<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 June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 000-25273
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 59-3422536
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 CENTRAL AVENUE, ST. PETERSBURG, FLORIDA 33701
------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(727) 803-2040
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
Class: Outstanding at August 10, 2000:
Common Stock, $.01 par value 12,800,261
<PAGE> 2
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 1
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000......................................................... 1
Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 2000............................... 2
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1999 and the six months ended
June 30, 2000............................................................. 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 2000.............................................. 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders....................... 13
Item 6. Exhibits and Reports on Form 8-K.......................................... 13
</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 administrative proceedings
involving the Company's principal customer; (xiv) uncertainties regarding the
market acceptance of the Company's new services;(xv) difficulties in
establishing positive name recognition in the marketplace; (xvi) ability to
service new unaffiliated customers, including the development and implementation
of e-business initiatives; and (xvii) difficulties in achieving expected expense
reductions as a result of management initiatives. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected in the forward-looking statements as a
result of various factors. All forward-looking statements included in this
document are based on information available to the Company on the date hereof
and the Company assumes no obligation to update any such forward-looking
statement. Among the factors that could cause actual results to differ
materially are the factors detailed in Item 2 of this report and the risks
discussed under the caption "Risk Factors" included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999, as filed with the
Securities Exchange Commission on March 30, 2000. Prospective investors should
also consult the risks described from time to time in the Company's Reports on
Form 10-Q, 8-K and 10-K and Annual Reports to Shareholders.
ii
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 4,702,861 $ 4,472,245
Accounts receivable, net ................................... 3,621,714 3,899,146
Due from affiliates ........................................ 2,920,543 3,533,796
Prepaid expenses and other assets .......................... 1,572,976 1,183,999
----------- -----------
Total current assets .................................. 12,818,094 13,089,186
PROPERTY AND EQUIPMENT, net ................................... 7,225,494 7,917,674
OTHER ASSETS
Goodwill, net .............................................. 16,257,663 15,804,833
Customer contracts, net .................................... 1,116,667 1,016,667
Deferred tax assets ........................................ 1,063,366 1,147,907
Capitalized software costs, net ............................ 976,225 1,053,119
Other ...................................................... 33,398 45,233
----------- -----------
Total assets ......................................... $39,490,907 $40,074,619
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt .......................... $ 481,637 $ 1,044,335
Accounts payable, trade .................................... 990,495 1,947,228
Due to affiliates .......................................... 12,833 60,000
Employee related accrued expenses .......................... 2,294,858 1,917,201
Other accrued expenses ..................................... 1,293,060 948,442
Income taxes payable ....................................... 413,241 182,095
Deferred revenue ........................................... 214,891 177,446
----------- -----------
Total current liabilities ............................ 5,701,015 6,276,747
LONG-TERM DEBT, less current portion .......................... 219,857 60,809
DEFERRED REVENUE .............................................. 684,915 658,718
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding ............. -- --
Common Stock, $.01 par value; 100,000,000 shares authorized,
12,678,743 and 12,800,261 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively ........ 126,787 128,002
Additional paid-in capital ................................. 26,810,282 27,199,067
Retained earnings .......................................... 5,948,051 5,751,276
----------- -----------
Total shareholders' equity ........................... 32,885,120 33,078,345
----------- -----------
Total liabilities and shareholders' equity ........... $39,490,907 $40,074,619
=========== ===========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES
Outsourcing services - affiliated ................. $ 12,944,426 $ 9,775,937 $ 22,730,540 $ 18,981,250
Outsourcing services .............................. 1,016,699 1,535,680 4,046,194 3,064,994
Flood zone determination services ................. 4,404,611 4,441,124 9,612,538 8,164,053
Flood zone determination services - affiliated .... 112,272 242,636 194,055 472,639
------------ ------------ ------------ ------------
Total revenues .............................. 18,478,008 15,995,377 36,583,327 30,682,936
------------ ------------ ------------ ------------
EXPENSES
Cost of outsourcing services ...................... 8,562,226 9,076,570 17,774,901 17,754,076
Cost of flood zone determination services ......... 2,111,891 2,002,329 4,325,325 3,860,858
Selling, general and administrative ............... 2,678,155 2,864,820 4,946,938 5,515,266
Management services from Parent ................... 592,795 475,511 1,198,355 979,048
Depreciation and amortization ..................... 1,398,693 1,445,039 2,731,949 2,752,609
------------ ------------ ------------ ------------
Total expenses .............................. 15,343,760 15,864,269 30,977,468 30,861,857
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .............................. 3,134,248 131,108 5,605,859 (178,921)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ................................... 101,208 63,106 222,238 130,156
Interest expense .................................. (140,408) (24,989) (480,506) (42,410)
------------ ------------ ------------ ------------
Total other income (expense) ................ (39,200) 38,117 (258,268) 87,746
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES ...................................... 3,095,048 169,225 5,347,591 (91,175)
PROVISION FOR INCOME TAXES ........................... 1,246,600 145,500 2,180,600 105,600
------------ ------------ ------------ ------------
NET INCOME (LOSS) .................................... $ 1,848,448 $ 23,725 $ 3,166,991 $ (196,775)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE ................... $ 0.15 $ 0.00 $ 0.26 $ (0.02)
============ ============ ============ ============
Weighted average common shares outstanding ........... 12,678,743 12,800,261 12,213,801 12,787,575
============ ============ ============ ============
</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
Issuance of stock options to
non-employees (unaudited) ............. -- 90,000 -- 90,000
Net loss (unaudited) ................... -- -- (196,775) (196,775)
-------- ----------- ----------- ------------
Balance at June 30, 2000 (unaudited) ....... $128,002 $27,199,067 $ 5,751,276 $ 33,078,345
======== =========== =========== ============
</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>
SIX MONTHS ENDED JUNE 30,
------------------------------
1999 2000
------------ -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 3,166,991 $ (196,775)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ................................. 2,731,949 2,752,609
Loss on disposal of property and equipment .................... 47,485 95,275
Non-employee stock options .................................... -- 90,000
Deferred income taxes, net .................................... 377,411 (84,541)
Changes in assets and liabilities:
Accounts receivable ......................................... 817,826 (277,432)
Income taxes recoverable .................................... 1,148,902 --
Prepaid expenses and other current assets ................... (151,272) 385,059
Other assets ................................................ 101,420 (401,316)
Accounts payable, trade ..................................... 198,742 956,733
Employee related accrued expenses ........................... 841,233 (377,657)
Other accrued expenses ...................................... (789,443) (44,618)
Income taxes payable ........................................ 382,287 (231,146)
Deferred revenue ............................................ 110,248 (63,642)
------------ -----------
Net cash provided by operating activities ................. 8,983,779 2,602,549
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Colonial Claims, net of cash acquired ............ 1,092 --
Repayment of acquisition debt ................................... (500,000) --
Payment of dividend to prior Colonial Claims shareholders ....... (670,000) --
Purchases of property and equipment ............................. (1,346,862) (2,670,729)
------------ -----------
Net cash used in investing activities ..................... (2,515,770) (2,670,729)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from initial public offering .............. 19,163,897 --
Net borrowings under line of credit ............................. 6,668,322 680,230
Repayment of debt ............................................... (9,526,102) (276,580)
Repayment of affiliated notes and interest payable .............. (14,708,420) --
Collection of affiliated note and interest receivable ........... 5,271,406 --
Net repayments to affiliates .................................... (4,995,466) (566,086)
------------ -----------
Net cash provided by (used in) financing activities ...... 1,873,637 (162,436)
------------ -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ...................................................... 8,341,646 (230,616)
CASH AND CASH EQUIVALENTS, beginning of period ..................... 1,868,867 4,702,861
------------ -----------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 10,210,513 $ 4,472,245
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for interest ........................................... $ 940,922 $ 32,349
============ ===========
Cash paid for income taxes ....................................... $ -- $ 325,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of net assets of Colonial Claims:
Total consideration consists of:
Common Stock.......................................... $ 1,700,000
Common Stock payable.................................. 300,000
Cash.................................................. 500,000
Short term obligation................................. 500,000
------------
$ 3,000,000
============
Fair value of assets acquired......................... $ 1,846,555
Liabilities assumed................................... 1,478,306
------------
Net assets............................................ 368,249
Goodwill.............................................. 2,631,751
------------
$ 3,000,000
============
</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 30, 2000.
The results of operations for the three months and six months ended June 30,
2000 are not necessarily indicative of the results that should be expected for a
full fiscal year.
Net Income (Loss) Per Common Share
Net income (loss) per common share, which represents both basic and
diluted earnings per share ("EPS"), is computed by dividing net income (loss) by
the weighted average common shares outstanding. The following table reconciles
the numerator and denominator of the basic and dilutive EPS computation:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1999 2000 1999 2000
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) ................................... $ 1,848,448 $ 23,725 $ 3,166,991 $ (196,775)
=========== =========== =========== ============
Denominator:
Weighted average number of Common Shares
used in basic EPS ................................ 12,678,743 12,800,261 12,213,801 12,787,575
Diluted stock options ............................... -- -- -- --
----------- ----------- ----------- ------------
Weighted average number of Common Shares
and diluted potential Common Shares used
in diluted EPS ................................... 12,678,743 12,800,261 12,213,801 12,787,575
=========== =========== =========== ============
</TABLE>
For the six months ended June 30, 1999 and 2000, options to purchase
719,000 and 852,750 shares, respectively, of Common Stock were outstanding
during the periods but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the Common Stock, and therefore, the effect would be
antidilutive.
Reclassifications
Certain prior year balances have been reclassified in order to conform
to the current year's presentation.
5
<PAGE> 8
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 2. CONTINGENCIES
Bankers Insurance Company ("BIC"), a subsidiary of Bankers Insurance
Group ("BIG"), the Company's principal shareholder and customer, and Bankers
Life Insurance Company ("BLIC") and Bankers Security Insurance Company ("BSIC"),
subsidiaries of BIC, have been subject to an investigation by the Florida
Department of Insurance (the "DOI"), the principal regulator of insurance
activities in the State of Florida, stemming from their use of a private
investigator to gather information on a DOI employee and the private
investigator's unauthorized use of illegal wiretaps in connection therewith. On
March 23, 2000, the Treasurer and Insurance Commissioner of the State of
Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC
and BSIC based upon the results of such investigation. The administrative
complaint charges BIC, BLIC and BSIC with violating various provisions of the
Florida Insurance Code including, among other things, a provision requiring
insurance companies to have management, officers or directors that are, among
other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC
that the Insurance Commissioner intends to impose such penalties or take such
other administrative actions as may be proper or appropriate under applicable
law, including possibly entering an order suspending or revoking the
certificates of authority of BIC, BLIC and BSIC to conduct business as insurance
companies in the State of Florida.
BIC, BLIC and BSIC have informed the Company that they intend to
vigorously defend against such action, but no assurances can be given as to the
outcome thereof. In the event the DOI were to enter an order suspending or
revoking the certificates of authority of BIC, BLIC and BSIC to conduct business
as insurance companies in the State of Florida, or impose other significant
penalties on any of them, it would materially adversely affect the business
and/or operations of BIG and, in turn, could result in the loss of or material
decrease in the Company's business from BIG, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
On November 19, 1999, the United States, on behalf of the Federal
Emergency Management Association ("FEMA"), filed a civil action against BIC in
the U.S. District Court for the District of Maryland stemming from FEMA's
investigation of certain cash management and claims processing practices of BIC
in connection with its participation in the National Flood Insurance Program
("NFIP"). The complaint alleges, among other things, that BIC knowingly failed
to report and pay interest income it had earned on NFIP funds to the United
States in violation of the False Claims Act. The complaint further alleges
various common law theories, including fraud, breach of contract, unjust
enrichment and negligent misrepresentation. The complaint seeks civil penalties
of $1.08 million and actual damages of approximately $1.1 million as well as
treble, punitive and consequential damages, costs and interest. The suit is
currently administratively closed pending an appeal on the preliminary issue of
whether the controversy is subject to arbitration. BIC has informed the Company
that it intends to vigorously defend against the action, but no assurances can
be given as to the outcome thereof. However, BIG and its legal counsel have
advised the Company that an adverse judgment in this action would not have a
material adverse affect on the business and/or operations of BIC, although no
assurances can be given in this regard.
FEMA's investigation of certain claims processing practices of BIC in
connection with its participation in the NFIP is continuing, and BIC has
produced documentation in connection therewith. If the parties are unable to
reach agreement in these matters, the United States could amend its complaint
against BIC to add additional claims under the False Claims Act and/or various
common law and equitable theories relating to such matters. In the event such
continuing investigation or any consequence thereof materially adversely affects
the business or operations of BIC, it could result in the loss of or material
decrease in the Company's business from BIC, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
During 1999, BIG, together with certain of its affiliates, including
the Company, was subject to a wage and hour audit conducted by the Department of
Labor ("DOL"). The DOL audit, which was completed in June, 2000, resulted in the
Company owing approximately $90,000 for the payment of overtime wages owed to
certain employees who were previously misclassified as salaried associates. Such
expense is included in "Cost of outsourcing services" in the accompanying
consolidated statements of operations for the three months and six months ended
June 30, 2000.
6
<PAGE> 9
The Company is involved in various legal actions arising in the
ordinary course of business. Management believes that the ultimate resolution of
these actions will not have a material adverse effect on the Company's financial
position, results of operations, or liquidity, although no assurances can be
given in this regard.
7
<PAGE> 10
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. SEGMENT INFORMATION
The following table presents summarized financial information for the
Company's reportable segments:
<TABLE>
<CAPTION>
INTERCOMPANY
OUTSOURCING FLOOD ZONE ELIMINATIONS CONSOLIDATED
SERVICES DETERMINATIONS AND OTHER TOTALS
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999 -
(UNAUDITED)
Operating revenues - affiliated .. $ 13,070,948 $ 112,272 $ (126,522) $ 13,056,698
Operating revenues - unaffiliated 1,016,699 4,404,611 -- 5,421,310
Operating income ................. 2,375,694 758,554 -- 3,134,248
Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538
Total liabilities ................ 17,007,162 14,292,685 (17,920,360) 13,379,487
THREE MONTHS ENDED JUNE 30, 2000 -
(UNAUDITED)
Operating revenues - affiliated .. $ 10,031,073 $ 242,636 $ (255,136) $ 10,018,573
Operating revenues - unaffiliated 1,535,680 4,441,124 -- 5,976,804
Operating income (loss) .......... (942,500) 1,073,608 -- 131,108
Identifiable assets .............. 32,376,463 25,577,752 (17,879,596) 40,074,619
Total liabilities ................ 19,039,060 5,836,810 (17,879,596) 6,996,274
SIX MONTHS ENDED JUNE 30, 1999 -
(UNAUDITED)
Operating revenues - affiliated .. $ 22,953,095 $ 194,055 $ (222,555) $ 22,924,595
Operating revenues - unaffiliated 4,046,194 9,612,538 -- 13,658,732
Operating income ................. 3,486,993 2,118,866 -- 5,605,859
Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538
Total liabilities ................ 17,007,162 14,292,685 (17,920,360) 13,379,487
SIX MONTHS ENDED JUNE 30, 2000 -
(UNAUDITED)
Operating revenues - affiliated .. $ 19,478,889 $ 472,639 $ (497,639) $ 19,453,889
Operating revenues - unaffiliated 3,064,994 8,164,053 -- 11,229,047
Operating income (loss) .......... (1,757,424) 1,578,503 -- (178,921)
Identifiable assets .............. 32,376,463 25,577,752 (17,879,596) 40,074,619
Total liabilities ................ 19,039,060 5,836,810 (17,879,596) 6,996,274
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES
Outsourcing services .................... 75.6% 70.7% 73.2% 71.9%
Flood zone determination services ....... 24.4 29.3 26.8 28.1
----- ----- ----- -----
Total revenues ...................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
EXPENSES
Cost of outsourcing services ............ 46.4 56.8 48.6 57.8
Cost of flood zone determination services 11.4 12.5 11.8 12.6
Selling, general and administrative ..... 14.5 17.9 13.5 18.0
Management services from Parent ......... 3.2 3.0 3.3 3.2
Depreciation and amortization ........... 7.6 9.0 7.5 9.0
----- ----- ----- -----
Total expenses ...................... 83.1 99.2 84.7 100.6
----- ----- ----- -----
Operating income (loss) ................... 16.9 0.8 15.3 (0.6)
Interest income ........................... 0.5 0.4 0.6 0.4
Interest expense .......................... (0.8) (0.2) (1.3) (0.1)
----- ----- ----- -----
Income (loss) before provision
for income taxes ......................... 16.6 1.0 14.6 (0.3)
Provision for income taxes ................ 6.6 0.9 5.9 0.3
----- ----- ----- -----
Net income (loss) ......................... 10.0% 0.1% 8.7% (0.6)%
===== ===== ===== =====
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000
Outsourcing Services Revenues. Outsourcing services revenues decreased
$2.6 million, or 19.0%, to $11.3 million for the three months ended June 30,
2000 from $14.0 million for the corresponding period in 1999. The decrease was
primarily attributable to revenue generated during the second quarter of 1999
under an affiliated technical support services arrangement. No revenue was
generated under this arrangement during the corresponding period in 2000.
Additionally, effective April 1, 1999, the Company amended its existing service
agreements with affiliated insurers to provide for minimum aggregate quarterly
service fee payments through December 31, 1999 with respect to certain lines of
business. The minimum service fee arrangement was established to compensate the
Company for maintaining an infrastructure to process certain lines of business
of affiliated insurers that have not grown as rapidly as originally forecasted.
If such minimum service fee requirements with respect to said lines of business
under the agreements had not been implemented as of April 1, 1999, aggregate
affiliated outsourcing services revenues, which totaled $12.9 million for the
three months ended June 30, 1999, would have been $11.1 million in accordance
with the terms of the affiliated service agreements as in effect prior April 1,
1999. The amended agreement requiring such minimums expired in December, 1999
and was not subsequently renewed. Additionally, a decline in the volume of auto
premium processed on behalf of the Company's affiliated customers contributed to
the decrease in outsourcing services revenues during the second quarter of 2000.
Partially offsetting these decreases was an increase in outsourcing services
revenue generated from flood premium processed on behalf of the Company's
affiliated and unaffiliated customers as well as auto claims processed on behalf
of the Company's unaffiliated customers.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues increased $167,000, or 3.7%, to $4.68 million for the three
months ended June 30, 2000 from $4.52 million for the corresponding period in
1999. The increase was primarily attributable to flood zone determination
services revenues generated from new customers, partially offset by a continued
decline in mortgage refinancings and loan originations, which have historically
driven the demand for flood zone determinations from the Company's existing
customers.
9
<PAGE> 12
Cost of Outsourcing Services. Cost of outsourcing services increased
$514,000, or 6.0%, to $9.1 million for the three months ended June 30, 2000 from
$8.6 million for the corresponding period in 1999. As a percentage of
outsourcing services revenues, cost of outsourcing services increased to 80.2%
for the three months ended June 30, 2000 from 61.3% for the corresponding period
in 1999 primarily as a result of a decrease in dollar amount of outsourcing
services revenues and an increase in the cost of outsourcing services during
three months ended June 30, 2000 from the corresponding period in 1999. The
increase in the dollar amount of cost of outsourcing services was primarily due
to staff additions and the use of contract programmers to develop and staff new
unaffiliated programs as well as an increase in facilities costs due to the
occupancy of the Company's new operating and call center facility, partially
offset by a decrease in revenue from the Company's claims catastrophe
subsidiary, of which approximately 70.0% of each dollar of revenue is paid to
its independent adjusters who adjust the claims on the Company's behalf.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services decreased $110,000, or 5.2%, to $2.0 million for the
three months ended June 30, 2000 from $2.1 million for the corresponding period
in 1999. As a percentage of flood zone determination services revenues, cost of
flood zone determination services decreased to 42.8% for the three months ended
June 30, 2000 from 46.8% for the corresponding period in 1999 primarily as a
result of a decrease in the dollar amount of cost of flood zone determination
services during the three months ended June 30, 2000 from the corresponding
period in 1999. The decrease in the dollar amount of cost of flood zone
determination services resulted primarily from a redesign of various production
workflows during 1999 that enabled the Company to increase employee productivity
and reduce operating expenses, primarily personnel related costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $187,000, or 7.0%, to $2.86 million for the
three months ended June 30, 2000 from $2.68 million for the corresponding period
in 1999. The increase in selling, general and administrative expenses was
primarily attributable to the continued assumption of certain administrative
services, including human resources, agency accounting, cash management and
legal, that were previously provided to the Company under the management service
agreement with BIG. Also contributing to the increase was an estimated
lease-break charge for the closure of a satellite office.
Management Services from Parent. Management services from Parent
decreased $117,000, or 19.8%, to $476,000 for the three months ended June 30,
2000 from $593,000 for the corresponding period in 1999. The decrease was
primarily related to the continued assumption of certain administrative
services, including human resources, agency accounting, cash management and
legal services, that were previously provided to the Company under the
management service agreement with BIG.
Interest Expense. Interest expense decreased $115,000, or 82.2%, to
$25,000 for the three months ended June 30, 2000 from $140,000 for the
corresponding period in 1999. The decrease was primarily related to the early
repayment of most of the Company's debt obligations from the net proceeds
received by the Company from its initial public offering in February, 1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Outsourcing Services Revenues. Outsourcing services revenues decreased
$4.7 million, or 17.7%, to $22.0 million for the six months ended June 30, 2000
from $26.8 million for the corresponding period in 1999. The decrease was
primarily attributable to revenue generated during the second quarter of 1999
under an affiliated technical support services arrangement. No revenue was
generated under this arrangement during the corresponding period in 2000.
Additionally, effective April 1, 1999, the Company amended its existing service
agreements with affiliated insurers to provide for minimum aggregate quarterly
service fee payments through December 31, 1999 with respect to certain lines of
business. The minimum service fee arrangement was established to compensate the
Company for maintaining an infrastructure to process certain lines of business
of affiliated insurers that have not grown as rapidly as originally forecasted.
If such minimum service fee requirements with respect to said lines of business
under the agreements had not been implemented as of April 1, 1999, aggregate
affiliated outsourcing services revenues, which totaled $22.7 million for the
six months ended June 30, 1999, would have been $20.9 million in accordance with
the terms of the affiliated service agreements as in effect prior to April 1,
1999. The amended agreement requiring such minimums expired in December, 1999
and was not subsequently renewed. The decrease was also due to a decrease in the
volume of flood and wind damage claims administered by the Company's outsourcing
operations during the first six months of 2000 as compared to the same period in
1999. During the first six months of 1999, the Company recognized revenues
totaling approximately $3.3 million from the administration of property damage
claims resulting from Hurricane Georges, which storm occurred in September 1998.
In comparison, the Company recognized revenues of approximately $1.1 million
during the first six months of 2000 from the administration of property damage
claims
10
<PAGE> 13
resulting from Hurricanes Floyd and Irene, which storms occurred during the
fourth quarter of 1999. Additionally, a decline in the volume of auto premium
processed on behalf of the Company's affiliated customers contributed to the
decrease in outsourcing services revenues during the first six months of 2000.
Partially offsetting these decreases was an increase in outsourcing services
revenues generated from flood premium and auto claims processed on behalf of the
Company's unaffiliated customers.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues decreased $1.2 million, or 11.9%, to $8.6 million for the six
months ended June 30, 2000 from $9.8 million for the corresponding period in
1999. The decrease was primarily attributable to the termination of the
Company's "life-of-loan" insurance policy, effective April 1, 1999, in which,
prior to the termination of the policy, the Company was compensated for
performing flood zone re-determinations for certain existing customers. Prior to
the termination of the life-of-loan policy, the Company paid an insurance
premium for every flood zone determination issued which required life-of-loan
tracking. In exchange for the premium, the Company received a fixed amount for
every flood zone determination that had to be reissued as a result of a change
in the underlying flood zone classification of a property. Also contributing to
the decrease in flood zone determination services revenues during the first six
months of 2000 as compared to same period in 1999 was a continued decline in
mortgage refinancings and loan originations, which have historically driven the
demand for flood zone determinations from the Company's existing customers. This
decrease was partially offset by flood zone determination services revenues
generated from new customers.
Cost of Outsourcing Services. Cost of outsourcing services decreased
$21,000, or 0.1%, to $17.76 million for the six months ended June 30, 2000 from
$17.77 million for the corresponding period in 1999. As a percentage of
outsourcing services revenues, however, cost of outsourcing services increased
to 80.5% for the six months ended June 30, 2000 from 66.4% for the corresponding
period in 1999 primarily as a result of a decrease in dollar amount of
outsourcing services revenues during the six months ended June 30, 2000 from the
corresponding period in 1999. The decrease in the dollar amount of cost of
outsourcing services was primarily attributable to a decrease in revenue from
the Company's claims catastrophe subsidiary, of which approximately 70.0% of
each dollar of revenue is paid to its independent adjusters who adjust the
claims on the Company's behalf. Partially offsetting the decrease in the dollar
amount of expenses from the Company's claims catastrophe subsidiary was an
increase in costs from the Company's outsourcing subsidiary as a result of
increases in personnel costs due to staff additions and the use of contract
programmers to develop and staff new unaffiliated programs as well as an
increase in facilities costs due to the occupancy of the Company's new operating
and call center facility.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services decreased $464,000, or 10.7%, to $3.9 million for the six
months ended June 30, 2000 from $4.3 million for the corresponding period in
1999. As a percentage of flood zone determination services revenues, however,
cost of flood zone determination services increased to 44.7% for the six months
ended June 30, 2000 from 44.1% for the corresponding period in 1999 primarily as
a result of a decrease in the dollar amount of flood zone determination services
revenue during the six months ended June 30, 2000 from the corresponding period
in 1999. The decrease in the dollar amount of cost of flood zone determination
services resulted primarily from a redesign of various production workflows
during 1999 that enabled the Company to increase employee productivity and
reduce operating expenses, primarily personnel-related costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $568,000, or 11.5%, to $5.5 million for the
six months ended June 30, 2000 from $4.9 million for the corresponding period in
1999. The increase in selling, general and administrative expenses was primarily
attributable to the continued assumption of certain administrative services,
including human resources, agency accounting, cash management and legal
services, that were previously provided to the Company under a management
service agreement with BIG. Also contributing to the increase were severance
costs relating to the resignation of an officer during the first quarter of
2000, as well as a lease-break charge for the closure of a satellite office.
Management Services from Parent. Management services from Parent
decreased $219,000, or 18.3%, to $979,000 for the six months ended June 30, 2000
from $1.2 million for the corresponding period in 1999. The decrease was
primarily related to the continued assumption of certain administrative
services, including human resources, agency accounting, cash management and
legal services, that were previously provided to the Company under the
management service agreement with BIG.
Interest Expense. Interest expense decreased $438,000, or 91.2%, to
$42,000 for the six months ended June 30, 2000 from $481,000 for the
corresponding period in 1999. The decrease was primarily related to the early
repayment of most of the Company's debt obligations from the net proceeds
received by the Company from its initial public offering in February, 1999.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company's principal sources of liquidity
consisted of cash on-hand, cash flows from operations and available borrowings
under the Company's revolving credit facility.
In February, 1999, the Company completed an initial public offering of
3,350,000 shares of Common Stock at a price of $11 per share. Of the 3,350,000
shares sold, 1,350,000 were sold by Venture Capital Corporation (the "Selling
Shareholder"), a Cayman Islands company. The offering generated net proceeds
("Offering Proceeds") to the Company of approximately $19.2 million after
deducting offering expenses paid by the Company of approximately $1.3 million.
The Offering Proceeds, together with funds received from BIG from proceeds made
available to BIG by a subsidiary of the Selling Shareholder, were used during
1999 to repay all obligations with BIG and its affiliates and to repay most of
the Company's third-party debt obligations.
In June, 1999, the Company entered into a revolving line of credit
agreement ("LOC") with a financial institution that provides for borrowings of
up to two times the rolling four quarter earnings before interest, taxes,
depreciation and amortization ("EBITDA"), but in no event more than $12,000,000.
The LOC bears interest at a specified percentage over LIBOR (8.41% at June 30,
2000) based on the ratio of funded debt (as defined) to EBITDA. Interest
payments are payable monthly and the remaining unpaid principal balance is due
in full in July, 2001. The LOC is collateralized by substantially all of the
Company's assets and is subject to certain quarterly financial covenants
requiring the Company to maintain the following minimum ratios: (i) interest
bearing debt to EBITDA of not more than 2.0 to 1.0; (ii) total liabilities to
tangible net worth of not more than 1.0 to 1.0; and (iii) fixed charge coverage
(as defined) of not less than 2.5 to 1.0. As of June 30, 2000, the outstanding
balance and available line of credit under the agreement totaled $680,230 and
$11,319,770, respectively.
The Company believes that cash on-hand, cash flows from operations and
available borrowings under the Company's LOC facility will be sufficient to
satisfy currently anticipated working capital and capital expenditure
requirements for the next twelve months. Unanticipated rapid expansion, business
or systems development, or potential acquisitions may cause the Company to
require additional funds. The Company identifies and assesses, in the normal
course of business, potential acquisitions of technologies or businesses which
it believes to strategically fit its business plan. The Company may enter into
such transactions should opportunities present themselves in the future.
YEAR 2000 COMPLIANCE
During the first six months of 2000, the Company continued its
remediation program related to a universal situation commonly referred to as the
"Year 2000 Problem." The Year 2000 Problem relates to the inability of certain
computer software programs to properly recognize and process date-sensitive
information relative to the Year 2000 and beyond, and the inability of
non-information technology systems to function properly when the Year 2000
arrives. As of the date of this report, the Company has not experienced any
significant problems related to the Year 2000 Problem. Additionally, the Company
has not become aware of any significant Year 2000 issues affecting the Company's
major customers or suppliers, nor has it received any material complaints
regarding Year 2000 Problems related to its services. The Company does not
anticipate any remaining costs to address additional Year 2000 Problems to be
significant, although no assurances can be given in this regard.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to market risk associated with other financial instruments (such as
variable rate debt) are not material.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the disclosure set forth under
the caption "Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2000 Annual Meeting of Shareholders held on June 1,
2000, one matter was submitted to a vote of shareholders. Robert M. Menke,
William D. Hussey and E. Ray Solomon were elected as Directors of the Company
for three-year terms expiring in 2003 and David M. Howard was elected as a
Director of the Company for a one-year term expiring in 2001. The following
table sets forth certain information with respect to the election of directors
at the 2000 Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
Shares
Name of Nominee Shares Voted For Withholding
--------------- ---------------- Authority
-----------
<S> <C> <C>
Robert M. Menke 11,511,351 26,660
William D. Hussey 11,510,351 27,660
E. Ray Solomon, Ph.D., CLU 11,509,301 28,710
David M. Howard 11,521,651 16,360
</TABLE>
The following table sets forth the other Directors of the Company whose
terms of office continued after the 2000 Annual Meeting of Shareholders:
Name of Director Term Expires
---------------- ------------
Robert G. Menke 2001
Alejandro M. Sanchez 2001
David K. Meehan 2002
Daniel J. White 2002
John A. Grant, Jr. 2002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT NO. DESCRIPTION
---------- -----------
10.1 Insurance Administration Services Agreement,
effective as of May 3, 2000, by and between
Insurance Management Solutions, Inc. and Reliance
Insurance Company
10.2 Insurance Administration Services Agreement,
effective as of June 30, 2000, by and between
Insurance Management Solutions, Inc. and Instant
Insurance Holdings, Inc.
10.3 Development Services Agreement, effective as of June
30, 2000, by and between Insurance Management
Solutions, Inc. and Instant Insurance Holdings, Inc.
10.4 Insurance Administration Services Agreement,
effective as of June 22, 2000, by and between
Insurance Management Solutions, Inc. and Instant
Insurance Holdings, Inc.
27.1 Financial Data Schedule (for SEC use only)
a) Reports on Form 8-K
None
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 INSURANCE MANAGEMENT SOLUTIONS
GROUP, INC.
(Registrant)
By: /s/ DAVID M. HOWARD
------------------------------------
David M. Howard President and
Chief Executive Officer
(Principal Executive Officer)
By: /s/ CHRISTOPHER P. BREAKIRON
------------------------------------
Christopher P. Breakiron
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial and Accounting
Officer)
14
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 - Insurance Administration Services Agreement, effective as of May
3, 2000, by and between Insurance Management Solutions, Inc. and
Reliance Insurance Company
10.2 - Insurance Administration Services Agreement, effective as of
June 30, 2000, by and between Insurance Management Solutions, Inc.
and Instant Insurance Holding, Inc.
10.3 - Development Services Agreement, effective as of June 30, 2000,
by and between Insurance Management Solutions, Inc. and Instant
Insurance Holding, Inc.
10.4 - Insurance Administration Services Agreement, effective as of
June 22, 2000, by and between Insurance Management Solutions, Inc.
and Instant Insurance Holding, Inc.
27.1 - Financial Data Schedule (for SEC use only)
15
