<PAGE> 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, 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)
<TABLE>
<S> <C>
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)
</TABLE>
(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:
<TABLE>
<S> <C>
Class: Common Stock, $.01 par value Outstanding at May 10, 1999: 12,678,743
</TABLE>
<PAGE> 2
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 1
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999........................................................ 1
Consolidated Statements of Income for the three months
ended March 31, 1998 and 1999............................................. 2
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1998 and the three months ended
March 31, 1999............................................................ 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1999...................................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 12
Item 2. Changes in Securities and Use of Proceeds................................. 12
Item 4. Submission of Matters to a Vote of Security Holders....................... 12
Item 6. Exhibits and Reports on Form 8-K.......................................... 12
</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.
ii
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 1,868,867 $ 7,794,067
Accounts receivable, net .................................................. 3,549,044 4,335,686
Due from affiliates ....................................................... 570,139 1,577,797
Note and interest receivable - affiliate .................................. 5,271,406 --
Income taxes recoverable .................................................. 1,148,902 953,813
Prepaid expenses and other assets ......................................... 859,684 1,429,205
----------- -----------
Total current assets ................................................. 13,268,042 16,090,568
PROPERTY AND EQUIPMENT, net .................................................. 8,507,897 8,300,526
OTHER ASSETS
Goodwill, net ............................................................. 14,515,785 16,625,068
Customer contracts, net ................................................... 1,316,667 1,266,667
Deferred tax assets ....................................................... 967,191 303,891
Other ..................................................................... 1,326,273 1,036,473
----------- -----------
Total assets ........................................................ $39,901,855 $43,623,193
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ......................................... $ 3,026,944 $ 1,866,230
Current portion of notes and interest payable - affiliates ................ 9,180,743 --
Accounts payable, trade ................................................... 831,674 1,028,120
Due to affiliates ......................................................... 1,748,509 69,518
Employee related accrued expenses ......................................... 1,804,677 2,030,702
Other accrued expenses .................................................... 755,436 904,810
Deferred revenue .......................................................... 214,891 214,891
----------- -----------
Total current liabilities ........................................... 17,562,874 6,114,271
LONG-TERM DEBT, less current portion ......................................... 7,470,539 5,876,281
NOTES PAYABLE - AFFILIATES, less current portion ............................. 5,527,677 --
DEFERRED REVENUE ............................................................. 651,602 720,442
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, 10,000,000 and
12,678,743 shares issued and outstanding at December 31, 1998 and
March 31, 1999, respectively ............................................ 105,242 126,787
Additional paid-in capital ................................................ 5,830,930 26,713,878
Retained earnings ......................................................... 2,752,991 4,071,534
----------- -----------
Total shareholders' equity .......................................... 8,689,163 30,912,199
----------- -----------
Total liabilities and shareholders' equity .......................... $39,901,855 $43,623,193
=========== ===========
</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 INCOME
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1999
---- ----
(unaudited)
<S> <C> <C>
REVENUES
Outsourcing services - affiliated ............ $ 8,493,788 $ 9,786,114
Outsourcing services ......................... 161,231 3,029,495
Flood zone determination services ............ 6,627,418 5,207,927
Flood zone determination services - affiliated 236,368 81,783
----------- -----------
Total revenues ......................... 15,518,805 18,105,319
----------- -----------
EXPENSES
Cost of outsourcing services ................. 6,427,537 8,969,340
Cost of flood zone determination services .... 3,066,725 2,213,434
Selling, general and administrative .......... 1,684,842 2,512,118
Management services from Parent .............. 678,572 605,560
Depreciation and amortization ................ 633,117 1,333,256
----------- -----------
Total expenses ......................... 12,490,793 15,633,708
----------- -----------
OPERATING INCOME ................................ 3,028,012 2,471,611
----------- -----------
MINORITY INTEREST ............................... (424,796) --
OTHER INCOME (EXPENSE):
Interest income .............................. -- 121,030
Interest expense ............................. (405,948) (340,098)
----------- -----------
Total other income (expense) ........... (405,948) (219,068)
INCOME BEFORE PROVISION FOR INCOME TAXES ........ 2,197,268 2,252,543
PROVISION FOR INCOME TAXES ...................... 1,088,900 934,000
----------- -----------
NET INCOME ...................................... $ 1,108,368 $ 1,318,543
=========== ===========
NET INCOME PER COMMON SHARE ..................... $ 0.11 $ 0.11
=========== ===========
Weighted average common shares outstanding ...... 10,000,000 11,743,693
=========== ===========
</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 19,184,493 -- 19,204,493
Net income (unaudited) ...................... -- -- 1,318,543 1,318,543
-------- ----------- ----------- -----------
Balance at March 31, 1999 (unaudited) ........... $126,787 $26,713,878 $ 4,071,534 $30,912,199
======== =========== =========== ===========
</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>
Three Months Ended March 31,
----------------------------
1998 1999
---- ----
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $1,108,368 $ 1,318,543
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 272,921 1,333,256
Loss on disposal of property and equipment ................... -- 4,777
Equity in earnings of Geotrac, Inc. .......................... (408,138) --
Deferred income taxes, net ................................... (114,100) 556,911
Changes in assets and liabilities:
Accounts receivable ....................................... (32,823) 214,251
Income taxes recoverable .................................. -- 195,089
Prepaid expenses and other current assets ................. (134,834) (241,203)
Other assets .............................................. (18,837) 277,716
Accounts payable, trade ................................... 47,192 178,621
Employee related accrued expenses ......................... (363,862) 226,025
Other accrued expenses .................................... 10,002 (534,718)
Income taxes payable ...................................... 649,102 --
Deferred revenue .......................................... 81,870 68,840
---------- ------------
Net cash provided by operating activities .............. 1,096,861 3,598,108
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Colonial Claims, net of cash acquired ............ -- 1,092
Repayment of acquisition debt ................................... -- (500,000)
Payment of dividend to prior Colonial Claims shareholders -- (670,000)
Purchases of property and equipment ............................. (232,962) (829,858)
---------- ------------
Net cash used in investing activities .................. (232,962) (1,998,766)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from initial public offering .............. -- 19,204,493
Repayment of debt ............................................... (751,424) (2,754,972)
Repayment of affiliated notes and interest payable .............. -- (14,708,420)
Collection of affiliated note and interest receivable ........... -- 5,271,406
Net repayments to affiliates .................................... (227,545) (2,686,649)
---------- ------------
Net cash provided by (used in) financing activities .... (978,969) 4,325,858
---------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... (115,070) 5,925,200
CASH AND CASH EQUIVALENTS, beginning of period ..................... 115,070 1,868,867
---------- ------------
CASH AND CASH EQUIVALENTS, end of period ........................... $ -- $ 7,794,067
========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash paid for interest ........................................... $ 83,190 $ 763,726
========== ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Dividend declared to Parent .................................. $1,100,000 $ --
========== ============
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 ....................................... 411,589
Goodwill ......................................... 2,331,751
------------
$ 2,700,000
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE> 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, 1998, as
filed with the Securities and Exchange Commission on March 31,1999. The results
of operations for the three-month period ended March 31, 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. For the three months ended March 31, 1998, the operations of
Geotrac, Inc. have been consolidated in the Company's statement of income, with
a minority interest deduction representing the net income of Geotrac, Inc.
allocable to the 51% interest held by the majority stockholders prior to the
Company acquiring the remaining interest.
Net Income Per Common Share
Net income per common share, which represents both basic and diluted
earnings per share ("EPS"), is computed by dividing net income by the weighted
average common shares outstanding. The following table reconciles the numerator
and denominator of the basic and dilutive EPS computation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Numerator:
Net income ................................... $ 1,108,368 $ 1,318,543
=========== ===========
Denominator:
Weighted average number of Common Shares
used in basic EPS ......................... 10,000,000 11,743,693
Diluted stock options ........................ -- --
----------- -----------
Weighted average number of Common Shares
and diluted potential Common Shares used in
diluted EPS ............................... 10,000,000 11,743,693
=========== ===========
</TABLE>
For the three months ended March 31, 1999, options to purchase 671,500
shares of Common Stock were outstanding during the period but were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Common Stock, and
therefore, the effect would be antidilutive.
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 offering generated net proceeds to the Company of
approximately $19,204,000, after deducting offering expenses paid by the Company
of approximately $1,256,000. Such offering expenses were charged to additional
paid-in capital against the proceeds from the initial public offering. 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 proceeds.
5
<PAGE> 8
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 months ended March 31, 1998 and 1999 would not have been
materially different from the Company's historical results of operations.
NOTE 4. 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 and certain of its employees (one of whom is now an officer of
Insurance Management Solutions, Inc. and several of whom are now employees of
the Company) have been subpoenaed on behalf of the Federal Emergency Management
Agency ("FEMA") to produce documentation or testify 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 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. Since the investigations are in the early stages, it is impossible
at this time to predict the ultimate outcome of these investigations.
NOTE 5. 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>
MARCH 31, 1998 - (UNAUDITED)
Operating revenues - affiliated . $ 8,802,652 $ 236,368 $ (308,864) $ 8,730,156
Operating revenues - unaffiliated 161,231 6,627,418 -- 6,788,649
Operating income ................ 698,647 2,329,365 -- 3,028,012
Identifiable assets ............. 13,307,037 12,111,488 -- 25,418,525
MARCH 31, 1999 - (UNAUDITED)
Operating revenues - affiliated . $ 9,882,147 $ 81,783 $ (96,033) $ 9,867,897
Operating revenues - unaffiliated 3,029,495 5,207,927 -- 8,237,422
Operating income ................ 1,111,299 1,360,312 -- 2,471,611
Identifiable assets ............. 24,896,270 28,408,666 (9,681,743) 43,623,193
</TABLE>
6
<PAGE> 9
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
MARCH 31,
-------------------
1998 1999
----- -----
<S> <C> <C>
REVENUES
Outsourcing services .................... 55.8% 70.8%
Flood zone determination services ....... 44.2 29.2
----- -----
Total revenues ...................... 100.0 100.0
----- -----
EXPENSES
Cost of outsourcing services ............ 41.4 49.5
Cost of flood zone determination services 19.8 12.2
Selling, general and administrative ..... 10.9 13.9
Management services from Parent ......... 4.3 3.3
Depreciation and amortization ........... 4.1 7.4
----- -----
Total expenses ...................... 80.5 86.3
----- -----
Operating income .......................... 19.5 13.7
Minority interest ......................... (2.7) --
Interest income ........................... -- 0.7
Interest expense .......................... (2.6) (1.9)
----- -----
Income before provision for income taxes .. 14.2 12.5
Provision for income taxes ................ 7.0 5.2
----- -----
Net income ................................ 7.2% 7.3%
===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Outsourcing Services Revenues. Outsourcing services revenues increased
$4.2 million, or 48.1%, to $12.8 million for the three months ended March 31,
1999 from $8.7 million for the corresponding period in 1998. The increase was
primarily attributable to (i) revenues totaling approximately $2.0 million
earned by the recently acquired Colonial Claims business, (ii) growth in
affiliated flood, non-standard automobile and workers compensation lines of
business, and (iii) claims fee income of approximately $768,000 associated with
the settlement of flood and wind damage claims resulting from Hurricane Georges
in late September, 1998.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues decreased $1.6 million, or 22.9%, to $5.3 million for the
three months ended March 31, 1999 from $6.9 million for the corresponding period
in 1998. The decrease in revenue was primarily attributable to a return to
historical levels of flood zone determination volumes (resulting, in large part,
from a decrease in the demand for refinancing of loans), which began in the
second half of 1998 and continued in the first quarter of 1999. Additionally,
during the quarter ended March 31, 1999, the Company experienced a reduction in
flood zone determination revenue from a large customer that is experiencing
financial difficulties. The decrease in flood zone determination services
revenues was partially offset by a novation of the Company's life-of-loan
insurance policy in which an estimate of the present value of future losses to
be claimed under the policy (approximately $500,000) was paid to the Company in
exchange for a release of liability for such future losses under the policy.
Cost of Outsourcing Services. Cost of outsourcing services increased $2.5
million, or 39.5%, to $9.0 million for the three months ended March 31, 1999
from $6.4 million for the corresponding period in 1998. As a percentage of
outsourcing services revenues, cost of outsourcing services decreased to 70.0%
for the three months ended March 31, 1999 from 74.3% for the corresponding
period in 1998. The increase in cost of outsourcing services was primarily
attributable to (i) expenses totaling approximately $1.6 million incurred by the
recently acquired Colonial Claims, (ii) increases in information technology
costs due to additions to staff and use of contract programmers, (iii) increased
services provided to BIG due to the growth in the volume of BIG's insurance
business, and (iv) increases in cost to bring on new unaffiliated programs.
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.
7
<PAGE> 10
Cost of Flood Zone Determination Services. Cost of flood zone
determination services decreased $853,000, or 27.8%, to $2.2 million for the
three months ended March 31, 1999 from $3.1 million for the corresponding period
in 1998. As a percentage of flood zone determination services revenues, cost of
flood zone determination services decreased to 41.8% for the three months ended
March 31, 1999 from 44.7% for the corresponding period in 1998. The decrease in
cost of flood zone determination services resulted primarily from the merger of
Bankers Hazard Determination Services, Inc. ("BHDS") and Geotrac, Inc. in July,
1998 and a subsequent elimination of certain duplicated functions and
facilities.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $827,000, or 49.1%, to $2.5 million for the
three months ended March 31, 1999 from $1.7 million for the corresponding period
in 1998. The increase in selling, general and administrative expenses was
primarily attributable to (i) expenses totaling approximately $167,000 incurred
by the Company's direct marketing subsidiary, which was formed in August 1998,
(ii) expenses totaling approximately $90,000 incurred by the recently acquired
Colonial Claims, and (iii) 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. The increase
in selling, general and administrative expenses was partially offset by a
decrease in management related expenses of BHDS relating to the merger of BHDS
and Geotrac, Inc. in July, 1998 and a subsequent elimination of certain
duplicated functions.
Management Services from Parent. Management services from Parent decreased
$73,000, or 10.8%, to $606,000 for the three months ended March 31, 1999 from
$679,000 for the corresponding period in 1998. The decrease was primarily
related to an amendment to the management service agreement, which became
effective January 1, 1999, in which certain accounting and internal audit
functions were eliminated (such functions are currently performed by the Company
directly).
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $700,000, or 110.6%, to $1.3 million for the three months
ended March 31, 1999 from $633,000 for the corresponding 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, and (iii) depreciation related to
assets, consisting of telephone equipment and computer hardware and software,
transferred and assigned to the Company in April, 1998 for use in its business.
Prior to April 1, 1998, the depreciation for such equipment, which totaled
$282,015 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, Inc. However, the Company has elected to reflect the operations
of Geotrac, Inc. prior to the July, 1998 acquisition on a consolidated basis
with the Company, with the net income of Geotrac, Inc. allocable to the 51%
interests held by the prior majority stockholders during the three months ended
March 31, 1998 reflected as minority interest.
Provision for Income Taxes. The Company's effective income tax rates were
49.6% and 41.5%, for the three months ended March 31, 1998 and 1999,
respectively. Income before 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 41.5%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operations through cash generated
from operations and receipt of service fees advanced from BIG. Bank borrowings
have been used to finance fixed asset purchases.
Net cash provided by operating activities was $1.1 million and $3.6
million for the three months ended March 31, 1998 and 1999, respectively. Net
cash provided by operating activities increased during the first quarter of
1999 primarily as a result of an increase in depreciation and amortization,
recognized as a result of the acquisition of the remaining 51% of Geotrac, Inc.
in July, 1998, as well as by the net change in various operating assets and
liabilities.
Net cash used in investing activities was $233,000 and $2.0 million for
the three months ended March 31, 1998 and 1999, respectively. The increase in
net cash used in investing activities during the first quarter of 1999 was
primarily due to the acquisition of Colonial Claims during January, 1999, in
which the Company paid $1,000,000 as partial consideration towards the total
purchase price. Additionally, during first quarter of 1999, the Company paid a
dividend accrual totaling $670,000 to the prior shareholders of Colonial Claims.
Such dividend accrual was included in the net assets that were acquired from
Colonial Claims.
8
<PAGE> 11
Net cash provided by (used in) financing activities was $(979,000) and
$4.3 million for the three months ended March 31, 1998 and 1999, respectively.
The increase in net cash provided by financing activities during the first
quarter of 1999 was primarily due to net proceeds totaling $19,204,000 received
by the Company from its initial public offering in February, 1999, as well as
the repayment of a note and interest receivable totaling $5.3 million from an
affiliate, partially offset by the repayment of various debt obligations,
affiliated notes and related accrued interest, and intercompany balances that
were repaid from the IPO proceeds and affiliated note and interest receivable.
The Company believes that cash flows from operations and net proceeds from
its initial public offering completed in February, 1999 will not only satisfy
working capital needs for 1999 but will also be sufficient to retire or redeem
most existing debts of the Company. Unanticipated rapid expansion, business or
systems development, or potential acquisitions may cause the Company to require
additional funds. In addition, prior to the initial public offering, the Company
at times relied upon advances against the future service fees it charges its
affiliates to support working capital needs, which primarily include payroll
costs. Since the initial public offering, the Company has discontinued this
practice. The Company is in the process of negotiating a revolving line of
credit with a bank that will be used to refinance existing debt and to provide
bridge financing for working capital or acquisition needs. The Company
identifies and assesses, in the normal course of business, potential
acquisitions of technologies or businesses which it believes to strategically
fit its business plan. The Company may enter into such transactions should
opportunities present themselves in the future.
YEAR 2000 COMPLIANCE
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") and is in the process of carrying out the Plan. An independent
accounting firm has been engaged to validate the Plan. The Plan 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;
telecommunications equipment, including voice, fax and modems; and printers. For
IT software systems, this 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. Testing has commenced and is expected to continue through the
third quarter of 1999. The Company is already issuing policies with terms
extending beyond the Year 2000 and believes it will not experience any
difficulty in processing business on its core processing systems.
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. Non-IT systems testing is underway
and is expected to be completed during the third quarter of 1999.
9
<PAGE> 12
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. The Plan also provides for detailed questionnaires and follow-up
letters to be sent to all outside software vendors requiring responses, and
ultimately certification, as to their Year 2000 readiness. A review of these
responses by Company management will lead to decisions regarding the retention
or replacement of vendors and/or their products. Such decisions are expected to
be made prior to June 30, 1999. The Company will replace such vendors and
products if it believes their state of Year 2000 readiness poses a risk to the
Company sufficient to warrant doing so. The Company does not anticipate any
difficulty in securing adequate replacements for such vendors or products.
Costs associated with addressing the Year 2000 Problem 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. The Company does not anticipate the
total replacement of any core system. 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.
The most reasonably likely worse case scenario for the Company's
outsourcing operation 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 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 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 or results of operations.
The Company will develop a contingency plan to deal with situations which
may require manual processing. This plan, expected to be developed in the first
half of 1999, will incorporate 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 operation. The Project Plan also 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.
10
<PAGE> 13
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.
Updated versions of such software that are Year 2000 compliant are expected to
be put into service during the second quarter of 1999. Of the Company's flood
zone determination network operating systems, the Company has determined that
certain versions are not Year 2000 compliant. These versions are expected to be
upgraded in the second quarter of 1999. The Company is in the process of having
its other flood zone determination hardware and software components validated
for Year 2000 compliance by the vendors that supply those products.
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. The
Company has contacted the various vendors providing such systems regarding
validation of their systems. This project is expected to be completed by July
31,1999.
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
tests will be documented, errors corrected and retested before verification can
be signed-off.
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 by
September 30, 1999.
The Company estimates that, to date, it has spent approximately $150,000
in time and materials (computing costs, network and telephone support, office
supplies, programming support and project coordination) in executing its Project
Plan with respect to its flood zone determination operations. The Company
anticipates that it will cost an additional $100,000 to address the Year 2000
Problem with respect to these operations. Nearly all costs, whether incurred or
to be incurred, are internal to the Company. The Company does not anticipate the
total replacement of any core system. In the event an outside vendor's software
is targeted for replacement, the Company may incur additional costs relating to
acquisition of replacement software, conversion of data, and personnel training.
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 is in the process of developing a contingency plan relating to
manual preparedness in the event of the impairment of its flood zone
determination IT systems. This plan involves construction of adequate staffing
models that provide an accurate indication of the number of additional employees
required to process determinations manually 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.
11
<PAGE> 14
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
Paragraphs 4 and 5 as set forth under the caption "Item 1. Business -
Recent Acquisitions" in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 are hereby incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 9, 1999, the shareholders of the Company approved, by
unanimous written consent, the Company's Long Term Incentive Plan, Non-Employee
Directors' Stock Option Plan and Non-Qualified Stock Option Plan. No other
matters were submitted to a vote of security holders during the first quarter of
1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K
None
12
<PAGE> 15
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 14, 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/ KELLY K. KING
--------------------------------------------
Kelly K. King
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
13
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