Insurance Management Solutions (INMG) 10-Q 2001 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2001
	or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to _______________

Commission File Number: 000-25273

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)

Florida	59-3422536
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 September 30, 2001: 12,800,261

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

Form 10-Q Quarterly Report

TABLE OF CONTENTS

			Page Number
PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements	1
		Consolidated Balance Sheets as of December 31, 2000 and September 30, 2001	1
		Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and 2001	2
		Consolidated Statement of Shareholders’ Equity for the year ended December 31, 2000 and the nine months ended September 30, 2001	3
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 2001	4
		Notes to Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	15
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	16
	Item 5.	Other Information	16
	Item 6.	Exhibits and Reports on Form 8-K	19

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 ability of the Company to meet anticipated working capital and capital expenditure requirements; (ii) the ability of the Company to consummate the pending sale of its Geotrac of America, Inc. subsidiary; (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 financial condition of the Company’s clients; (vii) the ability of the Company to control costs; (viii) the declaration and payment of dividends; (ix) the impact of general economic conditions and interest rate fluctuations on the demand for the Company’s services, including flood zone determination services; (x) the outcome of certain litigation and administrative proceedings involving the Company’s principal customer; (xi) changes in existing service agreements and arrangements; (xii) the ability to obtain new customers and retain existing customers; (xiii) the ability to obtain third-party information technology outsourcing services on a timely basis and at reasonable costs; and (xiv) the ability to achieve expected expense reductions as a result of management initiatives. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. All forward-looking statements included in this document are based on information available to the Company on the date hereof and the Company assumes no obligation to update any such forward-looking statement. Among the factors that could cause actual results to differ materially are the factors detailed in Item 2 of this Report and the risks discussed under the caption “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities Exchange Commission on April 17, 2001. Prospective investors should also consult the risks described from time to time in the Company’s Reports on Form 10-Q, 8-K and 10-K and Annual Reports to Shareholders.

ii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

					December 31,		September 30,
					2000		2001
							(unaudited)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents				$	5,192,161	$	8,419,601
	Accounts receivable, net					3,789,288		4,082,479
	Due from affiliates					2,615,699		9,907,036
	Prepaid expenses and other assets					1,573,037		1,301,796
		Total current assets			$	13,170,185	$	23,710,912
PROPERTY AND EQUIPMENT, net						9,116,552		10,373,045
OTHER ASSETS
	Goodwill, net					15,352,001		14,672,754
	Customer contracts, net					916,667		766,667
	Deferred tax assets					682,081		629,617
	Capitalized software costs, net					1,044,846		700,715
	Other					483,216		129,448
			Total assets		$	40,765,548	$	50,983,158
				LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
	Current portion of long-term debt				$	219,857	$	79,562
	Accounts payable, trade					2,370,825		1,864,617
	Due to affiliates					—		306,602
	Employee related accrued expenses					1,693,823		2,374,307
	Other accrued expenses					2,008,201		3,125,520
	Income taxes payable					557,676		3,518,852
			Total current liabilities		$	6,850,382	$	11,269,460
LONG-TERM DEBT, LESS CURRENT PORTION						—		161,584
DEFERRED REVENUE						802,578		883,541
SHAREHOLDERS’ EQUITY
	Preferred Stock, $.01 par value; 20,000,000 shares authorized, no shares issued and outstanding					—		—
	Common Stock, $.01 par value; 100,000,000 shares authorized, 12,800,261 shares issued and outstanding at December 31, 2000 and September 30, 2001, respectively					128,002		128,002
	Additional paid-in capital					27,545,901		27,680,901
	Retained earnings					5,438,685		10,859,670
			Total shareholders’ equity		$	33,112,588	$	38,668,573
			Total liabilities and shareholders’ equity		$	40,765,548	$	50,983,158

     The accompanying notes are an integral part of these consolidated statements.

1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2000			2001			2000			2001
			(unaudited)						(unaudited)
REVENUES
	Outsourcing services — affiliated		$	9,677,754		$	9,154,505		$	28,659,004		$	30,332,599
	Outsourcing services			1,744,877			10,385,473			4,809,871			15,322,563
	Flood zone determination services			4,471,168			4,927,464			12,635,221			14,754,430
	Flood zone determination services — affiliated			276,545			339,659			749,184			892,806
		Total revenues	$	16,170,344		$	24,807,101		$	46,853,280		$	61,302,398
EXPENSES
	Cost of outsourcing services			9,072,449			14,304,945			26,826,525			31,273,839
	Cost of flood zone determination services			1,992,061			2,606,756			5,852,919			7,167,451
	Selling, general and administrative			3,916,174			3,265,005			9,431,440			8,808,175
	Management services from Parent			515,870			498,989			1,494,918			1,187,506
	Depreciation and amortization			1,297,120			1,302,114			4,049,729			4,026,733
		Total expenses	$	16,793,674		$	21,977,809		$	47,655,531		$	52,463,704
OPERATING INCOME/(LOSS)				($623,330	)	$	2,829,292			($802,251	)	$	8,838,694
OTHER INCOME/(EXPENSE):
	Interest income			71,091			130,458			201,247			250,492
	Interest expense			(10,421	)		(8,353	)		(52,831	)		(13,599	)
	Other			—			(23,001	)		—			(54,388	)
		Total other income/(expense)	$	60,670		$	99,104		$	148,416		$	182,505
INCOME/(LOSS) BEFORE PROVISION FOR INCOME TAXES				(562,660	)		2,928,396			(653,835	)		9,021,299
PROVISION/(BENEFIT) FOR INCOME TAXES				(6,117	)		1,147,414			99,483			3,600,214
NET INCOME/(LOSS)				($556,543	)	$	1,780,982			($753,318	)	$	5,420,985
NET INCOME/(LOSS) PER COMMON SHARE				($.04	)	$	.14			($.06	)	$	.42
Weighted average common shares outstanding				12,800,261			12,800,261			12,791,835			12,800,261

The accompanying notes are an integral part of these consolidated statements.

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

				Additional
		Common		Paid-In		Retained
		Stock		Capital		Earnings			Total
Balance at January 1, 2000		$	126,787	$	26,810,282	$	5,948,051		$	32,885,120
	Issuance of Common Stock as partial consideration for the acquisition of Colonial Claims		1,215		298,785		—			300,000
	Initial public offering of Common Stock, net of offering costs		—		338,200		—			338,200
	Issuance of stock options to non-employees		—		98,634		—			98,634
	Net income/(loss)		—		—		(509,366	)		(509,366	)
Balance at December 31, 2000		$	128,002	$	27,545,901	$	5,438,685		$	33,112,588
	Compensation expenses related to stock Options issued to non-employees (unaudited)		—		135,000		—			135,000
	Net income/(loss) (unaudited)		—		—		5,420,985			5,420,985
Balance at September 30, 2001 (unaudited)		$	128,002	$	27,680,901	$	10,859,670		$	38,668,573

     The accompanying notes are an integral part of this consolidated statement.

3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

					Nine Months Ended September 30,
					2000			2001
					(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
		Net income/(loss)				($753,318	)	$	5,420,985
		Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
			Depreciation and amortization			4,049,729			4,026,733
			Loss on disposal of property and equipment			177,546			393,494
			Non-employee stock options			135,000			135,000
			Non-cash compensation expense related to phantom stock plan			338,200			—
			Deferred income taxes, net			376,386			52,464
			Changes in assets and liabilities:
				Accounts receivable		518,096			(293,191	)
				Income taxes recoverable		(314,006	)		—
				Prepaid expenses and other current assets		104,425			148,386
				Other assets		(478,992	)		(44,736	)
				Accounts payable, trade		896,425			(506,208	)
				Employee related accrued expenses		225,376			680,484
				Other accrued expenses		738,525			1,117,319
				Income taxes payable		(413,241	)		2,961,176
				Deferred revenue		(185,207	)		80,963
				Net cash provided by operating activities	$	5,414,944		$	14,172,869
CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of property and equipment				(4,081,015	)		(4,451,577	)
		Issuance of note receivable				(500,000	)		(5,049,452	)
		Collection of note receivable				—			469,594
				Net cash used in investing activities		($4,581,015	)		($9,031,435	)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Net borrowings under line of credit				—			—
		Repayment of debt				(392,374	)		21,289
		Net advances to/from affiliates				63,050			(1,935,283	)
				Net cash provided by/(used in) financing activities		($329,324	)		($1,913,994	)
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS						504,605			3,227,440
CASH AND CASH EQUIVALENTS, beginning of period						4,702,861			5,192,161
CASH AND CASH EQUIVALENTS, end of period					$	5,207,466		$	8,419,601
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
	Cash paid for interest				$	50,557		$	13,599
	Cash paid for income taxes				$	450,345		$	586,574

The accompanying notes are an integral part of these consolidated statements.

4

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of Insurance Management Solutions Group, Inc. and subsidiaries (the “Company”) have been prepared in accordance with the instructions to Form 10-Q and do not include all of the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. The accompanying consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on April 17, 2001. The results of operations for the three months and nine months ended September 30, 2001 are not necessarily indicative of the results that should be expected for a full fiscal year.

Net Income/(Loss) Per Common Share

Net income/(loss) per common share, which represents both basic and diluted earnings per share (“EPS”), is computed by dividing net income/(loss) by the weighted average common shares outstanding. The following table reconciles the numerator and denominator of the basic and dilutive EPS computation:

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2000			2001		2000			2001
Numerator:
	Net income/(loss)		($556,543	)	$	1,780,982		($753,318	)	$	5,420,985
Denominator:
	Weighted average number of Common Shares used in basic EPS		12,800,261			12,800,261		12,791,835			12,800,261
	Diluted stock options		—			—		—			—
	Weighted average number of Common Shares and diluted potential Common Shares used in diluted EPS		12,800,261			12,800,261		12,791,835			12,800,261

For the nine months ended September 30, 2000 and 2001, options to purchase 703,000 and 548,500 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.

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141,Business Combinations, and SFAS 142,Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the year beginning January 1, 2002; however certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The Company has not yet analyzed the effect of these new standards; accordingly, the Company is unable at present to state what effect the adoption of these standards will have on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

5

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS

In conjunction with the Company’s acquisition of Geotrac, Inc., it entered into a Corporate Governance Agreement, dated July 31, 1998, with Geotrac of America, Inc. (“Geotrac”) and Daniel J. White (“Mr. White”), Geotrac’s president and majority shareholder of Geotrac, Inc. prior to the acquisition, setting forth certain terms and conditions pertaining to the operation of Geotrac. This agreement contains, among other things, a provision that restricts the Company’s ability to make distributions or transfer funds from Geotrac by means of intercompany loans, advances or dividends without the unanimous approval of Geotrac’s Board of Directors. Mr. White is presently a director of Geotrac. Therefore, pursuant to the Corporate Governance Agreement, Mr. White may impede the Company’s ability to access excess cash balances retained by its Geotrac subsidiary, even if all of the other directors of Geotrac were to approve the distribution thereof to the Company. To date, the Company has been able to access Geotrac’s excess cash when necessary, primarily through the prepayment of outstanding intercompany indebtedness. No assurances can be given, however, that the Company will be able to obtain available cash from Geotrac. If the Company is unable to do so, it ultimately could have a material adverse effect on the Company’s business, financial condition and results of operations.

On April 2, 2001, the Geotrac Board of Directors authorized the payment of dividends to the Company, to be distributed quarterly beginning July 15, 2001 for the next 12 months, based upon Year 2000 earnings of Geotrac. In early August 2001, Geotrac authorized the payment of an additional dividend to the Company in the amount of $200,000. This dividend was paid on August 22, 2001.

As of September 30, 2001, the Company had total consolidated net assets of approximately $38.7 million, of which approximately $22.1 million represented the net assets of Geotrac. As of such date, the tangible net assets of Geotrac consisted primarily of cash of $3.6 million, other current assets of $4.4 million (including $1.7 million due from affiliates) and current liabilities of $4.5 million (including $1.1 million due to affiliates). As a result of the restrictions described in the first paragraph of this note, the Company’s consolidated retained earnings, which totaled $10.9 million as of September 30, 2001, are not completely available for dividend distribution.

With regard to the proposed sale of Geotrac, Inc., see Note 6. “Proposed Sale of Geotrac of America, Inc.” following.

NOTE 3. CONTINGENCIES

On September 28, 2000, October 25, 2000 and October 30, 2000, three alleged shareholders of the Company filed three nearly identical lawsuits in the United States District Court for the Middle District of Florida, each on behalf of a putative class of all persons who purchased shares of the Company’s Common Stock pursuant and/or traceable to the registration statement for the Company’s February 1999 initial public offering (the “IPO”). The lawsuits were consolidated on December 1, 2000, and the consolidated action is proceeding under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs’ Consolidated Amended Class Action Complaint, filed February 7, 2001, names as defendants the following parties: the Company; Bankers Insurance Group, Inc., the Company’s principal shareholder and customer together with its subsidiaries (“BIG”); Venture Capital Corporation, a selling shareholder in the IPO; the five inside directors of the Company at the time of the IPO; and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the underwriters for the IPO. The complaint alleges, among other things, that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by making certain false and misleading statements in the roadshow presentations, registration statement and prospectus relating to the IPO. More specifically, the complaint alleges that, in connection with the IPO, the defendants made various material misrepresentations and/or omissions relating to: (i) the Company’s ability to integrate Geotrac’s flood zone determination business with the Company’s own flood zone determination business and with its insurance outsourcing services business; (ii) actual and anticipated synergies between the Company’s flood zone determination and outsourcing services business lines; and (iii) the Company’s use of the IPO proceeds. The complaint seeks unspecified damages, including interest, and equitable relief, including a rescission remedy. On July 11, 2001, U.S. District Judge Richard A. Lazzara denied all of the defendants’ motions to dismiss the Amended Complaint.

6

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The defendants’ answers to the Amended Complaint currently were filed in late August 2001. Written discovery has commenced and, later this year, various pre-trial deadlines and a trial date likely will be set. Management of the Company believes the material allegations of the Amended Complaint are without merit and intends to vigorously defend the lawsuit. No assurances can be given, however, with respect to the outcome of the litigation, and an adverse result could have a material adverse effect on the Company’s business, financial condition and results of operations.

Bankers Insurance Company (“BIC”), a subsidiary of BIG, and Bankers Life Insurance Company (“BLIC”) and Bankers Security Insurance Company (“BSIC”), subsidiaries of BIC, have been subject to an investigation by the Florida Department of Insurance (the “DOI”), the principal regulator of insurance activities in the State of Florida, stemming from their use of a private investigator to gather information on a DOI employee and the private investigator’s unauthorized use of illegal wiretaps in connection therewith. On March 23, 2000, the Treasurer and Insurance Commissioner of the State of Florida, as head of the DOI, filed an administrative complaint against BIC, BLIC and BSIC based upon the results of such investigation. The administrative complaint charges BIC, BLIC and BSIC with violating various provisions of the Florida Insurance Code including, among other things, a provision requiring insurance companies to have management, officers or directors that are, among other things, trustworthy. The complaint further notifies BIC, BLIC and BSIC that the Insurance Commissioner intends to impose such penalties or take such other administrative actions as may be proper or appropriate under applicable law, including possibly entering an order suspending or revoking the certificates of authority of BIC, BLIC and BSIC to conduct business as insurance companies in the State of Florida.

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.

7

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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.

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.

NOTE 4. SEGMENT INFORMATION

The following table presents summarized financial information for the Company’s reportable segments:

						Intercompany
	Outsourcing			Flood Zone		Eliminations			Consolidated
	Services			Determinations		and Other			Totals
Three months ended September 30, 2000 - (unaudited)
Operating revenues — affiliated	$	9,959,049		$	276,545		($281,295	)	$	9,954,299
Operating revenues — unaffiliated	$	1,744,877		$	4,471,168		—		$	6,216,045
Operating income/(loss)		($1,791,038	)	$	1,167,708		—			($623,330	)
Identifiable assets	$	29,606,136		$	26,926,790		($16,427,631	)	$	40,105,295
Three months ended September 30, 2001 - (unaudited)
Operating revenues — affiliated	$	9,491,564		$	339,659		($337,059	)	$	9,494,164
Operating revenues — unaffiliated	$	10,385,473		$	4,927,464		—		$	15,312,937
Operating income/(loss)	$	2,020,067		$	809,225		—		$	2,829,292
Identifiable assets	$	39,147,649		$	27,437,480		($15,601,971	)	$	50,983,158
Nine months ended September 30, 2000 - - (unaudited)
Operating revenues — affiliated	$	29,437,938		$	749,184		($778,934	)	$	29,408,188
Operating revenues — unaffiliated	$	4,809,871		$	12,635,221		—		$	17,445,092
Operating income/(loss)		($3,548,462	)	$	2,746,211		—			($802,251	)
Identifiable assets	$	29,606,136		$	26,926,790		($16,427,631	)	$	40,105,295
Nine months ended September 30, 2001 - - (unaudited)
Operating revenues — affiliated	$	31,225,405		$	892,806		($892,806	)	$	31,225,405
Operating revenues — unaffiliated	$	15,322,563		$	14,754,430		—		$	30,076,993
Operating income/(loss)	$	5,682,391		$	3,156,303		—		$	8,838,694
Identifiable assets	$	39,147,649		$	27,437,480		($15,601,971	)	$	50,983,158

8

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5. RELATED PARTY TRANSACTIONS

Secured Line of Credit with BIG

On August 14, 2001, the Company entered into a Credit and Security Agreement with BIG (together with the related loan documentation, the “Credit Agreement”), pursuant to which the Company established a short-term, secured line of credit in favor of BIG in the amount of up to $5.0 million (the “Line of Credit”). As of the date of this Report, the aggregate principal amount outstanding under the Line of Credit is $5.0 million. The principal purpose of the Line of Credit is to assist BIG, the Company’s principal customer and shareholder, with certain short-term working capital needs.

Pursuant to the Credit Agreement, interest is payable monthly on amounts outstanding under the Line of Credit at an annual rate equal to the Prime Rate (as defined in the Credit Agreement”), plus 1.5%. The Credit Agreement further provides that the Line of Credit will expire on February 28, 2002, unless repaid in full prior to such time or otherwise terminated pursuant to the terms of the Credit Agreement.

The Line of Credit is secured by (i) a first lien security interest in all accounts and contract rights of Bankers Underwriters, Inc., a wholly-owned subsidiary of BIG (“BUI”), with insurance agents (including but not limited to general agents with respect to the sale of federal flood insurance) (collectively, the “Flood Book”), and (ii) an option (the “Option”) to purchase from BIG the outstanding capital stock, consisting of 10,898 shares (the “Option Shares”) of common stock, $318 par value per share, of First Community Insurance Company, a New York insurance company licensed in all fifty states (“FCIC”). BUI currently is a Florida general insurance agent for FCIC and BIC, a Florida insurance company licensed in approximately 30 states and a wholly-owned subsidiary of BIG. As of the date of this Report, management of the Company believes the fair market value of the Flood Book exceeds the aggregate principal amount of the Line of Credit.

With respect to the Option, the aggregate exercise price for the Option Shares is $108,980, or $10.00 per Option Share. The Option Shares are subject to certain outstanding liens relating to certain indebtedness of BIG having an aggregate outstanding balance, as of September 30, 2001, totaling approximately $11.5 million. The Option will become exercisable only at such time as (i) there shall be a default in the payment of any amounts due under the Credit Agreement for more than ten days after the date when they shall become due or (ii) there shall be any other default under the Credit Agreement if, after notice thereof, such default has not been cured within thirty days of such notice. In addition, any acquisition of the Option Shares by the Company pursuant to the Option would require the prior approval of the New York Department of Insurance. In the event the Option were to be exercised, no assurances can be given that such approval could be obtained.

The foregoing description of the Line of Credit is qualified in its entirety by reference to the Credit and Security Agreement, dated August 14, 2001, including the related Master Promissory Note, Collateral Assignment of Flood Book and Stock Option Agreement, filed as Exhibits 10.1–10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

NOTE 6. PROPOSED SALE OF GEOTRAC OF AMERICA, INC.

On September 20, 2001 the Company entered into an agreement (the “Stock Purchase Agreement”) with certain other parties to dispose of the stock of the Company’s wholly-owned subsidiary, Geotrac of America, Inc. (“Geotrac”). The parties to the Stock Purchase Agreement are the Company, Geotrac, Geotrac Holdings, Inc. (“Geotrac”), Daniel J. White, the Daniel J. White Trust, the Sandra A. White Trust, and, solely for purposes of a non-competition covenant, Bankers Insurance Group, Inc. (“BIG”). Mr. White is currently a director of the Company and the President, Chief Executive Officer and a director of Geotrac. BIG is the Company’s majority shareholder and principal customer.

The Stock Purchase Agreement contemplates that all issued and outstanding capital stock of Geotrac (the “Shares”) will be purchased by Geotrac Holdings, Inc., a Delaware corporation formed by Daniel J. White, for purposes of the acquisition of such stock. The purchase price payable for the Shares is to be $19,000,000 in cash plus 524,198 shares of the outstanding Common Stock, $.01 par value, of the Company (“Company Common Stock”). The Stock Purchase Agreement also contemplates that certain of the parties will enter into additional agreements as of the closing of the transactions contemplated by the Stock Purchase Agreement, including a ten-year agreement for the provision of certain ongoing flood zone determination services at favorable pricing. The favorable long-term Flood Zone Determination Service Agreement with Geotrac was valued at approximately $2,189,000 by management of the Company and supported by an independent third-party investment banking firm’s valuation.

The transactions contemplated by the Stock Purchase Agreement are anticipated to close not later than January 31, 2002. However, the transactions contemplated by the Stock Purchase Agreement will not be consummated unless certain conditions are either satisfied or waived prior to closing. These conditions include, among other things, that the shareholders of the Company approve the Stock Purchase Agreement and the transactions contemplated thereby in accordance with Florida law. Although BIG (including its wholly-owned subsidiaries) owns sufficient shares of the outstanding Company Common Stock to approve or disapprove the Stock Purchase Agreement, BIG has informed the Company that it intends to vote its shares with respect to the transaction in the same manner as the holders of a majority of the outstanding shares of Company Common Stock held by persons other than BIG and its affiliates.

In addition, in order to consummate the transactions contemplated by the Stock Purchase Agreement, Geotrac Holdings will need to obtain substantial financing from third-party sources. As of the date hereof, Geotrac Holdings has received non-binding financing commitments totaling $17,000,000; however, no assurances can be given that such financing will ultimately be obtained. If for any reason Geotrac Holdings cannot finally obtain such financing, it may be unable to consummate the transactions contemplated by the Stock Purchase Agreement. In such event, the Company may have no or only limited remedies available to it under the Stock Purchase Agreement.

Because of the uncertainties surrounding the conditions of the Stock Purchase Agreement, such as obtaining the requisite shareholder approval, and due to the lack of a formal plan of disposition of Geotrac, if the sale is not consummated, Geotrac’s operations have not been presented herein as discontinued. Note 4 to the interim financial statements does however provide the reader separate segment data pertaining to Geotrac.

At present, the Company expects that Geotrac’s operations will continue to be profitable through the date of closing. While subject to what the fair market value of the Company’s Common Stock will be at date of closing, the Company does not currently expect to realize a substantial pre-tax gain or loss on the transaction. Currently, the Company expects the transaction costs (e.g. legal, financial advisory fees) to be approximately $700,000. Through September 30, 2001, approximately $450,000 of this amount has been expensed as indicated in the attached financial statements. It should be noted that no assurances can be given about Geotrac’s ability to continue to generate profits until closing nor the magnitude of the gain or loss to be realized from the transaction itself when it is completed.

Because of the existence of unamortized non-deductible goodwill (for income tax purposes) which was created when Geotrac was acquired by the Company, the current tax liability and income tax expense for financial statement purposes associated with the Geotrac sale will be greater by the tax effect of the remaining balance of non-deductible goodwill or approximately $2,200,000 based upon an effective income tax rate of 40% and a goodwill balance of $5,400,000 at September 30, 2001.

On a pro forma basis, as if the sale of Geotrac was completed on September 30, 2001 when the fair market value of the Company’s Common Stock was $2.37 a share or $1,242,349 in total, the Company would have realized a pre-tax gain of $290,500, before the recognition of an income tax expense of approximately $2,200,000.

9

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth for the periods indicated certain selected historical operating results of the Company as a percentage of total revenues:

				Three Months Ended							Nine Months Ended
				September 30,							September 30,
				2000				2001			2000				2001
			Revenues
	Outsourcing services				70.6	%			78.8	%		71.4	%			74.5	%
	Flood zone determination services				29.4				21.2			28.6				25.5
		Total revenues			100.0				100.0			100.0				100.0
			Expenses
	Cost of outsourcing services				56.1				57.7			57.3				51.0
	Cost of flood zone determination services				12.3				10.5			12.5				11.7
	Selling, general and administrative				24.2				13.2			20.1				14.4
	Management services from Parent				3.2				2.0			3.2				1.9
	Depreciation and amortization				8.0				5.2			8.6				6.6
		Total expenses			103.8				88.6			101.7				85.6
Operating income/(loss)					(3.8	)			11.4			(1.7	)			14.4
Interest income					0.4				0.5			0.4				0.4
Interest expense					(0.1	)			—			(0.1	)			—
Other					—				(0.1	)		—				(0.1	)
Income/(loss) before provision for income taxes					(3.5	)			11.8			(1.4	)			14.7
Provision for income taxes					0.0				4.6			0.2				5.9
Net income/(loss)					(3.5	)	%		7.2	%		(1.6	)	%		8.8	%

Comparison of the Three Months Ended September 30, 2000 and 2001

Overview. On April 13, 2001 the Company entered into a Letter Agreement with BIG (including BIC, BSIC and FCIC, direct or indirect subsidiaries of BIG) (the “Letter Agreement”). Pursuant to the Letter Agreement, the parties agreed, among other things, to extend the term of each of the service agreements between the Company and BIG until December 1, 2002. To obtain BIG’s agreement to such extension, the Company, in turn, agreed to certain service fee modifications. Under the service agreements, as amended, BIG pays the Company (1) a monthly fee based upon direct written premiums for policy administration services relating to its flood, homeowners and commercial lines of business and (2) a monthly fee based upon net claims (after deductibles) for claims administration services relating to its flood line of business. The service fees payable under the service agreements with respect to (a) policy administration services relating to the automobile line of business and (b) claim administration services relating to all lines of business other than flood, remain unchanged. If such amendments to the service agreements had been in effect for the fiscal year ended December 31, 2000, the Company’s affiliated outsourcing revenues, which totaled approximately $38.0 million on an actual basis, would have been approximately $30.0 million on a pro forma basis. As of September 30, 2001, any anticipated reduction in affiliated outsourcing revenues resulting from the implementation of such service fee changes was largely offset by a corresponding reduction in operating costs as a result of, among other things, the elimination of data and technical support services from the administration services to be provided by the Company to BIG under the service agreements. The Company believes that any future anticipated reduction in affiliated outsourcing revenues resulting from the implementation of such service fee changes should continue to be offset by a corresponding reduction in operating costs, although no assurances can be given in this regard.

10

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Outsourcing Services Revenues.Outsourcing services revenues increased $8.1 million, or 71.1%, to $19.5 million for the three months ended September 30, 2001 from $11.4 million for the corresponding period in 2000. The increase was primarily attributable to the impact of Tropical Storm Allison, which storm occurred in June, 2001. Although this was a June storm, it impacted July results as well. The increase in year-to-year third quarter revenue related to processing for this storm was approximately $7.7 million, consisting primarily of Unaffiliated Revenue service fees.

Flood Zone Determination Services Revenues.Flood zone determination services revenues increased $519,000, or 10.9%, to $5.3 million for the three months ended September 30, 2001 from $4.7 million for the corresponding period in 2000. This increase was primarily attributable to an increase in the number of flood zone determinations processed by the Company during the third quarter of 2001 as compared to the corresponding period in 2000. The increase in the number of flood zone determinations processed was primarily due to a decrease in mortgage interest rates and corresponding increase in mortgage refinancings and loan originations, which have historically driven the demand for flood zone determinations.

Cost of Outsourcing Services.Cost of outsourcing services increased $5.2 million, or 57.7%, to $14.3 million for the three months ended September 30, 2001 from $9.1 million for the corresponding period in 2000. As a percentage of outsourcing services revenues, cost of outsourcing services decreased to 73.2% for the three months ended September 30, 2001 from 79.4% for the corresponding period in 2000. The decrease in cost of outsourcing services as a percentage of outsourcing services was primarily attributable to a decrease in payroll costs due to two staffing reductions completed in late 2000 and early 2001 and a decrease in contract labor/consulting costs due to the reduction in staffing needs and related support. In addition, as part of the revision of the Company’s contractual arrangements with BIG, the Company’s Information Technology staff was terminated and transferred to BIG effective June 1, 2001. These decreases were more than offset, in dollar terms, by a combination of several factors. First, the Company experienced an increase in revenue from the corresponding period of the prior year, as a result of Tropical Storm Allison, from Colonial Claims Corporation (“Colonial Claims”), the Company’s claims catastrophe subsidiary. Approximately 70% of each dollar of revenue generated by Colonial Claims is paid to its independent adjusters who adjust claims on the company’s behalf. Second, there was an increase from the corresponding period of the prior year for costs related to the conversion to a new document imaging system and the opening of a new document output center in late 2000.

Cost of Flood Zone Determination Services.Cost of flood zone determination services increased $615,000, or 30.9%, to $2.6 million for the three months ended September 30, 2001 from $2.0 million for the corresponding period in 2000. The increase in Cost of Flood Zone Determination Services was primarily attributable to an increase in revenues related to flood zone determination services, as described in the preceding paragraph. As a percentage of flood zone determination services revenues, cost of flood zone determination services increased to 49.5% for the three months ended September 30, 2001 from 42.0% for the corresponding period in 2000.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased $651,000, or 16.6%, to $3.3 million for the three months ended September 30, 2001 from $3.9 million for the corresponding period in 2000. This decrease was due primarily to the one-time recognition of $848,000 in bad debt expense in the third quarter of 2000 related to the write-off of non-collectible unaffiliated revenue, offset slightly by increased administrative salary expense related to increased sales volumes. In addition, selling, general, and administrative expenses for the quarter ended September 30, 2000 included certain severance payments made to former officers of the Company, and no such payments were made during the quarter ended September 30, 2001.

Management Services from Parent.Management services from Parent decreased $17,000, or 3.3%, to $499,000 for the three months ended September 30, 2001 from $516,000 for the corresponding period in 2000. The decrease was primarily related to the assumption of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company by BIG under a management service agreement.

11

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Interest Expense.Interest expense decreased $2,000, or 19.8%, to $8,000 for the three months ended September 30, 2001 from $10,000 for the corresponding period in 2000. The decrease resulted primarily from the payment of substantially all of the Company’s outstanding debt obligations.

Provision for Income Taxes.The Company’s effective income tax rates were 39.2% and 1.1% the three months ended September 30, 2001 and 2000, respectively. The effective tax rates reflect various non-deductible items, including goodwill recognized in connection with the acquisitions of Geotrac in July, 1998 and Colonial Claims in January, 1999. For additional information on the reconciliation of the Company’s effective income tax rate to the federal statutory income tax rate, see “Note 10, Income Taxes”, in “Notes to the Consolidated Financial Statements for the year-ended December 31, 2000”, as reported in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 2001.

Comparison of the Nine Months Ended September 30, 2000 and 2001

Outsourcing Services Revenues.Outsourcing services revenues increased $12.2 million, or 36.4%, to $45.7 million, for the nine months ended September 30, 2001 from $33.5 million for the corresponding period in 2000. The increase was primarily attributable to the impact of Tropical Storm Allison, which storm occurred during June, 2001. The increase in revenue related to processing for this storm was approximately $4.2 million, including an increase of $2.2 million in Affiliated Revenue, and an increase of $2.0 million in Unaffiliated Revenue. The Company’s Colonial Claims subsidiary also experienced an increase in revenue of $8.1 million, from the corresponding period of the prior year, due primarily to an increase in claims business as a result of Tropical Storm Allison. Additionally, revenue generated by the Company's automobile line of business increased approximately $1.3 million for the nine months ended September 30, 2001 as compared to the corresponding period in 2000 due principally to significant volume increases in new business for Non-standard Auto. The foregoing increases were partially offset by a decrease in revenue from a third-party outsourcing customer, as the contract with this customer has been terminated and, accordingly, processing on behalf of each customer is winding down and will cease no later than December, 2002.

Flood Zone Determination Services Revenues.Flood zone determination services revenues increased $2.3 million, or 16.9%, to $15.6 million for the nine months ended September 30, 2001 from $13.4 million for the corresponding period in 2000. The increase was primarily attributable to an increase in the number of flood zone determinations processed by Geotrac during the first nine months of 2001 as compared to the corresponding period in 2000. The increase in the number of flood zone determinations processed was primarily due to the existence of continued historically low mortgage interest rates. These continued low interest rates resulted, in turn, in a corresponding increase in mortgage refinancing activity and loan originations, which historically drive the demand for flood zone determinations.

Cost of Outsourcing Services.Cost of outsourcing services increased $4.4 million, or 16.6%, to $31.3 million for the nine months ended September 30, 2001 from $26.8 million for the corresponding period in 2000. As a percentage of outsourcing services revenues, cost of outsourcing services decreased to 68.5% for the nine months ended September 30, 2001 from 80.2% for the corresponding period in 2000. The increase in the dollar amount of cost of outsourcing services was primarily attributable to the increase in Colonial Claims costs of $6.0 million related to claims adjuster expenses necessitated due to the aforementioned Tropical Storm Allison, which storm occurred in June, 2001. This increase was partially offset by (i) a decrease of $3.1 million in payroll costs due to two staffing reductions completed in late 2000 and early in 2001, (ii) the termination and transfer of the Company's information technology staff to BIG effective June 1, 2001 (iii) a decrease of $869,000 in third-party contract labor/consulting costs, and (iv) an increase in costs due to the conversion to a new document imaging system and the opening of a new document output center in late 2000.

12

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cost of Flood Zone Determination Services. Cost of flood zone determination services increased $1.3 million, or 22.5%, to $7.2 million for the nine months ended September 30, 2001 from $5.9 million for the corresponding period in 2000. As a percentage of flood zone determination services revenues, cost of flood zone determination services increased to 45.8% for the nine months ended September 30, 2001 from 43.7% for the corresponding period in 2000. The increase in Cost of Flood Zone Determination Services was primarily attributable to corresponding increases in revenues related to flood zone determinations, as described in the preceding paragraph.

Selling, General and Administrative Expenses.Selling, general and administrative expenses decreased $623,000, or 6.6%, to $8.8 million for the nine months ended September 30, 2001 from $9.4 million for the corresponding period in 2000. This decrease was primarily attributable to the continued assumption of certain administrative services that were previously provided to the Company by BIG under a management service agreement, partially offset by a decrease in payroll costs as a result of the staffing reductions described above and the completion of certain severance payment obligations.

Management Services from Parent.Management services from Parent decreased $307,000, or 20.6%, to $1.2 million for the nine months ended September 30, 2001 from $1.5 million for the corresponding period in 2000. The decrease was primarily related to the assumption of certain administrative services, including human resources, agency accounting, cash management and legal services, that were previously provided to the Company by BIG under a management service agreement.

Interest Expense.Interest expense decreased $39,000, or 74.3%, to $14,000 for the nine months ended September 30, 2001 from $53,000 for the corresponding period in 2000. The decrease resulted primarily from the payment of substantially all of the Company’s outstanding debt obligations. Interest expense for the period ended September 30, 2001 relates to expenses for capital leases for information technology equipment. These leases will expire during the fourth quarter of 2001.

Provision for Income Taxes. The Company’s effective income tax rates were 39.9% and 15.2% for the nine months ended September 30, 2001 and 2000, respectively. The effective tax rates reflect various non-deductible items, including goodwill recognized in connection with the acquisitions of Geotrac in July, 1998 and Colonial Claims in January, 1999. For additional information on the reconciliation of the Company’s effective income tax rate to the federal statutory income tax rate, see “Note 10 — Income Taxes”, in “Notes to the Consolidated Financial Statements” for the year-ended December 31, 2000, as reported in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 17, 2001.

Liquidity and Capital Resources

During the year ended December 31, 2000, the Company’s principal sources of liquidity consisted of cash on-hand and cash flows from operations.

In conjunction with the Company’s acquisition of Geotrac, Inc., it entered into a Corporate Governance Agreement, dated July 31, 1998, with Geotrac of America, Inc. (“Geotrac”) and Daniel J. White (“Mr. White”), Geotrac’s president and the majority shareholder of Geotrac, Inc. prior to the acquisition, setting forth certain terms and conditions pertaining to the operation of Geotrac. The Corporate Governance Agreement provides, among other things, that for so long as Mr. White owns stock in the Company or Geotrac, or has an option to purchase stock in Geotrac, certain actions by Geotrac will require the unanimous approval of Geotrac’s Board of Directors, including any merger or consolidation, the payment of management or similar fees to the Company or its subsidiaries and affiliates, the sale or issuance of Geotrac stock, and the sale of Geotrac assets outside the ordinary course of business to anyone other than an affiliate of Geotrac. In addition, under the terms of the Corporate Governance Agreement, unanimous board approval is required in order to make cash distributions to the Company, whether by dividend or otherwise.

13

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Consequently, pursuant to the Corporate Governance Agreement, Mr. White may impede the Company’s ability to access excess cash balances retained by its Geotrac subsidiary, even if all of the other directors of Geotrac were to approve such a distribution. Mr. White is presently a director and shareholder of the Company. To date, the Company has been able to access Geotrac’s excess cash when necessary, primarily through the prepayment of outstanding intercompany indebtedness. No assurances can be given, however, that the Company will be able to obtain available cash from Geotrac. If the Company is unable to do so, it could have a material adverse effect on the Company’s business, financial condition and results of operations.

On April 2, 2001, the Geotrac Board of Directors authorized the payment of dividends to the Company, to be distributed quarterly beginning July 15, 2001 for the next 12 months based upon Year 2000 earnings of Geotrac. In early August, 2001, Geotrac authorized the payment of an additional dividend to the Company in the amount of $200,000.

In addition to the foregoing, the Company, on September 20, 2001, entered into an agreement with certain other parties to dispose of the stock of Geotrac of America, Inc. See Note 6. to the Consolidated Financial Statements and also Item 5. Other Information, following.

On April 13, 2001, the Company entered into a Commitment Letter to advance service fee payments (the “Commitment Letter”) with BIG, pursuant to which BIG has agreed to advance to the Company up to $1.5 million per month as a prepayment of service fees due by BIG and its affiliates under the service agreements with such companies. Such advances are available to the Company beginning June 1, 2001 and continuing through December 1, 2002 and shall be payable upon demand by the Company. Any funds advanced by BIG to the Company under the Commitment Letter shall constitute a prepayment of, and shall be credited toward, the service fees charged to BIG by the Company during the month following such advance. The Company presently has no intention of requesting any such advances from BIG, but no assurances can be given that the Company will not be required to do so in the future.

On August 14, 2001, the Company entered into a credit arrangement with BIG pursuant to which the Company established a $5.0 million secured line of credit in favor of BIG (the “Line of Credit”), which Line of Credit will expire no later than February 28, 2002. BIG, the Company’s principal customer and shareholder, requested the Line of Credit to assist with certain short-term working capital needs. The Company believes that cash on-hand, cash flows from operations, and cash advances under the Commitment Letter are, and will continue to be, sufficient to support the Line of Credit and to satisfy the Company’s currently-anticipated working capital requirements until the Line of Credit expires. Given the significance of BIG as the principal customer of the Company, management of the Company, including the Audit Committee of the Board of Directors, determined that it was in the best interests of the Company and its shareholders to extend this Line of Credit. For additional information regarding the Line of Credit, see “Item 5. Other Information.”

The Company believes that cash on-hand, cash flows from operations and cash advances available under the Commitment Letter will be sufficient to satisfy currently anticipated working capital and capital expenditure requirements for the foreseeable future. However, unanticipated rapid expansion, business or systems development, or other unforeseen factors may cause the Company to require additional funds, which may not be available to the Company upon acceptable terms.

14

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART I. FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141,Business Combinations, and SFAS 142,Goodwill and Intangible Assets.SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for the year beginning January 1, 2002; however certain provisions of that Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. The Company has not yet analyzed the effect of these new standards and, accordingly, is unable to state what effect, if any, the adoption of these standards will have on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposal Of. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is evaluating the impact of the adoption of this standard and has not yet determined the effect of adoption on its financial position and results of operations.

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.

15

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On September 28, 2000, October 25, 2000 and October 30, 2000, three alleged shareholders of the Company filed three nearly identical lawsuits in the United States District Court for the Middle District of Florida, each on behalf of a putative class of all persons who purchased shares of the Company’s Common Stock pursuant and/or traceable to the registration statement for the Company’s February 1999 initial public offering (the “IPO”). The lawsuits were consolidated on December 1, 2000, and the consolidated action is proceeding under Case No. 8:00-CV-2013-T-26MAP. The plaintiffs’ Consolidated Amended Class Action Complaint, filed February 7, 2001, names as defendants the following parties: the Company; BIG; Venture Capital Corporation, a selling shareholder in the IPO; the five inside directors of the Company at the time of the IPO; and Raymond James & Associates, Inc. and Keefe, Bruyette & Woods, Inc., the underwriters for the IPO. The complaint alleges, among other things, that the defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, by making certain false and misleading statements in the roadshow presentations, registration statement and prospectus relating to the IPO. More specifically, the complaint alleges that, in connection with the IPO, the defendants made various material misrepresentations and/or omissions relating to: (i) the Company’s ability to integrate Geotrac’s flood zone determination business with the Company’s own flood zone determination business and with its insurance outsourcing services business; (ii) actual and anticipated synergies between the Company’s flood zone determination and outsourcing services business lines; and (iii) the Company’s use of the IPO proceeds. The complaint seeks unspecified damages, including interest, and equitable relief, including a rescission remedy. On July 11, 2001, U.S. District Judge Richard A. Lazzara denied all of the defendants’ motions to dismiss the Amended Complaint.

     The defendants’ answers to the Amended Complaint were filed in late August 2001. Written discovery has commenced and, later this year, various pre-trial deadlines and a trial date likely will be set. Management of the Company believes the material allegations of the Amended Complaint are without merit and intends to vigorously defend the lawsuit. No assurances can be given, however, with respect to the outcome of the litigation, and an adverse result could have a material adverse effect on the Company’s business, financial condition and results of operations.

Except as set forth in the preceding two paragraphs, there have been no material changes to the disclosure set forth under the caption “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

Item 5. Other Information

     As previously reported, on April 13, 2001, the Company entered into a Letter Agreement (the “Letter Agreement”) with BIG and Bankers Insurance Company (“BIC”), Bankers Security Insurance Company (“BSIC”) and First Community Insurance Company (“FCIC”), all direct or indirect subsidiaries of BIG, pursuant to which the various contractual arrangements between the Company and such affiliated entities have been significantly altered.

     With respect to the Administrative Services Agreement, effective as of January 1, 1998, between the Company and BIG (the “Administration Agreement”), the Letter Agreement provides that the existing Administration Agreement was terminated effective as of April 1, 2001 and will be replaced with a new Corporate Services Agreement (the “Corporate Services Agreement”). Pursuant to the Corporate Services Agreement, BIG will provide the Company with various corporate marketing and corporate training services requested by the Company from time to time at fixed hourly rates ranging from $40.00 to $100.00 per hour, depending on the services being provided. The Letter Agreement further provides that the parties will negotiate in good faith to execute and deliver the Corporate Services Agreement incorporating those terms on or before June 1, 2001; provided however, that in the event such agreement is not executed and delivered by that date, BIG will provide such services at the rates specified in the Letter Agreement. As of the date of this Report, the parties have not executed the Corporate Services Agreement and, thus, BIG continues to provide the aforementioned services at the rates specified in the Letter Agreement.

16

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART II. OTHER INFORMATION

Item 5. Other Information (continued)

The Letter Agreement also provides that the Technical Support Agreement, dated April 1, 1999, between the Company and BIG (the “Old Support Agreement”), was terminated effective April 1, 2001 and will be replaced with a New Technical Support Services Agreement (the “New Support Agreement”). Pursuant to the New Support Agreement, BIG will provide the Company with certain technical support, computer programming and systems analysis services at specified rates (except for software development services, which shall be provided on a time and materials basis). The Letter Agreement further provides that the parties will negotiate in good faith to execute and deliver the New Support Agreement incorporating these terms on or before June 1, 2001; provided, however, that in the event such agreement is not executed and delivered by that date, BIG will provide such services at the rates specified in the Letter Agreement until the earlier of (a) the execution and delivery of the New Support Agreement, or (b) December 1, 2002. As of the date of this Report the parties have not executed the New Support Agreement and, thus, BIG continues to provide the aforementioned services at the rates specified in the Letter Agreement.

With respect to the separate Service Agreements, effective as of January 1, 1998, and as amended between the Company and each of BIC, BSIC and FCIC (each a “Service Agreement” and collectively the “Service Agreements”), the Letter Agreement amended each of the Service Agreements, effective June 1, 2001 to, among other things, extend the term of each Service Agreements to December 1, 2001, modify certain of the service fees payable thereunder, and eliminate data and technical support services from the administrative services to be provided. The Letter Agreement further provides that the parties will act in good faith to execute and deliver, on or before June 1, 2001, a more definitive amendment (each an “Amendment” and collectively the “Amendments”) to each of the Service Agreements incorporating the terms set forth in the Letter Agreement; provided, however, that in the event such Amendments to the Service Agreements have not been executed and delivered by that date, the amendments to the Service Agreements set forth in the Letter Agreement shall continue in effect. As of the date of this Report, the parties have not executed the Amendments and; thus, the amendments to the Service Agreements set forth in the Letter Agreement are still controlling.

As previously reported, on August 14, 2001, the Company entered into a Credit and Security Agreement with BIG (together with the related loan documentation, the “Credit Agreement”), pursuant to which the Company established a short-term, secured line of credit in favor of BIG in the amount of up to $5.0 million (the “Line of Credit”). As of the date of this Report, the aggregate principal amount outstanding under the Line of Credit is $5.0 million. The principal purpose of the Line of Credit is to assist BIG, the Company’s principal customer and shareholder, with certain short-term working capital needs.

Pursuant to the Credit Agreement, interest is payable monthly on amounts outstanding under the Line of Credit at an annual rate equal to the Prime Rate (as defined in the Credit Agreement”), plus 1.5%. The Credit Agreement further provides that the Line of Credit will expire on February 28, 2002, unless repaid in full prior to such time or otherwise terminated pursuant to the terms of the Credit Agreement.

17

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART II. OTHER INFORMATION

Item 5. Other Information (continued)

The Line of Credit is secured by (i) a first lien security interest in all accounts and contract rights of Bankers Underwriters, Inc., a wholly-owned subsidiary of BIG (“BUI”), with insurance agents (including but not limited to general agents with respect to the sale of federal flood insurance) (collectively, the “Flood Book”), and (ii) an option (the “Option”) to purchase from BIG the outstanding capital stock, consisting of 10,898 shares (the “Option Shares”) of common stock, $318 par value per share, of First Community Insurance Company, a New York insurance company licensed in all fifty states (“FCIC”). BUI currently is a Florida general insurance agent for FCIC and BIC, a Florida insurance company licensed in approximately 30 states and a wholly-owned subsidiary of BIG. As of the date of this Report, management of the Company believes the fair market value of the Flood Book well exceeds the aggregate principal amount of the Line of Credit.

With respect to the Option, the aggregate exercise price for the Option Shares is $108,980, or $10.00 per Option Share. The Option Shares are subject to certain outstanding liens relating to certain indebtedness of BIG having an aggregate outstanding balance, as of September 30, 2001, totaling approximately $11.5 million. The Option will become exercisable only at such time as (i) there shall be a default in the payment of any amounts due under the Credit Agreement for more than ten days after the data when they shall become due or (ii) there shall be any other default under the Credit Agreement if, after notice thereof, such default has not been cured within thirty days of such notice. In addition, any acquisition of the Option Shares by the Company pursuant to the Option would require the prior approval of the New York Department of Insurance. In the event the Option were to be exercised, no assurances can be given that such approval could be obtained.

The foregoing description of the Line of Credit is qualified in its entirety by reference to the Credit and Security Agreement, Master Promissory Note, Collateral Assignment of Flood Book and Stock Option Agreement filed as Exhibits 10.1 through 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.

As previously reported, on September 20, 2001, the Company entered into an agreement (the “Stock Purchase Agreement”) with certain other parties to sell all of the outstanding capital stock of Geotrac of America, Inc., a wholly-owned subsidiary of the Company (“Geotrac”). The parties to the Stock Purchase Agreement are the Company, Geotrac, Geotrac Holdings, Inc. (“Geotrac Holdings”), Daniel J. White, the Daniel J. White Trust, the Sandra A. White Trust, and, solely for purposes of a non-competition covenant, BIG. Mr. White is currently a director of the Company and the President, Chief Executive Officer and a director of Geotrac. BIG is the Company's majority shareholder and principal customer.

The Stock Purchase Agreement contemplates that all issued and outstanding capital stock of Geotrac (the “Shares”) will be purchased by Geotrac Holdings, a Delaware corporation formed by Daniel J. White for purposes of the acquisition of such stock. The purchase price payable for the Shares is to be $19,000,000 in cash plus 524,198 shares of the outstanding Common Stock, $.01 par value, of the Company (“Company Common Stock”). The Stock Purchase Agreement also contemplates that certain of the parties will enter into additional agreements as of the closing of the transactions contemplated by the Stock Purchase Agreement, including an agreement for the provision of certain ongoing flood zone determination services.

The transactions contemplated by the Stock Purchase Agreement are anticipated to close not later than January 31, 2002. However, the transactions contemplated by the Stock Purchase Agreement will not be consummated unless certain conditions are either satisfied or waived prior to closing. These conditions include, among other things, that the shareholders of the Company approve the Stock Purchase Agreement and the transactions contemplated thereby in accordance with Florida law. To this end, the Company is presently scheduled to hold a Special Meeting of Shareholders on December 26, 2001 for the sole purpose of approving or disapproving of the Stock Purchase Agreement and the transactions contemplated thereby. (On November 9, 2001, the Company filed preliminary proxy materials with the Securities and Exchange Commission relating to the solicitation of proxies in connection with such Special Meeting of Shareholders.) Although BIG (including its wholly-owned subsidiaries) owns sufficient shares of the outstanding Company Common Stock to approve or disapprove the Stock Purchase Agreement, BIG has informed the Company that it intends to vote its shares with respect to the transaction in the same manner as the holders of a majority of the outstanding shares of Company Common Stock held by persons other than BIG.

In addition, in order to consummate the transactions contemplated by the Stock Purchase Agreement, Geotrac Holdings will need to obtain substantial financing from third-party sources. As of the date hereof, Geotrac Holdings has received non-binding financing commitments totaling $17,000,000; however, no assurances can be given that such financing will ultimately be obtained. If for any reason Geotrac Holdings cannot finally obtain such financing, it may be unable to consummate the transactions contemplated by the Stock Purchase Agreement. In such event, the Company may have no or only limited remedies available to it under the Stock Purchase Agreement.

The foregoing description is qualified in its entirety by reference to the Stock Purchase Agreement (including the Exhibits thereto) filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed on September 21, 2001.

On October 1, 2001, the Company and Anthony R. Marando extended his employment agreement as Chief Financial Officer of the Company. This employment agreement is attached as Exhibit 10.5.

The Company has recently received several unsolicited inquiries and/or proposals from unaffiliated third parties regarding the possible sale of all of the business and assets of the Company (including its subsidiaries) after the consummation of the Geotrac Sale. Although the Company continues to engage in informal discussions with certain of such third parties regarding a possible transaction, as of the date of this Report, the Company is not a party to any letter of intent or similar agreement with respect to any such proposed transaction. Consequently, regardless of whether the Geotrac Sale is consummated, no assurance can be given as to whether the Company will seek, or be able to enter into, a transaction relating to the sale of the business and assets of the Company other than Geotrac.

18

INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

     a) Exhibits

2.1	Stock Purchase Agreement, dated as of September 20, 2001, by and among Insurance Management Solutions Group, Inc., Geotrac of America, Inc., Geotrac Holdings, Inc., Daniel J. White, the Daniel J. White Trust, the Sandra A. White Trust and, solely for purposes of Section 7.2, Bankers Insurance Group, Inc. (including the exhibits thereto).*
10.1	Credit and Security Agreement, dated August 14, 2001, between Insurance Management Solutions Group, Inc. and Bankers Insurance Group, Inc.**
10.2	Master Promissory Note, dated August 14, 2001, by Bankers Insurance Group, Inc.**
10.3	Collateral Assignment of Flood Book, dated August 14, 2001, by Bankers Underwriters, Inc.**
10.4	Stock Option Agreement, dated August 14, 2001, between Bankers Insurance Group, Inc. and Insurance Management Solutions Group, Inc.**
10.5	Employment Agreement, dated October 1, 2001, between Anthony R. Marando and Insurance Management Solutions Group, Inc.

*	Previously filed as part of the Company's Current Report on Form 8-K filed on September 21, 2001.
**	Previously filed as part of the Company's Form 10-Q for June 30, 2001 as filed on August 20, 2001.

     b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K on September 21, 2001 to report that on September 20, 2001, the Company entered into an agreement with certain other parties to sell all of the outstanding capital stock of Geotrac of America, Inc., a wholly-owned subsidiary of the Company.

19

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.

	INSURANCE MANAGEMENT SOLUTIONS GROUP, INC. (Registrant)
Date: November 14, 2001	By: /s/ DAVID M. HOWARD
	David M. Howard President and Chief Executive Officer (Principal Executive Officer)
	By: /s/ ANTHONY R. MARANDO
	Anthony R. Marando Chief Financial Officer (Principal Financial and Accounting Officer)

20

EXHIBIT INDEX

EXHIBIT
NUMBER	DESCRIPTION
2.1	Stock Purchase Agreement, dated as of September 20, 2001, by and among Insurance Management Solutions Group, Inc., Geotrac of America, Inc., Geotrac Holdings, Inc., Daniel J. White, the Daniel J. White Trust, the Sandra A. White Trust and, solely for purposes of Section 7.2, Bankers Insurance Group, Inc., (including the exhibits thereto).*
10.1	Credit and Security Agreement, dated August 14, 2001, between Insurance Management Solutions Group, Inc. and Bankers Insurance Group, Inc.*
10.2	Master Promissory Note, dated August 14, 2001, by Bankers Insurance Group, Inc.*
10.3	Collateral Assignment of Flood Book, dated August 14, 2001, by Bankers Underwriters, Inc.*
10.4	Stock Option Agreement, dated August 14, 2001, between Bankers Insurance Group, Inc. and Insurance Management Solutions Group, Inc.*
10.5	Employment Agreement, dated October 1, 2001, between Anthony R. Marando and Insurance Management Solutions Group, Inc.

* Incorporated by reference.

E-1