<PAGE> 1
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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 September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 000-25273
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3422536
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification 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, Outstanding at November 10, 1999:
$.01 par value 12,678,743
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<PAGE> 2
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements...................................................... 1
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1999.................................................... 1
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1998 and 1999......................... 2
Consolidated Statement of Shareholders' Equity for the year
ended December 31, 1998 and the nine months ended
September 30, 1999........................................................ 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999.................................. 4
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 17
Item 2. Changes in Securities and Use of Proceeds................................. 17
Item 6. Exhibits and Reports on Form 8-K.......................................... 17
</TABLE>
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 ability of the Company and
its significant suppliers and large customers to address the Year 2000 Issue;
(xiii) the impact of general economic conditions and interest rate fluctuations
on the demand for the Company's services, including flood zone determination
services; and (xiv) the outcome of certain litigation and administrative
proceedings involving the Company's principal customer. 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
Registration Statement on Form S-1, as amended (Reg. No. 333-57747).
Prospective investors should also consult the risks described from time to time
in the Company's Reports on Form 10-Q, 8-K and 10-K and Annual Reports to
Shareholders.
i
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 1,868,867 $ 3,361,234
Accounts receivable, net ................................... 3,549,044 3,884,983
Due from affiliates ........................................ 570,139 3,510,522
Note and interest receivable - affiliate ................... 5,271,406 --
Income taxes recoverable ................................... 1,148,902 6,044
Prepaid expenses and other assets .......................... 859,684 1,498,198
----------- -----------
Total current assets .................................. 13,268,042 12,260,981
PROPERTY AND EQUIPMENT, net ................................... 8,507,897 7,452,530
OTHER ASSETS
Goodwill, net .............................................. 14,515,785 16,180,132
Customer contracts, net .................................... 1,316,667 1,166,667
Deferred tax assets ........................................ 967,191 408,891
Other ...................................................... 1,326,273 961,335
----------- -----------
Total assets ......................................... $39,901,855 $38,430,536
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt .......................... $ 3,026,944 $ 527,750
Current portion of notes and interest payable - affiliates . 9,180,743 --
Accounts payable, trade .................................... 831,674 823,835
Due to affiliates .......................................... 1,748,509 214,061
Employee related accrued expenses .......................... 1,804,677 2,462,453
Other accrued expenses ..................................... 755,436 730,661
Deferred revenue ........................................... 214,891 214,891
----------- -----------
Total current liabilities ............................ 17,562,874 4,973,651
LONG-TERM DEBT, less current portion .......................... 7,470,539 309,120
NOTES PAYABLE - AFFILIATES, less current portion .............. 5,527,677 --
DEFERRED REVENUE .............................................. 651,602 655,785
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding..............
Common Stock, $.01 par value; 100,000,000 shares authorized,
10,524,198 and 12,678,743 shares issued and outstanding at
December 31, 1998 and September 30, 1999, respectively ... 105,242 126,787
Additional paid-in capital ................................. 5,830,930 26,673,282
Retained earnings .......................................... 2,752,991 5,691,911
----------- -----------
Total shareholders' equity ........................... 8,689,163 32,491,980
----------- -----------
Total liabilities and shareholders' equity ........... $39,901,855 $38,430,536
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
<PAGE> 4
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES
Outsourcing services - affiliated .................... $ 9,309,691 $ 9,757,699 $ 26,614,949 $ 32,488,239
Outsourcing services ................................. 443,653 1,503,489 892,461 5,549,683
Flood zone determination services .................... 5,857,446 4,170,414 18,800,574 13,782,952
Flood zone determination services - affiliated ....... 517,385 214,946 1,064,567 409,001
------------ ------------ ------------ ------------
Total revenues ................................. 16,128,175 15,646,548 47,372,551 52,229,875
------------ ------------ ------------ ------------
EXPENSES
Cost of outsourcing services ......................... 7,019,626 8,830,476 19,813,902 26,127,841
Cost of flood zone determination services ............ 2,441,808 1,899,411 8,524,121 6,224,736
Selling, general and administrative .................. 2,164,883 2,995,844 5,705,077 8,420,318
Management services from Parent ...................... 1,137,304 535,813 2,506,321 1,734,168
Deferred compensation (non-recurring item) ........... -- -- 728,069 --
Depreciation and amortization ........................ 1,216,969 1,405,120 2,981,179 4,137,069
------------ ------------ ------------ ------------
Total expenses ................................. 13,980,590 15,666,664 40,258,669 46,644,132
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) ................................. 2,147,585 (20,116) 7,113,882 5,585,743
------------ ------------ ------------ ------------
MINORITY INTEREST ....................................... (30,817) -- (472,803) --
OTHER INCOME (EXPENSE):
Interest income ...................................... 201,549 68,009 307,905 290,247
Interest expense ..................................... (666,954) (295,864) (1,653,165) (776,370)
------------ ------------ ------------ ------------
Total other income (expense) ................... (465,405) (227,855) (1,345,260) (486,123)
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES 1,651,363 (247,971) 5,295,819 5,099,620
PROVISION (BENEFIT) FOR INCOME TAXES .................... 700,600 (19,900) 2,388,400 2,160,700
------------ ------------ ------------ ------------
NET INCOME (LOSS) ....................................... $ 950,763 $ (228,071) $ 2,907,419 $ 2,938,920
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE ...................... $ .09 $ (.02) $ .29 $ .24
============ ============ ============ ============
Weighted average common shares outstanding .............. 10,524,198 12,678,743 10,176,653 12,370,485
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE> 5
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 .................. $100,000 $ 69,991 $ -- $ 169,991
Cash dividends to Parent ................ -- -- (1,100,000) (1,100,000)
Issuance of Common Stock as partial
consideration for the acquisition of
Geotrac, Inc. ......................... 5,242 5,760,939 -- 5,766,181
Net income .............................. -- -- 3,852,991 3,852,991
-------- ----------- ----------- -----------
Balance at December 31, 1998 ................ 105,242 5,830,930 2,752,991 8,689,163
Issuance of Common Stock as partial
consideration for the acquisition of
Colonial Claims (Note 3) (unaudited)... 1,545 1,698,455 -- 1,700,000
Initial public offering of Common Stock,
net of offering costs (Note 2)
(unaudited)............................. 20,000 19,143,897 -- 19,163,897
Net income (unaudited) .................. -- -- 2,938,920 2,938,920
-------- ----------- ----------- -----------
Balance at September 30, 1999 (unaudited) ... $126,787 $26,673,282 $ 5,691,911 $32,491,980
======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
3
<PAGE> 6
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 2,907,419 $ 2,938,920
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 2,981,179 4,137,069
Depreciation and amortization of Geotrac, Inc.
prior to July 1998 acquisition ........................ (712,990) --
Loss on disposal of property and equipment .............. 37,914 163,228
Equity in earnings of Geotrac, Inc. ..................... (485,034) --
Write-off of deferred financing costs ................... -- 244,752
Deferred income taxes, net .............................. (1,074,665) 451,911
Changes in assets and liabilities:
Accounts receivable ................................... (474,170) 664,954
Income taxes recoverable .............................. -- 1,142,858
Prepaid expenses and other current assets ............. (542,464) (310,196)
Other assets .......................................... 6,279 (59,874)
Accounts payable, trade ............................... 125,587 (25,664)
Employee related accrued expenses ..................... (163,486) 657,776
Other accrued expenses ................................ 696,250 (708,867)
Income taxes payable .................................. 2,172,415 --
Deferred revenue ...................................... 319,369 4,183
----------- ------------
Net cash provided by operating activities ........... 5,793,603 9,301,050
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Geotrac, Inc., net of cash acquired ........ 2,797,008 --
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 ....................... (825,358) (2,231,214)
----------- ------------
Net cash provided by (used in) investing activities . 1,971,650 (3,400,122)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from initial public offering ........ -- 19,163,897
Repayment of debt ......................................... (2,798,665) (9,660,613)
Repayment of affiliated notes and interest payable ........ -- (14,708,420)
Collection of affiliated note and interest receivable ..... -- 5,271,406
Deferred offering costs ................................... (614,796) --
Cash dividends paid to Parent ............................. (1,100,000) --
Net advances from (to) affiliates ......................... 183,476 (4,474,831)
----------- ------------
Net cash used in financing activities ............... (4,329,985) (4,408,561)
----------- ------------
INCREASE IN CASH AND CASH
EQUIVALENTS ................................................ 3,435,268 1,492,367
CASH AND CASH EQUIVALENTS, beginning of period ............... 115,070 1,868,867
----------- ------------
CASH AND CASH EQUIVALENTS, end of period ..................... $ 3,550,338 $ 3,361,234
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for:
Interest ................................................ $ 819,754 $ 1,013,716
=========== ============
Taxes ................................................... $ 675,000 $ 920,000
=========== ============
</TABLE>
4
<PAGE> 7
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of fixed assets by issuance of debt
(including capital lease obligations)........................... $ 4,265,639 $ --
=========== ===========
Repurchase of Preferred Stock of Subsidiary in exchange for
issuance of note ............................................... $ 6,750,000 $ --
=========== ===========
Purchase of 51% interest in net assets of Geotrac, Inc.:
Total consideration consists of:
Common Stock ........................................ $ 5,766,181
Promissory Note ..................................... 1,500,000
Short-term obligation ............................... 728,069
-----------
7,994,250
===========
Fair value of assets acquired ....................... 10,990,152
Liabilities assumed ................................. 10,650,887
-----------
Net assets .......................................... 339,265
Goodwill ............................................ 14,933,247
-----------
$15,272,512
===========
Purchase of net assets of Colonial Claims:
Total consideration consists of:
Common Stock ........................................ $ 1,700,000
Cash ................................................ 500,000
Short-term obligation ............................... 500,000
-----------
2,700,000
===========
Fair value of assets acquired ....................... 1,846,555
Liabilities assumed ................................. 1,478,306
-----------
Net assets .......................................... 368,249
Goodwill ............................................ 2,331,751
-----------
$ 2,700,000
===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE> 8
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, accordingly, 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, 1998, as filed with the Securities and Exchange Commission on
March 31,1999. The results of operations for the three month and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that should be expected for a full fiscal year.
Principles of Consolidation
During July, 1998, the Company acquired the remaining 51% interest in
Geotrac, Inc. (now known as Geotrac of America, Inc.), the Company's flood zone
determination services subsidiary ("Geotrac"), pursuant to a merger with
Bankers Hazard Determination Services, Inc. For the three month and nine
month periods ended September 30, 1998, the operations of Geotrac have been
consolidated in the Company's statements of income, with minority interest
deductions representing the net income of Geotrac allocable to the 51% interest
held by the majority stockholders prior to the Company acquiring the remaining
interest.
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ...................... $ 950,763 $ (228,071) $ 2,907,419 $ 2,938,920
=========== ============ =========== ===========
Denominator:
Weighted average number of Common Shares
used in basic EPS.................... 10,524,198 12,678,743 10,176,653 12,370,485
Diluted stock options .................. -- -- -- --
---------- ---------- ---------- ----------
Weighted average number of Common Shares
and diluted potential Common Shares
used in diluted EPS ................. 10,524,198 12,678,743 10,176,653 12,370,485
=========== ============ =========== ===========
</TABLE>
For the nine months ended September 30, 1999, options to purchase
635,500 shares of Common Stock were outstanding during the period but were not
included in the computation of diluted earnings per share because the exercise
prices of the options were greater than the average market price of the Common
Stock, and therefore, the effect would be antidilutive.
NOTE 2. INITIAL PUBLIC OFFERING
In February, 1999, the Company completed an initial public offering
("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the
3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation, a
Cayman Islands company. The IPO generated net proceeds to the Company of
approximately $19,164,000, after deducting offering expenses paid by the
Company of approximately $1,296,000. Such offering expenses were charged to
additional paid-in capital against the proceeds from the IPO. Refer to notes 6,
7, and 8 in the Company's consolidated financial statements included in the
Annual Report on Form 10-K for the year ended December 31, 1998, for a
description of the use of the net proceeds from the IPO.
6
<PAGE> 9
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. ACQUISITION
Effective January 7, 1999, the Company, through a wholly-owned
subsidiary, acquired all of the issued and outstanding capital stock of
Colonial Catastrophe Claims Corporation, a Florida corporation ("Colonial
Catastrophe"), in exchange for (i) 154,545 shares of Common Stock, (ii) cash in
the amount of $500,000, (iii) a promissory note in the principal amount of
$500,000, and (iv) an additional payment of $300,000, payable in additional
shares of Common Stock, based upon the net income before taxes of Colonial
Claims (as hereinafter defined) for the year ending December 31, 1999. On
January 15, 1999, Colonial Catastrophe was merged into the acquiring subsidiary
and the name of the acquiring subsidiary was changed to "Colonial Claims
Corporation" (hereinafter "Colonial Claims"). The total purchase price of the
acquisition was allocated in accordance with the provisions of Accounting
Principles Board Opinion No. 16, "Business Combinations", and accordingly was
based on the fair value of the net tangible assets acquired on the date of
acquisition. Had the acquisition of Colonial Claims occurred on January 1,
1998, the pro forma results of operations for the three and nine month periods
ended September 30, 1998 and 1999 would not have been materially different from
the Company's historical results of operations.
NOTE 4. LONG-TERM DEBT
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 (7.13%
at September 30, 1999) based on the ratio of funded debt (as defined) to
EBITDA. Interest payments are payable monthly and the remaining unpaid
principal balance is due in full in July, 2001. The LOC is collateralized by
substantially all of the Company's assets and is subject to certain quarterly
financial covenants requiring the Company to maintain the following minimum
ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0; (ii)
total liabilities to tangible net worth of not more than 1.0 to 1.0; and (iii)
fixed charge coverage (as defined) of not less than 2.5 to 1.0. As of September
30, 1999, there was no outstanding balance under the LOC.
NOTE 5. CONTINGENCIES
Bankers Insurance Company ("BIC"), the Company's principal customer
and a wholly-owned subsidiary of Bankers Insurance Group, Inc. (together with
its subsidiaries, "BIG"), is currently subject to an investigation by the
Florida Department of Insurance (the "DOI"), the principal regulator of
insurance activities in the State of Florida, stemming from BIC's use of a
private investigator to gather information on a DOI employee and the private
investigator's unauthorized use of illegal wiretaps in connection therewith. In
addition, BIC has been subpoenaed on behalf of the Federal Emergency Management
Agency ("FEMA") to produce documentation in connection with its investigation
of certain cash management and claims processing practices of BIC. BIC is
currently involved in discussions relating to the resolution of certain matters
raised in the investigation. If the parties are unable to reach agreement in
these matters, the United States could file suit under the False Claims Act
and/or various common law and equitable theories. In the event either or both
of these investigations or any consequence thereof materially adversely affects
the business or operations of BIC, it could result in the loss of or material
decrease in the Company's business from BIC, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company, based on information provided by BIG, does not believe
the outcome of these investigations will have a material adverse effect on the
business, financial condition or results of operations of BIC or the Company.
It is impossible at this time, however, to predict the ultimate outcome of
these investigations.
7
<PAGE> 10
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6. RELATED PARTY TRANSACTIONS
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, provided that certain key tasks are performed timely. If such minimum
service fee requirements with respect to said lines of business under the
agreements had not been implemented as of April 1, 1999, aggregate affiliated
outsourcing services revenues, which totaled $9.8 million and $32.5 million for
the three month and nine month periods ended September 30, 1999, respectively,
would have been $9.7 million and $30.6 million for the three and nine month
periods ended September 30, 1999, respectively, in accordance with the terms of
the affiliated service agreements as in effect prior to April 1, 1999.
During the quarter ended June 30, 1999, the Company also entered into
a Technical Support Services Agreement with BIG pursuant to which the Company
provides BIG with certain technical support services, computer programming and
systems analysis services. Under this agreement, such services are charged to
BIG on a time and materials basis. Revenue provided under this agreement
totaled approximately $1.3 million during the nine months ended September 30,
1999, which is included in affiliated outsourcing services revenue in the
accompanying consolidated statements of operations. No services were provided
under this agreement for the three months ended September 30, 1999.
NOTE 7. SEGMENT INFORMATION
The following table presents summarized financial information for the
Company's reportable segments:
<TABLE>
<CAPTION>
INTERCOMPANY
OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED
SERVICES DETERMINATIONS AND OTHER TOTALS
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30,
1998 - (UNAUDITED)
Operating revenues - affiliated .. $ 9,880,827 $ 517,385 $ (571,136) $ 9,827,076
Operating revenues - unaffiliated 443,653 5,857,446 -- 6,301,099
Operating income (loss) .......... (10,057) 2,157,642 -- 2,147,585
Identifiable assets .............. 24,303,879 32,958,313 (10,241,306) 47,020,886
THREE MONTHS ENDED SEPTEMBER 30,
1999 - (UNAUDITED)
Operating revenues - affiliated .. $ 9,987,895 $ 214,946 $ (230,196) $ 9,972,645
Operating revenues - unaffiliated 1,503,489 4,170,414 -- 5,673,903
Operating income (loss) .......... (918,929) 898,813 -- (20,116)
Identifiable assets .............. 24,826,261 25,155,030 (11,550,755) 38,430,536
NINE MONTHS ENDED SEPTEMBER 30,
1998 - (UNAUDITED)
Operating revenues - affiliated .. $ 27,872,981 $ 1,064,567 $ (1,258,032) $ 27,679,516
Operating revenues - unaffiliated 892,461 18,800,574 -- 19,693,035
Operating income ................. 1,250,767 5,863,115 -- 7,113,882
Identifiable assets .............. 24,303,879 32,958,313 (10,241,306) 47,020,886
NINE MONTHS ENDED SEPTEMBER 30,
1999 - (UNAUDITED)
Operating revenues - affiliated .. $ 32,940,990 $ 409,001 $ (452,751) $ 32,897,240
Operating revenues - unaffiliated 5,549,683 13,782,952 -- 19,332,635
Operating income ................. 2,568,064 3,017,679 -- 5,585,743
Identifiable assets .............. 24,826,261 25,155,030 (11,550,755) 38,430,536
</TABLE>
8
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES
Outsourcing services ...................... 60.5% 72.0% 58.1% 72.8%
Flood zone determination services ......... 39.5 28.0 41.9 27.2
----- ----- ----- -----
Total revenues ........................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
EXPENSES
Cost of outsourcing services .............. 43.5 56.4 41.8 50.0
Cost of flood zone determination services . 15.1 12.1 18.0 11.9
Selling, general and administrative ....... 13.4 19.2 12.0 16.1
Management services from Parent ........... 7.1 3.4 5.3 3.4
Deferred compensation (non-recurring item) -- -- 1.5 --
Depreciation and amortization ............. 7.6 9.0 6.3 7.9
----- ----- ----- -----
Total expenses ........................ 86.7 100.1 84.9 89.3
----- ----- ----- -----
Operating income (loss) ..................... 13.3 (0.1) 15.1 10.7
Minority interest ........................... (0.2) -- (1.0) --
Interest income ............................. 1.2 0.4 0.6 0.6
Interest expense ............................ (4.1) (1.9) (3.5) (1.5)
----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes.................. 10.2 (1.6) 11.2 9.8
Provision (benefit) for income taxes ........ 4.3 (0.1) 5.1 4.2
----- ----- ----- -----
Net income (loss) ........................... 5.9% (1.5)% 6.1% 5.6%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Outsourcing Services Revenues. Outsourcing services revenues for the
third quarter of 1999 increased 15.5% to $11.3 million from $9.8 million for
the comparable period in 1998. The increase was primarily attributable to (i)
incremental revenues earned by Colonial Claims, which was acquired in January,
1999, (ii) revenue generated under several new unaffiliated flood processing
contracts, which began to ramp up during the third quarter of 1999, and (iii)
growth in affiliated flood and auto lines of business.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues for the third quarter of 1999 decreased 31.2% to $4.4 million
from $6.4 million for the comparable period in 1998. The decrease in flood zone
determination revenue was primarily attributable to increases in interest rates
from the corresponding period of the prior year and a resulting decline in loan
originations and mortgage refinancings, which fuel the demand for flood zone
determinations.
Cost of Outsourcing Services. Cost of outsourcing services for the
third quarter of 1999 increased 25.8% to $8.8 million from $7.0 million for the
comparable period in 1998. The increase in cost of outsourcing services was
primarily attributable to (i) incremental expenses incurred by the recently
acquired Colonial Claims, (ii) increases in information technology costs due to
staff additions and use of contract programmers to develop new unaffiliated
programs, and (iii) incremental direct costs (primarily personnel) incurred to
service the growth of both affiliated and unaffiliated flood premium business.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services for the third quarter of 1999 decreased 22.2% to $1.9
million from $2.4 million for the comparable period in 1998. The decrease in
cost of flood zone determination services is primarily due to (i) a decrease in
flood zone determination services revenue from the corresponding period in
1998, (ii) the merger of Bankers Hazard Determination Services, Inc. ("BHDS")
and Geotrac in July, 1998 and a subsequent elimination of certain duplicated
functions and facilities, and (iii) a redesign of certain production workflows
in April, 1999 that enabled the Company to increase employee productivity and
reduce expenses.
9
<PAGE> 12
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the third quarter of 1999 increased 38.4% to $3.0
million from $2.2 million for the comparable period in 1998. The increase in
selling, general and administrative expenses was primarily attributable to (i)
additional wages and related benefits associated with adding executive
management, accounting, sales and marketing and other administrative staff to
support the Company's expanded operations, (ii) incremental expenses incurred
by the recently acquired Colonial Claims, and (iii) severance costs relating to
the resignations of certain officers.
Management Services from Parent. Management services from Parent
(i.e., BIG) for the third quarter of 1999 decreased 52.9% to $536,000 from $1.1
million for the comparable period in 1998. The decrease was primarily due to an
employment practices judgment that was settled during the third quarter of 1998
on behalf of the Company and its affiliates.
Depreciation and Amortization Expense. Depreciation and amortization
expense for the third quarter of 1999 increased 15.5% to $1.4 million from $1.2
million for the comparable period in 1998. The increase was primarily related to
additional goodwill amortization resulting from the purchase of Colonial Claims
in January, 1999, as well as amortization of software costs capitalized in
accordance with Statement of Positions 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which
the Company began amortizing in January, 1999.
Minority Interest. During July, 1998, the Company purchased the
remaining 51% of Geotrac. However, the Company has elected to reflect the
operations of Geotrac prior to the July, 1998 acquisition on a consolidated
basis with the Company, with the net income of Geotrac allocable to the 51%
interest held by the prior majority stockholders reflected as minority
interest.
Interest Expense. Interest expense for the third quarter of 1999
decreased 55.6% to $296,000 from $667,000 for the comparable period in 1998.
The decrease was primarily related to the early repayment of most of the
Company's debt obligations from proceeds received by the Company from its
initial public offering in February, 1999, partially offset by the write-off of
deferred financing costs during the third quarter of 1999 as a result of the
early repayment of a term loan.
Provision (Benefit) for Income Taxes. The Company's effective income
tax rates were 42.4% and (8.0%) for the three months ended September 30, 1998
and 1999, respectively. The effective tax rates reflect non-deductible goodwill
recognized in connection with the acquisition of Geotrac in July, 1998, and
Colonial Claims in January, 1999. Income before provision for income taxes in
1998, excluding minority interest which is presented net of tax in the
accompanying unaudited consolidated financial statements, resulted in an
effective income tax rate of 41.6% for the three months ended September 30,
1998.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
Outsourcing Services Revenues. Outsourcing services revenues for the
first nine months of 1999 increased 38.3% to $38.0 million from $27.5 million
for the comparable period in 1998. The increase was primarily attributable to
(i) incremental revenues from Colonial Claims, which was acquired in January,
1999, (ii) revenue generated under an affiliated technical support services
arrangement for both personal and commercial lines of insurance entered into on
April 1, 1999, (iii) claims fee income recognized during 1999 associated with
the settlement of flood and wind damage claims resulting from Hurricane Georges
in late September, 1998, and (iv) incremental revenues from the Company's
direct marketing subsidiary, which was formed in August, 1998. Effective April
1, 1999, the Company amended its existing service agreements with affiliated
insurers to provide for minimum aggregate quarterly service fee payments
through December 31, 1999 with respect to certain lines of business. If such
minimum service fee requirements with respect to said lines of business under
the agreements had not been implemented as of April 1, 1999, aggregate
affiliated outsourcing services revenues, which totaled $32.5 million for the
nine months ended September 30, 1999, would have been $30.6 million in
accordance with the terms of the affiliated service agreements as in effect
prior April 1, 1999. Such minimums were established to compensate the Company
for maintaining an infrastructure to process certain lines of business of
affiliated insurers that have not grown as rapidly as originally forecasted.
10
<PAGE> 13
Flood Zone Determination Services Revenues. Flood zone determination
services revenues for the first nine months of 1999 decreased 28.6% to $14.2
million from $19.9 million for the comparable period in 1998. The decrease in
flood zone determination services revenues was primarily attributable to
increases in interest rates from the corresponding period of the prior year and
a resulting decline in loan originations and mortgage refinancings, which fuel
the demand for flood zone determinations. Additionally, during 1999, the Company
has experienced a reduction in flood zone determination revenue from several
large customers that are experiencing financial difficulties. The decrease in
flood zone determination services revenues during the first nine months of 1999
was partially offset by a novation of the Company's life-of-loan insurance
policy in which an estimate of the present value of future losses to be claimed
under the policy (approximately $500,000) was paid to the Company in exchange
for a release of liability for such future losses under the policy.
Cost of Outsourcing Services. Cost of outsourcing services for the
first nine months of 1999 increased 31.9% to $26.1 million from $19.8 million
for the comparable period in 1998. The increase in cost of outsourcing services
was primarily attributable to (i) incremental expenses incurred by the recently
acquired Colonial Claims, (ii) increases in information technology costs due to
staff additions and use of contract programmers to develop new unaffiliated
programs, and (iii) incremental direct costs (primarily personnel) incurred to
service the growth of both affiliated and unaffiliated flood premium. These
increases were partially offset by a decrease in the lease cost of fixed assets
that were purchased by the Company from BIG on April 1, 1998. Prior to April 1,
1998, the depreciation for such equipment, which totaled $282,015 during the
three months ended March 31, 1998, was charged to the Company under an
arrangement similar to an operating lease and is included in cost of
outsourcing services. Such costs are now included in depreciation and
amortization.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services for the first nine months of 1999 decreased 27.0% to $6.2
million from $8.5 million for the comparable period in 1998. The decrease in
cost of flood zone determination services is primarily due to (i) a decrease in
flood zone determination services revenue from the corresponding period in 1998,
(ii) the merger of BHDS and Geotrac in July, 1998 and a subsequent elimination
of certain duplicated functions and facilities, and (iii) a redesign of certain
production workflows in April, 1999 that enabled the Company to increase
employee productivity and reduce expenses.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the first nine months of 1999 increased 47.6% to
$8.4 million from $5.7 million for the comparable period in 1998. The increase
in selling, general and administrative expenses was primarily attributable to
(i) additional wages and related benefits associated with adding executive
management, accounting, sales and marketing and other administrative staff to
support the Company's expanded operations, (ii) incremental expenses incurred
by the Company's direct marketing subsidiary, which was formed in August, 1998,
(iii) incremental expenses incurred by Colonial Claims, which was acquired in
January, 1999, (iv) and severance costs relating to the resignations of certain
officers.
Management Services from Parent. Management services from Parent for
the first nine months of 1999 decreased 30.8% to $1.7 million from $2.5 million
for the comparable period in 1998. The decrease was primarily related to an
employment practices judgment that was settled during the third quarter of 1998
on behalf of the Company and its affiliates. Also contributing to the decrease
in management services from Parent was an amendment to the management service
agreement, which became effective January 1, 1999, pursuant to which certain
accounting and internal audit functions are no longer performed by the Parent
(such functions are currently performed by the Company directly).
Depreciation and Amortization Expense. Depreciation and amortization
expense for the first nine months of 1999 increased 38.8% to $4.1 million from
$3.0 million for the comparable period in 1998. The increase was primarily
related to (i) additional goodwill amortization recognized during 1999 as a
result of the purchase of the remaining 51% of Geotrac, Inc. in July, 1998,
(ii) goodwill amortization resulting from the purchase of Colonial Claims in
January, 1999, (iii) amortization of software costs capitalized in accordance
with SOP 98-1, which the Company began amortizing in January, 1999 and (iv)
depreciation related to assets, consisting of telephone equipment and computer
hardware and software that were purchased by the Company from BIG in April,
1998 for use in its business. Prior to April 1, 1998, the depreciation for such
equipment, which totaled $282,015 during the three months ended March 31, 1998,
was charged to the Company under an arrangement similar to an operating lease
and was included in cost of outsourcing services.
Minority Interest. During July, 1998, the Company purchased the
remaining 51% of Geotrac. However, the Company has elected to reflect the
operations of Geotrac prior to the July, 1998 acquisition on a consolidated
basis with the Company, with the net income of Geotrac allocable to the 51%
interest held by the prior majority stockholders reflected as minority
interest.
11
<PAGE> 14
Interest Expense. Interest expense for the first nine months of 1999
decreased 53.0% to $776,000 from $1.7 million for the comparable period in
1998. The decrease was primarily related to the early repayment of most of the
Company's debt obligations from proceeds received by the Company from its
initial public offering in February, 1999, partially offset by the write-off of
deferred financing costs during 1999 as a result of the early repayment of a
term loan.
Provision for Income Taxes. The Company's effective income tax rates
were 45.1% and 42.4% for the nine months ended September 30, 1998 and 1999,
respectively. The effective tax rates reflect non-deductible goodwill
recognized in connection with the acquisition of Geotrac in July, 1998, and
Colonial Claims in January, 1999. Income before provision for income taxes in
1998, excluding minority interest which is presented net of tax in the
accompanying unaudited consolidated financial statements, resulted in an
effective income tax rate of 41.4% for the nine months ended September 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company's principal sources of liquidity
consisted of cash on-hand, cash flows from operations and available borrowings
under the Company's revolving credit facility. Prior to 1999, the Company
funded its operations through cash generated from operations and receipt of
service fees advanced from BIG. Bank borrowings were used to finance fixed
asset purchases.
In February, 1999, the Company completed an initial public offering
("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the
3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation (the
"Selling Shareholder"), a Cayman Islands company. The offering generated net
proceeds to the Company of approximately $19.2 million after deducting offering
expenses paid by the Company of approximately $1.3 million. The Company used a
portion of the net proceeds from the offering, together with funds received
from BIG from proceeds made available to BIG by a subsidiary of the Selling
Shareholder, to repay all obligations with BIG and its affiliates.
Additionally, the Company used a portion of the IPO proceeds to repay certain
debt obligations.
In June, 1999, the Company entered into a revolving line of credit
agreement ("LOC") with a financial institution that provides for borrowings of
up to two times the rolling four quarter earnings before interest, taxes,
depreciation and amortization ("EBITDA"), but in no event more than
$12,000,000. The LOC bears interest at a specified percentage over LIBOR (7.13%
at September 30, 1999) based on the ratio of funded debt (as defined) to
EBITDA. Interest payments are payable monthly and the remaining unpaid
principal balance is due in full in July, 2001. The LOC is collateralized by
substantially all of the Company's assets and is subject to certain quarterly
financial covenants requiring the Company to maintain the following minimum
ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0, (ii)
total liabilities to tangible net worth of not more than 1.0 to 1.0, and (iii)
fixed charge coverage (as defined) of not less than 2.5 to 1.0. On June 11,
1999, the Company used $6,664,084 of the available LOC to repay an existing
term loan. Subsequent to June 30, 1999, the Company used the remaining IPO
proceeds, together with excess cash reserves, to repay the LOC. Consequently,
as of September 30, 1999, there was no outstanding balance under the LOC.
The Company believes that cash on-hand, cash flows from operations and
available borrowings under the Company's LOC facility will be sufficient to
satisfy currently anticipated working capital and capital expenditure
requirements for the next twelve months. Unanticipated rapid expansion,
business or systems development, or potential acquisitions may cause the
Company to require additional funds. In addition, prior to the IPO, the Company
at times relied upon advances against the future service fees it charged its
affiliates to support working capital needs, which primarily included payroll
costs. Since the IPO, the Company has discontinued this practice. 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.
12
<PAGE> 15
YEAR 2000 COMPLIANCE
The Company is currently addressing a universal situation commonly
referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to Year 2000 and beyond, and the
inability of non-information technology systems to function properly when the
Year 2000 arrives.
Information concerning the Company's (1) state of readiness, (2) cost
of addressing Year 2000 issues, (3) risk of Year 2000 issues, and (4)
contingency plans is provided below. The discussion is divided into two parts:
the first part addresses the Company's outsourcing operations, and the second
part addresses the Company's flood zone determination operations.
Outsourcing Operations. With respect to both information technology
("IT") and non-information technology ("non-IT") systems associated with its
outsourcing operations, the Company has developed a detailed Year 2000 Project
Plan (the "Plan"), which as discussed below, has been substantially
implemented. During January, 1999, an independent accounting firm was engaged
to validate the Plan. The recommendations stemming from their review have been
incorporated into the Plan, which calls for testing, validation and
modification of the Company's systems in order to ensure Year 2000 compliance.
For IT hardware systems, the Plan addresses the Year 2000 Problem with
respect to: production servers; imaging servers; communication servers;
development servers; Q&A servers; wide-area network and network infrastructure;
AS/400 processors and tape drives; desk-top personal computers ("PCs");
telecommunications equipment, including voice, fax and modems; and printers.
Following is a summary of the procedures performed and the status of each major
area.
o Production servers, imaging servers, communication servers,
development servers and Q&A servers: As all of the Company's servers
are of similar make and configuration, the system date from a
representative server was rolled forward to known Year 2000 critical
dates. No errors were detected during this process. Prior to rolling
the system dates, the manufacturer of each hardware component was
contacted regarding the required system upgrades and/or enhancements
necessary to ensure Year 2000 compliance. All such system upgrades
and/or enhancements have been completed. As such, these systems are
believed to be Year 2000 compliant, although no assurances can be
given in this regard.
o Wide-area network; network infrastructure; telecommunications
equipment, including voice, fax and modems: The manufacturer of each
hardware and software component was contacted regarding the required
modifications necessary to ensure Year 2000 compliance. All such
system upgrades and/or enhancements have been completed. As such,
these systems are believed to be Year 2000 compliant, although no
assurances can be given in this regard.
o AS/400 processors, including "production" and "development"
processors; tape drives; Xerox production printers: The manufacturer
of each hardware and software component was contacted regarding the
required modifications necessary to ensure Year 2000 compliance. All
such system upgrades and/or enhancements have been completed.
Additionally, the system date of the development AS/400 processor and
one of the Company's Xerox production printers (all production
printers are identical) were rolled forward to known Year 2000
critical dates. No errors were detected during this process.
Additionally, the Company rolled forward the system date of a leased
AS\400, used as a disaster recovery "hot site", that is of similar
make and configuration as the Company's production AS\400. No errors
were detected during this process. As such, these systems are believed
to be Year 2000 compliant, although no assurances can be given in this
regard.
o Desktop PCs and modems, desktop printers: The Company has replaced a
significant majority of its non-Year 2000 compliant PCs with Year 2000
compliant models, as warranted by the manufacturers. The Company will
continue to identify non-Year 2000 compliant PCs, modems and printers
and apply the manufacturers' recommended system upgrades and/or
enhancements. In the event the Company is not able to identify and
correct all non-Year 2000 compliant PCs, modems and printers prior to
the end of 1999, management believes it will be able to apply the
necessary upgrades and/or enhancements after December 31, 1999 without
any significant interruption to its business, although no assurances
can be given in this regard.
13
<PAGE> 16
For IT software systems, the Plan addresses the Year 2000 Problem with
respect to: AS/400 operating and applications systems; personal computer
applications software, including spreadsheets, "macros," "uploads" and
"downloads"; and electronic forms. Following is a summary of the procedures
performed and the status of each major area.
o AS/400 operating and applications systems: The Company has performed
several system date rollovers on its development AS/400 operating and
applications systems (its "core systems") in which the system date
recognized by each software system was advanced to known critical
dates in the Year 2000. A significant majority of errors identified by
the system date rollovers have been corrected and retested. All
remaining errors are expected to be corrected by November 30, 1999.
Additionally, the Company is already issuing policies with terms
extending beyond the Year 2000 on its production AS/400. However, in
the event these remaining errors are not corrected prior to the end of
1999, management does not anticipate any significant interruption in
processing business on its core systems, although no assurances can be
given in this regard.
o Personal computer applications software: The Company has received all
recommended upgrades and/or enhancements provided by the manufacturers
of its global applications software. Such upgrades and/or enhancements
are expected to be completed by the end of 1999 through an automated
process performed through the Company's local area network. In the
event the Company is not able to apply the recommended upgrades and/or
enhancements through an automated process, each PC will have to be
manually updated, which would require significant personnel resources
to complete. In the event the Company is not able to apply the
recommended upgrades and/or enhancements to a majority of its PCs
prior to the end of 1999, this could result in a significant
interruption in its business workflows as access to core applications
would be limited. However, management believes it will be able to
apply the recommended upgrades and/or enhancements to a majority of
its PCs prior to the end of 1999, and therefore, does not anticipate
any significant interruption in its business workflows, although no
assurances can be given in this regard.
o Spreadsheets, macros, uploads, downloads and electronic forms:
Spreadsheets, macros, uploads, downloads and electronic forms are not
considered core systems, and as such, are not specifically addressed
within the Plan. However, the Company has instructed the users of
these applications to review their files for possible two digit
century date fields that may require modification. It is anticipated
that many of these files and applications will need to be modified
after December 31, 1999. However, management does not believe this
will result a significant interruption to its business workflows,
although no assurances can be given in this regard.
For non-IT systems, the Plan provides for testing of elevators,
generators, utilities, card key access, alarms, uninterrupted power source, air
conditioning/heating units and thermostats. All vendors and service providers
for these systems have been surveyed, and have indicated that these systems are
Year 2000 compliant.
The Plan also provides for certification of Year 2000 compliance by
the Company's business partners. Such partners provide office supplies, paper
supplies, copy center support, off-site tape management and disaster recovery
services. Based upon the Year 2000 certifications received to date, the Company
believes its "core business partners" (those business partners which, in the
event of non-Year 2000 compliance, could have a material adverse effect on the
Company's business, financial condition or results of operations) are Year 2000
complaint, although no assurances can be given in this regard. The Company will
continue to review the certifications received from its "non-core business
partners", which ultimately will lead to decisions regarding the retention or
replacement of vendors and/or their products. Such decisions regarding the
Company's non-core business partners are expected to continue into the Year
2000. However, in the event any of the Company's non-core business partners
fail to become Year 2000 compliant prior to the end of 1999, management does
not anticipate this will materially adversely affect the Company's business or
financial condition, although no assurance can be given in this regard.
Costs associated with addressing the Year 2000 Problem with respect to
the Company's outsourcing operations were immaterial prior to 1998. For
internally built applications software, the Company has consistently accounted
for the Year 2000 date as a normal part of program development. Nearly all
costs associated with addressing the Year 2000 Problem are internal expenses,
with the exception of the costs of engaging the independent accounting firm.
The Company currently estimates direct costs associated with addressing the
Year 2000 Problem for its outsourcing operations to be in the range of $300,000
to $400,000. In the event an outside vendor's software is targeted for
replacement, the Company may incur additional costs relating to the purchase
price of new software (which may be inflated if demand is high), conversion of
data to the new system, and training of personnel on the new system. Management
does not expect these costs to materially adversely affect the Company's
business or financial condition.
14
<PAGE> 17
The most reasonably likely worse case scenario for the Company's
outsourcing operations is the possibility that the Company will be required to
manually process applications for insurance, which will result in increased
costs of issuing insurance policies. Manually-processed applications would
increase data entry and also increase customer service intervention as
representatives of the Company seek to obtain complete and accurate customer
information in order to issue correct insurance policies. These increased
responsibilities may require significant overtime on the part of customer
service representatives and supervisors. Moreover, the Company may be required
to perform additional internal cash processing if its lockbox vendor is required
to operate in a manual environment. The flood insurance product may require
manual flood zone searches in lieu of automatic determinations in the event
such automated flood zone processes become unavailable. In addition, the
Company may be required, for a period of time, to issue manual checks for
return premiums, claims payments and producers' commissions as well as to
perform manual policy assembly. Such activities may also result in a substantial
increase in overtime wages for a significant percentage of the Company's
workforce as well as require the addition of a significant number of temporary
employees. Non-computer generated forms, manual check stock, retrieval of
physical records rather than electronic facsimiles and manual processing would
supplant computer processing until such systems are adapted to address the Year
2000 Problem. Risks associated with a manual environment as described above
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has developed a contingency plan to deal with situations
that may require manual processing. This plan incorporates each processing
department's needs in the event it must convert to manual systems from
automated systems. Such needs may include overtime hours, temporary employees,
additional space, paper forms in replacement of computer generated forms, blank
paper stock, physical file space, additional copiers and fax machines,
additional equipment, greater support for data reconciliation and cash
reconciliation processes in the absence of computer-generated production data,
and greater use of fiche and fiche readers.
Flood Zone Determination Operations. The Company has also adopted a
detailed plan (the "Project Plan") to address the Year 2000 Problem with
respect to its flood zone determination operations. The Project Plan calls for
testing, validation and modification of the IT and non-IT systems associated
with the Company's flood zone determination operations in order to ensure Year
2000 compliance.
For IT hardware systems, the Project Plan addresses the Year 2000
Problem with respect to: IBM AS/400 processors and tape drives; production
servers; communication servers; development servers; wide area network and
network infrastructure hardware; modems; printers; tape drives; desktop
personal computers; and fax servers. For IT software systems, the Plan
addresses the Year 2000 Problem with respect to: network operating systems;
software development packages and third-party vendor software packages;
in-house developed software packages; GeoCompass(R), the Company's flood zone
determination electronic ordering and delivery package; and GMaS internal
production routing.
The Company has reviewed and validated the Year 2000 compliance of the
IBM AS/400 business system used in its flood zone determination operations.
This process involved reviewing all internally developed application code,
modules, databases, and reports for correct date handling, changing all date
fields to handle the four digit century format, and upgrading the operating
system to the Year 2000 compliant version. The Company's internally developed
GeoCompass(R) and GMaS software packages have also been assessed for Year 2000
readiness and were upgraded to Year 2000 compliant versions during the second
quarter of 1999. The Company's flood zone determination network operating
systems were also upgraded to Year 2000 compliant versions during the second
quarter of 1999. The Company will continue to validate its other flood zone
determination hardware and software components for Year 2000 compliance with
the vendors that supply those products. However, non-compliance with the Year
2000 for any of the Company's other flood zone determination hardware and
software components is not expected to have a material adverse effect on the
Company's business, financial condition or results of operations, although no
assurances can be given in this regard.
The non-IT systems used in the Company's flood zone determination
operations include: internal telephone systems, auxiliary power supplies,
security systems, environmental control systems, and postal equipment. All
vendors and service providers for these systems have been surveyed, and have
indicated that these systems are Year 2000 compliant.
Testing methodology of existing internal systems includes the
identification of programs and Year 2000 critical dates for date rollover
testing. An initial test was completed in February, 1999 of a mirrored
production environment. This environment tested AS/400 applications,
communication and data transfer systems, electronically generated faxes and
data files, LAN and WAN connections, and production flow within the Company.
All errors have been documented, corrected, retested, and signed-off. As such,
management believes its existing internal systems to be Year 2000 compliant.
15
<PAGE> 18
The Company has a number of flood zone determination clients with
which it electronically exchanges data. The clients that use a proprietary
method for communicating data have been contacted by the Company regarding
their need to upgrade their interfaces. Most of the Company's flood zone
determination clients utilize its Compass product line. Version 3.x of that
software has been tested and verified for Year 2000 compliance. Users of
non-compliant versions of such software are expected to be upgraded to Year
2000 compliant versions prior to December 31, 1999.
The Company currently estimates direct costs (computing costs, network
and telephone support, office supplies, programming support and project
coordination) associated with addressing the Year 2000 Problem for its flood
zone determination operations to be in the range of $150,000 to $250,000.
Nearly all costs, whether incurred or to be incurred, are internal to the
Company. Management does not expect these costs to materially adversely affect
the Company's business or financial condition.
The most reasonably likely worst case scenario for the Company's flood
zone determination operations is the possibility that the Company will be
unable to electronically exchange data with its clients. Such circumstances
would require the Company to revert to manually exchanging requests for
searches and remitting completed determinations to clients. This increase in
manual operations would likely result in significant increases in the cost of
clerical support (temporary employees), data entry (overtime wages), paper
supplies, fax machines and telephone customer service support (overtime wages).
Moreover, the inability to electronically exchange data with certain clients
could result in a material loss of revenue.
The Company has developed a contingency plan relating to manual
preparedness in the event of the impairment of its flood zone determination IT
systems. As part of the plan, staffing models have been constructed that
provide an accurate indication of the number of additional employees required
to manually process determinations on a short-term basis. The plan also
addresses potential alternative forms of data exchange, such as faxes and data
tapes.
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.
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no material change 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, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 1999, the Company entered into a revolving line of credit agreement
("LOC") with a financial institution that provides for borrowings of up to
$12,000,000. Under the LOC, the Company is restricted from making any
distributions or dividends payable in cash or capital stock of the Company on
any shares of any class of its capital stock or apply any of its property or
assets to the purchase, redemption or other retirement of any shares of any
class of capital stock or any partnership interest when the ratio of interest
bearing debt to earnings before interest, taxes, depreciation, and amortization
exceeds 1.0 either before or as a result of the distribution. Concurrent with
the execution of the LOC, an existing term loan, which totaled $6.3 million,
was repaid using a portion of the available proceeds under the LOC. On June 11,
1999, the Company used $6,664,084 of the available LOC to repay an existing
term loan. During July, 1999, the Company used the remaining proceeds from its
initial public offering, together with excess cash reserves, to repay the LOC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K
The Company filed a Report on Form 8-K on August 25, 1999 reporting
certain management changes, including the appointment of David M.
Howard as President of Insurance Management Solutions Group, Inc. on
August 19, 1999 and the resignation of Kelly K. King as Senior Vice
President, Chief Financial Officer, Treasurer and Secretary of the
Company effective August 19, 1999. Included as an exhibit to such
filing is the Company's press release, dated August 19, 1999,
announcing such management changes.
17
<PAGE> 20
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: November 12, 1999 INSURANCE MANAGEMENT SOLUTIONS
GROUP, INC.
(Registrant)
By: /s/ DAVID K. MEEHAN
------------------------------------
David K. Meehan
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ CHRISTOPHER P. BREAKIRON
------------------------------------
Christopher P. Breakiron
Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and
Accounting Officer)
18
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A)
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM 10-Q.
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,361,234
<SECURITIES> 0
<RECEIVABLES> 3,884,983
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<CURRENT-ASSETS> 12,260,981
<PP&E> 14,130,292
<DEPRECIATION> (6,677,762)
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0
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<COMMON> 126,787
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<SALES> 0
<TOTAL-REVENUES> 52,229,875
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<TOTAL-COSTS> 46,644,132
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 776,370
<INCOME-PRETAX> 5,099,620
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