ ============ Cash paid for income taxes .............................................. $ 325,000 $ 113,750 ============ ============
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, 2000, as filed with the Securities and Exchange Commission on April 17, 2001. The results of operations for the three-month period ended March 31, 2001 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 MARCH 31, ------------------------------ 2000 2001 ------------ ------------ Numerator: Net income (loss) .................................. $ (220,500) $ 152,565 ============ ============ Denominator: Weighted average number of Common Shares used in basic EPS ................................ 12,774,889 12,800,261 Diluted stock options .............................. -- -- ------------ ------------ Weighted average number of Common Shares and diluted potential Common Shares used in diluted EPS ...................................... 12,774,889 12,800,261 ============ ============
As of March 31, 2000 and 2001, options to purchase 852,750 and 550,250 shares, respectively, of Common Stock were outstanding but were not included in the computation of diluted earnings per share as the inclusion of such shares would have an anti-dilutive effect. NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS In conjunction with the Company's acquisition of Geotrac, it entered into a Corporate Governance Agreement, dated July 31, 1998, with Geotrac of America, Inc. ("Geotrac") and Daniel J. White ("Mr. White"), Geotrac's president and then majority shareholder, setting forth certain terms and conditions pertaining to the operation of Geotrac. This agreement contains a provision, among other things, that restricts the Company's ability to make distributions or transfer funds from Geotrac by means of intercompany loans, advances or dividends without the unanimous approval of Geotrac's Board of Directors. Mr. White is presently a director of Geotrac. Therefore, pursuant to the Corporate Governance Agreement, Mr. White may impede the Company's ability to access excess cash balances retained by its Geotrac subsidiary, even if all of the other directors of Geotrac were to approve the distribution thereof to the Company. To date, the Company has been able to access Geotrac's excess cash when necessary, primarily through the prepayment of outstanding intercompany indebtedness. No assurances can be given, however, that the Company will be able to obtain available cash from Geotrac. If the Company is unable to do so, it ultimately could have a material adverse effect on the Company's business, financial condition and results of operations. 5 8 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS - (CONTINUED) As of March 31, 2001, the Company had total consolidated net assets of approximately $33.3 million, of which approximately $21.2 million represents the net assets of Geotrac. The tangible net assets of Geotrac consist primarily of cash of $1.5 million, other current assets of $4.0 million, including $1.2 million due from affiliates, and current liabilities of $2.9 million, including $1.1 million due to affiliates. As a result of the restrictions set forth in the preceding paragraph of this note, the Company's consolidated retained earnings as of March 31, 2001, which totaled $5.6 million, are not completely available for dividend distribution. However, the Company did not pay any dividends during the year ended December 31, 2000 or the three months ended March 31, 2001 and does not anticipate declaring or paying cash dividends in the foreseeable future. As such, all future earnings are expected to be retained for operating purposes. NOTE 3. CONTINGENCIES On September 28, 2000, October 25, 2000 and October 30, 2000, three alleged shareholders of the Company filed three nearly identical lawsuits in the United States District Court for the Middle District of Florida, each on behalf of a putative class of all persons who purchased shares of the Company's Common Stock pursuant and/or traceable to the registration statement for the Company's February 1999 initial public offering (the "IPO"). The lawsuits were consolidated on December 1, 2000, and the consolidated action is proceeding under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs' Consolidated Amended Class Action Complaint, filed February 7, 2001, names as defendants the following parties: the Company; Bankers Insurance Group, Inc., the Company's principal shareholder ("BIG"); Venture Capital Corporation, a selling shareholder in the IPO; the five inside directors of the Company at the time of the IPO; and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the underwriters for the IPO. (On April 6, 2001, the plaintiffs' filed a Notice of Scrivener's Error notifying all parties to the litigation and the court that Geotrac was inadvertently referenced as a defendant in one paragraph of the complaint). The complaint alleges, among other things, that the defendants violated Sections 11, 12(a) (2) and 15 of the Securities Act of 1933, as amended, by making certain false and misleading statements in the roadshow presentations, registration statement and prospectus relating to the IPO. More specifically, the complaint alleges that, in connection with the IPO, the defendants made various material misrepresentations and/or omissions relating to: (i) the Company's ability to integrate Geotrac's flood zone determination business with the Company's own flood zone determination business and with its insurance outsourcing services business; (ii) actual and anticipated synergies between the Company's flood zone determination and outsourcing services business lines; and (iii) the Company's use of the IPO proceeds. The complaint seeks unspecified damages, including interest, and equitable relief, including a rescission remedy. On March 26, 2001, the Company, BIG and the five inside director defendants filed a motion to dismiss the plaintiffs' Consolidated Amended Class Action Complaint for, among other things, failure to allege material misstatements and/or omissions in the roadshow presentations, registration statement and/or prospectus relating to the IPO. Similar motions have been filed by Venture Capital Corporation and the underwriters. Management of the Company believes the material allegations of the complaint are without merit and intends to vigorously defend the lawsuit. No assurances can be given, however, with respect to the outcome of the litigation, and an adverse result could have a material adverse effect on the Company's business, financial condition and results of operations. Bankers Insurance Company ("BIC"), a subsidiary of BIG, 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. On February 19, 2001, the DOI filed a Motion for Leave to File Amended Complaint. On March 29, 2001, the court issued an order granting the DOI's motion. 6 9 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 3. CONTINGENCIES - (CONTINUED) 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 a 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 Agency ("FEMA"), filed a civil action against BIC in the United States 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 stayed pending arbitration following a decision by the United States Court of Appeals for the Fourth Circuit in favor of BIC on its motion to stay the litigation pending arbitration. BIC has informed the Company that BIC is not aware of the government's intentions for further appeal of the order regarding arbitration. BIC has further 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 has advised the Company that an adverse judgment in this action should 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 either unable to reach agreement in these matters or resolve their disagreement in arbitration, 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 a 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. The Company is involved in various other legal proceedings arising in the ordinary course of business. Management believes that the ultimate resolution of these proceedings 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. NOTE 4. 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 ------------ -------------- ------------ ------------ MARCH 31, 2000 - (UNAUDITED) Operating revenues - affiliated ............. $ 9,865,066 $ 230,003 $ (659,753) $ 9,435,316 Operating revenues - unaffiliated ........... 1,529,314 3,722,929 -- 5,252,243 Operating income (loss) ..................... (814,924) 504,895 -- (310,029) Identifiable assets ......................... 29,583,281 25,591,496 (15,920,081) 39,254,696 MARCH 31, 2001 - (UNAUDITED) Operating revenues - affiliated ............. $ 9,581,963 $ 218,711 $ (218,711) $ 9,581,963 Operating revenues - unaffiliated ........... 1,219,534 4,294,168 -- 5,513,702 Operating income (loss) ..................... (454,482) 753,676 -- 299,194 Identifiable assets ......................... 37,632,044 24,699,555 (20,940,121) 41,391,478
7 10 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 ------------------ MARCH 31, 2000 2001 ------ ------ REVENUES Outsourcing services ....................................... 73.1% 70.1% Flood zone determination services .......................... 26.9 29.9 ------ ------ Total revenues ......................................... 100.0 100.0 ------ ------ EXPENSES Cost of outsourcing services ............................... 59.1 54.1 Cost of flood zone determination services .................. 12.7 13.5 Selling, general and administrative ........................ 18.0 18.9 Management services from Parent ............................ 3.4 2.5 Depreciation and amortization .............................. 8.9 9.0 ------ ------ Total expenses ......................................... 102.1 98.0 ------ ------ Operating income (loss) ......................................... (2.1) 2.0 Interest income ................................................. 0.4 0.4 Interest expense ................................................ (0.1) 0.0 ------ ------ Income (loss) before provision (benefit) for income taxes ....... (1.8) 2.4 Provision (benefit) for income taxes ............................ (0.3) 1.4 ------ ------ Net income (loss) ............................................... (1.5)% 1.0% ====== ======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001 Overview. On April 13, 2001 the Company entered into the Letter Agreement with BIG. Pursuant to the Letter Agreement, the parties agreed to extend the term of each of the service agreements until December 1, 2002. To obtain BIG's agreement to such extensions, the Company, in turn, agreed to certain service fee modifications. Under the service agreements, as amended, BIG will pay the Company (1) a monthly fee based upon direct written premiums for policy administration services relating to its flood, homeowners and commercial lines of business and (2) a monthly fee based upon net claims (after deductibles) for claims administration services relating to its flood line of business. The service fees payable under the service agreements with respect to (a) policy administration services relating to the automobile line of business, and (b) claim administration services relating to all lines of business other than flood, shall remain unchanged. If such amendments to the service agreements had been in effect for the fiscal year ended December 31, 2000, the Company's affiliated outsourcing revenues, which totaled approximately $38 million on an actual basis, would have been approximately $30 million on a pro forma basis. The Company believes that any anticipated reduction in affiliated outsourcing revenues resulting from the implementation of such service fee changes will be largely offset by a corresponding reduction in operating costs as a result of, among other things, the elimination of data and technical support services from the administration services to be provided by the Company to BIG under the service agreements, although no assurances can be given in this regard. Outsourcing Services Revenues. Outsourcing services revenues decreased $152,000, or 1.4%, to $10.6 million for the three months ended March 31, 2001 from $10.7 million for the corresponding period in 2000. The decrease was primarily attributable to a decrease in the volume of flood and wind damage claims administered by the Company's outsourcing operations during the first quarter of 2001 as compared to the corresponding period in 2000. During the first quarter of 2001, the Company recognized revenues totaling approximately $380,000 from the administration of property damage claims resulting from a tropical depression that caused extensive flooding in south Florida, which storm occurred during the fourth quarter of 2000. In comparison, the Company recognized revenues of approximately $950,000 during the first quarter of 2000 from the administration of property damage claims resulting from Hurricanes Floyd and Irene, which occurred during the fourth quarter of 1999. Additionally, outsourcing services revenues decreased during the first quarter of 2001 as compared to the corresponding period in 2000 as a result of the sale of the Company's direct marketing subsidiary, effective July 31, 2000, which subsidiary contributed approximately $300,000 in outsourcing revenue during the quarter-ended March 31, 2000. These decreases in outsourcing services revenues were partially offset by an increase in the volume of flood, homeowners and automobile premium processed on behalf of the Company's affiliated customers during the first quarter of 2001. 8 11 Flood Zone Determination Services Revenues. Flood zone determination services revenues increased approximately $560,000, or 14.2%, to $4.5 million for the three months ended March 31, 2001 from $4.0 million for the corresponding period in 2000. This increase was primarily attributable to an increase in the number of flood zone determinations processed by the Company during the first quarter of 2001 as compared to the corresponding period in 2000. The increase in the number of flood zone determinations processed was primarily due to a decrease in mortgage interest rates and a corresponding increase in mortgage refinancings and loan originations, which have historically driven the demand for flood zone determinations from the Company's customers. Cost of Outsourcing Services. Cost of outsourcing services decreased $504,000, or 5.8%, to $8.2 million for the three months ended March 31, 2001 from $8.7 million for the corresponding period in 2000. As a percentage of outsourcing services revenues, cost of outsourcing services decreased to 77.2% for the three months ended March 31, 2001 from 80.8% for the corresponding period in 2000 as a result of both an increase in dollar amount of outsourcing services revenues and a decrease in the cost of outsourcing services during three months ended March 31, 2001 as compared to the corresponding period in 2000. The decrease in the dollar amount of cost of outsourcing services was primarily attributable to a decrease in revenue from Colonial Claims Corporation ("Colonial Claims"), the Company's claims catastrophe subsidiary, of which approximately 70.0% of each dollar of revenue is paid to its independent adjusters who adjust claims on the Company's behalf. Additionally, cost of outsourcing services decreased during the three months ended March 31, 2001 as a result of a 53-employee staffing reduction completed in February, 2001. Cost of Flood Zone Determination Services. Cost of flood zone determination services increased $176,000, or 9.5%, to $2.0 million for the three months ended March 31, 2001 from $1.9 million for the corresponding period in 2000. As a percentage of flood zone determination services revenues, however, cost of flood zone determination services decreased to 45.1% for the three months ended March 31, 2001 from 47.0% for the corresponding period in 2000 primarily as a result of increased utilization of third party vendors, located in India and Mexico, to perform data entry services and manual flood zone determinations, respectively, at costs significantly below U.S. market rates. Selling, General and Administrative Expense. Selling, general and administrative expenses increased $201,000, or 7.6%, to $2.8 million for the three months ended March 31, 2001 from $2.7 million for the corresponding period in 2000. The increase in selling, general and administrative expenses was primarily attributable to (i) the assumption of the human resources function by the Company, effective April 1, 2000, which function was previously provided to the Company by BIG under a management services agreement, and (ii) additional legal expenses relating to the Company's shareholder action and various other legal matters. Partially offsetting these increases was a decrease in selling, general and administrative expenses as a result of the sale of substantially all of the assets of a direct marketing subsidiary of the Company, effective July 31, 2000. Management Services from Parent. Management services from Parent decreased $133,000, or 26.4%, to $371,000 for the three months ended March 31, 2001 from $504,000 for the corresponding period in 2000. The decrease was primarily related to the assumption of the human resources function by the Company, effective April 1, 2000, which function was previously provided to the Company by BIG under a management services agreement. Provision (Benefit) for Income Taxes. The Company's effective income tax (benefit) rates were 57.4% and (15.3%) the three months ended March 31, 2001 and 2000, respectively. The effective tax rates reflect various non-deductible items, including goodwill recognized in connection with the acquisitions of Geotrac in July, 1998 and Colonial Claims in January, 1999. For additional information on the reconciliation of the Company's effective income tax rate to the federal statutory income tax rate, see Note 10 - Income Taxes, in Notes to the Consolidated Financial Statements for the year-ended December 31, 2000, as reported in the Company's Form 10-K filed with the Securities and Exchange Commission on April 17, 2001. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 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, which line was terminated in December, 2000, as described below. Prior to January 1, 2000, the Company funded its operations through cash generated from operations, receipt of service fees advanced from BIG and available borrowings under the Company's line of credit. Bank borrowings were used to finance fixed asset purchases. In June, 1999, the Company entered into a revolving line of credit agreement ("LOC)" with a financial institution (the "Bank") that provided for borrowings of up to two times the Company's rolling four quarter earnings before interest, taxes, depreciation and amortization ("EBITDA"), but in no event more than $12.0 million. In December, 2000, the Company received notification from the Bank that it would no longer honor any requests by the Company for advances under the LOC due to the fact that the Bank believed the Company had experienced a material adverse change in its financial condition. Although the Company attempted to seek a replacement facility, it has since largely ceased its efforts to secure a new LOC as it has been unable to negotiate such an arrangement upon acceptable terms. 9 12 In conjunction with the Company's acquisition of Geotrac, it entered into a Corporate Governance Agreement, dated July 31, 1998, with Geotrac and Daniel J. White ("Mr. White"), Geotrac's president and then majority shareholder, setting forth certain terms and conditions pertaining to the operation of Geotrac. The Corporate Governance Agreement provides, among other things, that for so long as Mr. White owns stock in the Company or Geotrac, or has an option to purchase stock in Geotrac, 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. In addition, unanimous board approval under the Corporate Governance Agreement is required in order to make cash distributions to the Company, whether by dividend or otherwise. Therefore, pursuant to the Corporate Governance Agreement, Mr. White may impede the Company's ability to access excess cash balances retained by its Geotrac subsidiary, even if all of the other directors of Geotrac were to approve the distribution thereof to the Company. Mr. White is presently a director and shareholder of the Company. To date, the Company has been able to access Geotrac's excess cash when necessary, primarily through the prepayment of outstanding intercompany indebtedness. No assurances can be given, however, that the Company will be able to obtain available cash from Geotrac. If the Company is unable to do so, it could have a material adverse effect on the Company's business, financial condition and results of operations. On April 13, 2001, the Company entered into a Commitment Letter to advance service fee payments (the "Commitment Letter") with BIG pursuant to which BIG has agreed to advance to the Company up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under the service agreements with such companies. Such advances are available to the Company beginning June 1, 2001 continuing through December 1, 2002 and shall be payable upon demand by the Company. Any funds advanced by BIG to the Company under the Commitment Letter shall constitute a prepayment of, and shall be credited toward, the service fees charged to BIG by the Company during the month following such advance. The Company believes that cash on-hand, cash flows from operations and cash advances available under the Commitment Letter 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, however, which may not be available to the Company upon acceptable terms. The Company identifies and assesses, in the normal course of business, potential acquisitions of technologies or businesses that it believes strategically fit its business plan. The Company may enter into such transactions should opportunities present themselves in the future and should it be able to obtain the necessary financing upon acceptable terms, although no assurances can be made 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) is not material. 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, 2000, as filed with the Securities and Exchange Commission on April 17, 2001. ITEM 5. OTHER INFORMATION Effective May 7, 2001, Anthony R. Marando was appointed as Chief Financial Officer of the Company. Mr. Marando's appointment fills the vacancy created by the departure of Christopher P. Breakiron, who resigned as Vice President, Chief Financial Officer, Secretary and Treasurer of the Company effective April 17, 2001. Mr. Marando, age 44, joins the Company after serving as Chief Operating Officer of the e-Insurance division of Selectica, Inc. a software development and e-commerce company, from August 2000 to March 2001. Prior to that time, he served as Director of U.S. Financial Reporting for Canada Life Assurance Co. from May, 1999 to May 2000 and in various capacities, most recently as Assistant Vice President of Finance, with MetLife, Inc., from 1986 to December 1998. 10 13 Effective April 1, 2001, the Company entered into an employment agreement with Mr. Marando pursuant to which he is currently paid a salary at a rate of $171,080 annually. Mr. Marando's employment agreement provides for a term of six months, commencing April 9, 2001, provided that the agreement may be terminated (i) by the Company at any time for "cause" (as defined therein) or (ii) by either party prior to the expiration of such term upon 30 days prior notice (except that the Company may not give any such termination notice during the first 60 days of employment). Mr. Marando's employment shall continue after the expiration of such term only upon mutual agreement of the parties. Mr. Marando's employment agreement further provides that he shall be provided benefits, such as health, life and disability insurance, on the same basis as the Company's other employees. On April 25, 2001, the Board of Directors of the Company appointed Richard G. Torra as Secretary of the Company to fill the vacancy created by the departure of Mr. Breakiron. Mr. Torra is also Corporate Legal Counsel of the Company and has served in such capacity since August, 2000. Prior to that time, Mr. Torra served as Assistant Corporate Secretary and Associate General Counsel of BIG from July 1996 to July 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 Employment Agreement, dated May 7, 2001, between Anthony R. Marando and Insurance Management Solutions Group, Inc. 10.2 Letter Agreement, dated April 13, 2001, by and between Insurance Management Solutions, Inc., Bankers Insurance Group, Inc., Bankers Insurance Company, First Community Insurance Company and Bankers Security Insurance Company.* 10.3 Commitment Letter to advance service fee payments, dated April 13, 2001, between Insurance Management Solutions, Inc. and Bankers Insurance Group, Inc.* * Previously filed as part of the Company's Form 10-K for the year ended December 31, 2000, and incorporated by reference herein. b) Reports on Form 8-K The Company filed two reports on Form 8-K during the three months ended March 31, 2001: (1) The Company filed a Report on Form 8-K on February 15, 2001, to report that: (a) January 30, 2001, the Company's Board of Directors unanimously elected John S. McMullen as a Class III director to fill the vacancy created by the resignation of Jeffrey S. Bragg in January, 2000; and (b) on February 13, 2001, the Company reduced its overall workforce by approximately 10% by eliminating approximately 50 positions primarily in the areas of information technology and claims administration. (2) The Company filed a Report on Form 8-K on February 26, 2001 to report that: (a) its Common Stock was delisted from trading on the Nasdaq National Market at the opening of business on February 26, 2001, as a result of the failure of the Company's Common Stock to satisfy the maintenance criteria for continued listing on the Nasdaq National Market; and (b) William R. Hough & Co., a registered broker-dealer based in St. Petersburg, Florida, had advised the Company that it intended to register as a "market maker" for the Company's Common Stock on the OTC Bulletin Board. 11 14 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: May 15, 2001 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. (Registrant) By: /s/ DAVID M. HOWARD ------------------------------------------- David M. Howard President and Chief Executive Officer (Principal Executive Officer) By: /s/ ANTHONY R. MARANDO -------------------------------------------- Anthony R. Marando Chief Financial Officer (Principal Financial and Accounting Officer) 12 15 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 10.1 Employment Agreement, dated May 7, 2001, between Anthony R. Marando and Insurance Management Solutions Group, Inc. 10.2 Letter Agreement, dated April 13, 2001, by and between Insurance Management Solutions, Inc., Bankers Insurance Group, Inc., Bankers Insurance Company, First Community Insurance Company and Bankers Security Insurance Company.* 10.3 Commitment Letter to advance service fee payments, dated April 13, 2001, between Insurance Management Solutions, Inc. and Bankers Insurance Group, Inc.* * Previously filed as part of the Company's Form 10-K for the year ended December 31, 2000, and incorporated by reference herein.
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