<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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 000-25273
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-3422536
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 CENTRAL AVENUE, ST. PETERSBURG, FLORIDA 33701
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(727) 803-2040
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
Class: Common Stock, $.01 par value Outstanding at May 12, 2000: 12,800,261
<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> <C>
Item 1. Financial Statements...................................................... 1
Consolidated Balance Sheets as of December 31, 1999
and March 31, 2000........................................................ 1
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 2000............................................. 2
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1999 and the three months ended
March 31, 2000............................................................ 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 2000...................................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 10
Item 2. Changes in Securities and Use of Proceeds................................. 10
Item 6. Exhibits and Reports on Form 8-K.......................................... 11
</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 impact of general economic conditions and interest rate
fluctuations on the demand for the Company's services, including flood zone
determination services; (xiii) the outcome of certain litigation and
administrative proceedings involving the Company's principal customer; (xiv)
uncertainties regarding the market acceptance of the Company's new services;(xv)
difficulties in establishing positive name recognition in the market place; and
(xvi) difficulties in achieving expected expense reductions as a result of
management initiatives . Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. All forward-looking statements included in this document are based on
information available to the Company on the date hereof and the Company assumes
no obligation to update any such forward-looking statement. Among the factors
that could cause actual results to differ materially are the factors detailed in
Item 2 of this report and the risks discussed under the caption "Risk Factors"
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999, as filed with the Securities Exchange Commission on March 30, 2000.
Prospective investors should also consult the risks described from time to time
in the Company's Reports on Form 10-Q, 8-K and 10-K and Annual Reports to
Shareholders.
ii
<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,
1999 2000
------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .................................. $ 4,702,861 $ 4,346,617
Accounts receivable, net ................................... 3,621,714 3,618,579
Due from affiliates ........................................ 2,920,543 3,094,530
Prepaid expenses and other assets .......................... 1,572,976 1,381,682
----------- -----------
Total current assets .................................. 12,818,094 12,441,408
PROPERTY AND EQUIPMENT, net ................................... 7,225,494 7,440,976
OTHER ASSETS
Goodwill, net .............................................. 16,257,663 16,031,248
Customer contracts, net .................................... 1,116,667 1,066,667
Deferred tax assets ........................................ 1,063,366 1,055,666
Capitalized software costs, net ............................ 976,225 1,173,498
Other ...................................................... 33,398 45,233
----------- -----------
Total assets ......................................... $39,490,907 $39,254,696
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt .......................... $ 481,637 $ 422,904
Accounts payable, trade .................................... 990,495 1,209,791
Due to affiliates .......................................... 12,833 117,116
Employee related accrued expenses .......................... 2,294,858 2,569,057
Other accrued expenses ..................................... 1,293,060 841,519
Income taxes payable ....................................... 413,241 44,354
Deferred revenue ........................................... 214,891 161,168
----------- -----------
Total current liabilities ............................ 5,701,015 5,365,909
LONG-TERM DEBT, less current portion .......................... 219,857 255,438
DEFERRED REVENUE .............................................. 684,915 668,729
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding ............. -- --
Common Stock, $.01 par value; 100,000,000 shares authorized,
12,678,743 and 12,800,261 shares issued and outstanding at
December 31, 1999 and March 31, 2000, respectively ....... 126,787 128,002
Additional paid-in capital ................................. 26,810,282 27,109,067
Retained earnings .......................................... 5,948,051 5,727,551
----------- -----------
Total shareholders' equity ........................... 32,885,120 32,964,620
----------- -----------
Total liabilities and shareholders' equity ........... $39,490,907 $39,254,696
=========== ===========
</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 MARCH 31,
-------------------------------
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Outsourcing services - affiliated ....................... $ 9,786,114 $ 9,205,313
Outsourcing services .................................... 3,029,495 1,529,314
Flood zone determination services ....................... 5,207,927 3,722,929
Flood zone determination services - affiliated .......... 81,783 230,003
------------ ------------
Total revenues .................................... 18,105,319 14,687,559
------------ ------------
EXPENSES
Cost of outsourcing services ............................ 8,969,340 8,677,506
Cost of flood zone determination services ............... 2,213,434 1,858,529
Selling, general and administrative ..................... 2,512,118 2,650,446
Management services from Parent ......................... 605,560 503,537
Depreciation and amortization ........................... 1,333,256 1,307,570
------------ ------------
Total expenses .................................... 15,633,708 14,997,588
------------ ------------
OPERATING INCOME (LOSS) .................................... 2,471,611 (310,029)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income ......................................... 121,030 67,050
Interest expense ........................................ (340,098) (17,421)
------------ ------------
Total other income (expense) ...................... (219,068) 49,629
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES .. 2,252,543 (260,400)
PROVISION (BENEFIT) FOR INCOME TAXES ....................... 934,000 (39,900)
------------ ------------
NET INCOME (LOSS) .......................................... $ 1,318,543 $ (220,500)
============ ============
NET INCOME (LOSS) PER COMMON SHARE ......................... $ 0.11 $ (0.02)
============ ============
Weighted average common shares outstanding ................. 11,743,693 12,774,889
============ ============
</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, 1999 ..................... $ 105,242 $ 5,830,930 $ 2,752,991 $ 8,689,163
Issuance of Common Stock as partial
consideration for the acquisition of
Colonial Claims .......................... 1,545 1,698,455 -- 1,700,000
Initial public offering of Common Stock,
net of offering costs ..................... 20,000 19,143,897 -- 19,163,897
Issuance of stock options to
non-employees ............................. -- 137,000 -- 137,000
Net income ................................. -- -- 3,195,060 3,195,060
------------ ------------ ------------ ------------
Balance at December 31, 1999 ................... 126,787 26,810,282 5,948,051 32,885,120
Payment of earn-out in connection
with the acquisition of Colonial
Claims (unaudited) ........................ 1,215 298,785 -- 300,000
Net loss (unaudited) ....................... -- -- (220,500) (220,500)
------------ ------------ ------------ ------------
Balance at March 31, 2000 (unaudited) .......... $ 128,002 $ 27,109,067 $ 5,727,551 $ 32,964,620
============ ============ ============ ============
</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,
-------------------------------
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 1,318,543 $ (220,500)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................ 1,333,256 1,307,570
Loss on disposal of property and equipment ............... 4,777 57,439
Deferred income taxes, net ............................... 556,911 7,700
Changes in assets and liabilities:
Accounts receivable .................................... 214,251 3,135
Income taxes recoverable ............................... 195,089 --
Prepaid expenses and other current assets .............. (241,203) 189,095
Other assets ........................................... 277,716 (301,031)
Accounts payable, trade ................................ 178,621 219,296
Employee related accrued expenses ...................... 226,025 274,199
Other accrued expenses ................................. (534,718) (151,541)
Income taxes payable ................................... -- (368,887)
Deferred revenue ....................................... 68,840 (69,909)
------------ ------------
Net cash provided by operating activities ............ 3,598,108 946,566
------------ ------------
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 ........................ (829,858) (1,209,954)
------------ ------------
Net cash used in investing activities ................ (1,998,766) (1,209,954)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from initial public offering ......... 19,204,493 --
Net borrowings under line of credit ........................ -- 114,561
Repayment of debt .......................................... (2,754,972) (137,713)
Repayment of affiliated notes and interest payable ......... (14,708,420) --
Collection of affiliated note and interest receivable ...... 5,271,406 --
Net repayments to affiliates ............................... (2,686,649) (69,704)
------------ ------------
Net cash provided by (used in) financing activities .. 4,325,858 (92,856)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................. 5,925,200 (356,244)
CASH AND CASH EQUIVALENTS, beginning of period ................ 1,868,867 4,702,861
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ...................... $ 7,794,067 $ 4,346,617
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for interest ...................................... $ 763,726 $ 17,421
============ ============
Cash paid for income taxes .................................. $ -- $ 325,000
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of net assets of Colonial Claims:
Total consideration consists of:
Common Stock..................................... $ 1,700,000
Common Stock payable 300,000
Cash............................................. 500,000
Short term obligation............................ 500,000
------------
$ 3,000,000
============
Fair value of assets acquired.................... $ 1,846,555
Liabilities assumed.............................. 1,478,306
------------
Net assets....................................... 368,249
Goodwill......................................... 2,631,751
------------
$ 3,000,000
============
</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,
1999, as filed with the Securities and Exchange Commission on March 31, 2000.
The results of operations for the three-month period ended March 31, 2000 are
not necessarily indicative of the results that should be expected for a full
fiscal year.
Net Income (Loss) Per Common Share
Net income (loss) per common share, which represents both basic and
diluted earnings per share ("EPS"), is computed by dividing net income (loss) by
the weighted average common shares outstanding. The following table reconciles
the numerator and denominator of the basic and dilutive EPS computation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Numerator:
Net income (loss).......................................... $ 1,318,543 $ (220,500)
=========== ===========
Denominator:
Weighted average number of Common Shares
used in basic EPS....................................... 11,743,693 12,774,889
Diluted stock options...................................... -- --
----------- -----------
Weighted average number of Common Shares
and diluted potential Common Shares used in
diluted EPS............................................. 11,743,693 12,774,889
=========== ===========
</TABLE>
For the three months ended March 31, 1999 and 2000, options to purchase
671,500 and 852,750 shares, respectively, of Common Stock were outstanding
during the periods but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the Common Stock, and therefore, the effect would be
antidilutive.
NOTE 2. CONTINGENCIES
Bankers Insurance Company ("BIC"), a subsidiary of Bankers Insurance
Group ("BIG"), the Company's principal shareholder and customer, and Bankers
Life Insurance Company ("BLIC") and Bankers Security Insurance Company ("BSIC"),
subsidiaries of BIC, have been subject to an investigation by the Florida
Department of Insurance (the "DOI"), the principal regulator of insurance
activities in the State of Florida, stemming from their use of a private
investigator to gather information on a DOI employee and the private
investigator's unauthorized use of illegal wiretaps in connection therewith. On
March 23, 2000, the Treasurer and Insurance Commissioner of the State of
Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC
and BSIC based upon the results of such investigation. The administrative
complaint charges BIC, BLIC and BSIC with violating various provisions of the
Florida Insurance Code including, among other things, a provision requiring
insurance companies to have management, officers or directors that are, among
other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC
that the Insurance Commissioner intends to impose such penalties or take such
other administrative actions as may be proper or appropriate under applicable
law, including possibly entering an order suspending or revoking the
certificates of authority of BIC, BLIC and BSIC to conduct business as insurance
companies in the State of Florida.
5
<PAGE> 8
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 2. CONTINGENCIES - (CONTINUED)
BIC, BLIC and BSIC have informed the Company that they intend to
vigorously defend against such action, but no assurances can be given as to the
outcome thereof. In the event the DOI were to enter an order suspending or
revoking the certificates of authority of BIC, BLIC and BSIC to conduct business
as insurance companies in the State of Florida, or impose other significant
penalties on any of them, it would materially adversely affect the business
and/or operations of BIG and, in turn, could result in the loss of or material
decrease in the Company's business from BIG, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
On November 19, 1999, the United States, on behalf of the Federal
Emergency Management Association ("FEMA"), filed a civil action against BIC in
the U.S. District Court for the District of Maryland stemming from FEMA's
investigation of certain cash management and claims processing practices of BIC
in connection with its participation in the National Flood Insurance Program
("NFIP"). The complaint alleges, among other things, that BIC knowingly failed
to report and pay interest income it had earned on NFIP funds to the United
States in violation of the False Claims Act as well as various common law
theories, including fraud, breach of contract, unjust enrichment and negligent
misrepresentation. The complaint seeks civil penalties of $1.08 million and
actual damages of approximately $1.1 million as well as treble, punitive and
consequential damages, costs and interest. BIC has informed the Company that it
intends to vigorously defend against the action, but no assurances can be given
as to the outcome thereof. However, BIG and its legal counsel have advised the
Company that an adverse judgment in this action would not have a material
adverse affect on the business and/or operations of BIC, although no assurances
can be given in this regard.
FEMA's investigation of certain claims processing practices of BIC in
connection with its participation in the NFIP is continuing, and BIC has
produced documentation in connection therewith. If the parties are unable to
reach agreement in these matters, the United States could amend its complaint
against BIC to add additional claims under the False Claims Act and/or various
common law and equitable theories relating to such matters. In the event such
continuing investigation or any consequence thereof materially adversely affects
the business or operations of BIC, it could result in the loss of or material
decrease in the Company's business from BIC, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
During 1999, BIG, together with certain of its affiliates, including
the Company, was subject to a wage and hour audit conducted by the Department of
Labor ("DOL"). The Company has responded to the DOL's inquiries relating to the
classification of its employees for the purpose of determining overtime
compensation. The Company and BIG are in the process of jointly negotiating with
representatives of the DOL in an effort to fairly determine the proper
classification of certain employees and the amount of the past wages owed.
Although management cannot currently determine the amount of past wages to be
assessed to the Company, management does not believe it will have a material
adverse effect on the business, financial condition and results of operations of
the Company, although no assurances can be given in this regard.
The Company is involved in various legal actions arising in the
ordinary course of business. Management believes that the ultimate resolution of
these actions will not have a material adverse effect on the Company's financial
position, results of operations, or liquidity, although no assurances can be
given in this regard.
6
<PAGE> 9
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. SEGMENT INFORMATION
The following table presents summarized financial information for the
Company's reportable segments:
<TABLE>
<CAPTION>
INTERCOMPANY
OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED
SERVICES DETERMINATIONS AND OTHER TOTALS
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
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
Total liabilities................. 11,552,115 16,862,556 (15,703,674) 12,710,994
MARCH 31, 2000 - (UNAUDITED)
Operating revenues - affiliated... $ 9,865,066 $ 230,003 $ (659,753) $ 9,435,316
Operating revenues - unaffiliated. 1,529,314 3,722,929 -- 5,252,243
Operating income.................. (814,924) 504,895 -- (310,029)
Identifiable assets............... 29,583,281 25,591,496 (15,920,081) 39,254,696
Total liabilities................. 15,758,333 11,366,454 (20,834,711) 6,290,076
</TABLE>
7
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth for the periods indicated certain
selected historical operating results of the Company as a percentage of total
revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
----- -----
<S> <C> <C>
REVENUES
Outsourcing services................................. 70.8% 73.1%
Flood zone determination services.................... 29.2 26.9
----- -----
Total revenues................................... 100.0 100.0
----- -----
EXPENSES
Cost of outsourcing services......................... 49.5 59.1
Cost of flood zone determination services............ 12.2 12.7
Selling, general and administrative.................. 13.9 18.0
Management services from Parent...................... 3.3 3.4
Depreciation and amortization........................ 7.4 8.9
----- -----
Total expenses................................... 86.3 102.1
----- -----
Operating income (loss)................................ 13.7 (2.1)
Interest income........................................ 0.7 0.4
Interest expense....................................... (1.9) (0.1)
----- -----
Income (loss) before provision (benefit) for income taxes 12.5 (1.8)
Provision (benefit) for income taxes................... 5.2 (0.3)
----- -----
Net income (loss)...................................... 7.3% (1.5)%
===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
Outsourcing Services Revenues. Outsourcing services revenues decreased
$2.1 million, or 16.2%, to $10.7 million for the three months ended March 31,
2000 from $12.8 million for the corresponding period in 1999. The decrease was
primarily attributable to a decrease in the volume of flood and wind damage
claims administered by the Company's outsourcing operations during the first
quarter of 2000 as compared to the same period in 1999. During the first quarter
of 1999, the Company recognized revenues totaling approximately $2.8 million
from the administration of property damage claims resulting from Hurricane
Georges, which occurred in September 1998. In comparison, the Company recognized
revenues of approximately $862,000 during the first quarter of 2000 from the
administration of property damage claims resulting from Hurricanes Floyd and
Irene, which occurred during the fourth quarter of 1999. Additionally, a decline
in the volume of auto and flood premium processed on behalf of the Company's
affiliated customers contributed to the decrease in outsourcing services
revenues during the first quarter of 2000.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues decreased $1.3 million, or 25.3%, to $4.0 million for the
three months ended March 31, 2000 from $5.3 million for the corresponding period
in 1999. The decrease was primarily attributable to the termination of the
Company's "life-of-loan" insurance policy, effective April 1, 1999, in which,
prior to the termination of the policy, the Company was compensated for
performing flood zone re-determinations for certain existing customers. Prior to
the termination of the life-of-loan policy, the Company paid an insurance
premium for every flood zone determination issued which required life-of-loan
tracking. In exchange for the premium, the Company received a fixed amount for
every flood zone determination that had to be reissued as a result of a change
in the underlying flood zone classification of a property. Also contributing to
the decrease in flood zone determination services revenues during the first
quarter of 2000 as compared to same period in 1999 was a continued decline in
mortgage refinancings and loan originations, which have historically driven the
demand for flood zone determinations from the Company's existing customers. This
decrease was partially offset by flood zone determination services revenues
generated from new customers.
8
<PAGE> 11
Cost of Outsourcing Services. Cost of outsourcing services decreased
$292,000, or 3.3%, to $8.7 million for the three months ended March 31, 2000
from $9.0 million for the corresponding period in 1999. As a percentage of
outsourcing services revenues, however, cost of outsourcing services increased
to 80.8% for the three months ended March 31, 2000 from 70.0% for the
corresponding period in 1999 primarily as a result of a decrease in dollar
amount of outsourcing services revenues and an increase in the cost of
outsourcing services during three months ended March 31, 2000 from the
corresponding period in 1999. The decrease in the dollar amount of cost of
outsourcing services was primarily attributable to a decrease in revenue from
the Company's claims catastrophe subsidiary, of which approximately 70.0% of
each dollar of revenue is paid to its independent adjusters who adjust the
claims on the Company's behalf. Partially offsetting the decrease in the dollar
amount of expenses from the Company's claims catastrophe subsidiary was an
increase in costs from the Company's outsourcing subsidiary as a result of
increases in personnel costs due to staff additions and the use of contract
programmers to develop and staff new unaffiliated programs as well as an
increase in facilities costs due to delays in the buildout and occupancy of the
Company's new operating and call center facility.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services decreased $355,000, or 16.0%, to $1.9 million for the
three months ended March 31, 2000 from $2.2 million for the corresponding period
in 1999. As a percentage of flood zone determination services revenues, however,
cost of flood zone determination services increased to 47.0% for the three
months ended March 31, 2000 from 41.5% for the corresponding period in 1999
primarily as a result of a decrease in dollar amount of flood zone determination
services revenue during the three months ended March 31, 2000 from the
corresponding period in 1999. The decrease in the dollar amount of cost of flood
zone determination services resulted primarily from a redesign of various
production workflows during 1999 that enabled the Company to increase employee
productivity and reduce operating expenses, primarily personnel related costs.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $138,000, or 5.5%, to $2.7 million for the
three months ended March 31, 2000 from $2.5 million for the corresponding period
in 1999. The increase in selling, general and administrative expenses was
primarily attributable to the continued assumption of various administrative
services, primarily cash management and legal, that were previously provided to
the Company under the management service agreement with its affiliates, as well
as severance costs relating to the resignation of an officer during the first
quarter of 2000.
Management Services from Parent. Management services from Parent
decreased $102,000, or 16.8%, to $504,000 for the three months ended March 31,
2000 from $606,000 for the corresponding period in 1999. The decrease was
primarily related to the continued assumption of certain administrative
services, primarily cash management and legal, that were previously provided to
the Company under the management service agreement with its affiliates.
Interest Expense. Interest expense decreased $323,000, or 94.9%, to
$17,000 for the three months ended March 31, 2000 from $340,000 for the
corresponding period in 1999. The decrease was primarily related to the early
repayment of most of the Company's debt obligations from the net proceeds
received by the Company from its initial public offering in February, 1999.
Provision (Benefit) for Income Taxes. The Company's effective income
tax (benefit) rates were 41.5% and (15.3)%, for the three months ended March 31,
2000 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's principal sources of liquidity
consisted of cash on-hand, cash flows from operations and available borrowings
under the Company's revolving credit facility.
In February, 1999, the Company completed an initial public offering of
3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000
shares sold, 1,350,000 were sold by Venture Capital Corporation (the "Selling
Shareholders"), a Cayman Islands company. The offering generated net proceeds
("Offering Proceeds") to the Company of approximately $19.2 million after
deducting offering expenses paid by the Company of approximately $1.3 million.
The Offering Proceeds, together with funds received from BIG from proceeds made
available to BIG by a subsidiary of the Selling Shareholder, were used during
1999 to repay all obligations with BIG and its affiliates and to repay most of
the Company's third party debt obligations.
9
<PAGE> 12
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 (7.68% at March 31,
2000) based on the ratio of funded debt (as defined) to EBITDA. Interest
payments are payable monthly and the remaining unpaid principal balance is due
in full in July, 2001. The LOC is collateralized by substantially all of the
Company's assets and is subject to certain quarterly financial covenants
requiring the Company to maintain the following minimum ratios: (i) interest
bearing debt to EBITDA of not more than 2.0 to 1.0; (ii) total liabilities to
tangible net worth of not more than 1.0 to 1.0; and (iii) fixed charge coverage
(as defined) of not less than 2.5 to 1.0. As of March 31, 2000, the outstanding
balance and available line of credit under the agreement totaled $114,561 and
$11,885,439, respectively.
The Company believes that cash on-hand, cash flows from operations and
available borrowings under the Company's LOC facility will be sufficient to
satisfy currently anticipated working capital and capital expenditure
requirements for the next twelve months. Unanticipated rapid expansion, business
or systems development, or potential acquisitions may cause the Company to
require additional funds. The Company identifies and assesses, in the normal
course of business, potential acquisitions of technologies or businesses which
it believes to strategically fit its business plan. The Company may enter into
such transactions should opportunities present themselves in the future.
YEAR 2000 COMPLIANCE
During the first quarter of 2000, the Company continued its remediation
program related to a universal situation commonly referred to as the "Year 2000
Problem." The Year 2000 Problem relates to the inability of certain computer
software programs to properly recognize and process date-sensitive information
relative to the Year 2000 and beyond, and the inability of non-information
technology systems to function properly when the Year 2000 arrives. As of the
date of this report, the Company has not experienced any significant problems
related to the Year 2000 Problem. Additionally, the Company has not become aware
of any significant Year 2000 issues affecting the Company's major customers or
suppliers, nor has it received any material complaints regarding Year 2000
Problems related to its services. The Company does not anticipate any remaining
costs to address additional Year 2000 Problems to be significant, although no
assurances can be given in this regard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to market risk associated with other financial instruments (such as
variable rate debt) are not material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the disclosure set forth under
the caption "Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective January 7, 1999, the Company, through a wholly-owned
subsidiary, acquired all of the issued and outstanding capital stock of Colonial
Catastrophe Claims Corporation, a Florida corporation ("Colonial Catastrophe"),
in exchange for (i) 154,545 shares of Common Stock, (ii) cash in the amount of
$500,000, (iii) a promissory note in the principal amount of $500,000, and (iv)
an earn-out payment of $300,000, based upon achieving a target income before
taxes of Colonial Claims for the year ended December 31, 1999, which was paid
during February, 2000 by issuing 121,518 additional shares of Common Stock. 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" ("Colonial Claims"). The issuance of shares of the Company's Common
Stock pursuant to this acquisition is claimed to be exempt from registration of
the Securities Act of 1933, as amended, pursuant to Rule 506 under Regulation D
and/or Section 4(2) of such Act.
10
<PAGE> 13
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
The Company filed a Report on Form 8-K on February 3, 2000
reporting certain director and management changes that have
occurred since October 14, 1999, including the appointment of
David M. Howard as Chief Executive Officer and a director of
the Company on January 18, 2000, the appointment of Robert G.
Gantley as Chief Operating Officer of the Company on January
18, 2000, the resignation of Jeffrey S. Bragg as Executive
Vice President, Chief Operating Officer, and a director of the
Company on January 11, 2000, and the resignation of Kathleen
M. Batson as Senior Vice President of the Company on October
14, 1999, in order to become President of a wholly-owned
subsidiary of the Company. Included as an exhibit to such
filing is the Company's press release, dated January 31, 2000,
announcing such management changes.
11
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2000 INSURANCE MANAGEMENT SOLUTIONS
GROUP, INC.
(Registrant)
By: /s/ DAVID M. HOWARD
------------------------------------
David M. Howard
President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTOPHER P. BREAKIRON
------------------------------------
Christopher P. Breakiron
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial and Accounting
Officer)
12
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INSURANCE
MANAGEMENT SOLUTIONS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL
STATEMENTS FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FORM 10-Q.
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