1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
360 CENTRAL AVENUE, ST. PETERSBURG, FLORIDA 33701
------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(727) 803-2040
--------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class: Common Stock, $.01 par value Outstanding at May 11, 2001: 12,800,261
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 1
Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001........................................................ 1
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 2001............................................. 2
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 2000 and the three months ended
March 31, 2001............................................................ 3
Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 2001...................................... 4
Notes to Consolidated Financial Statements................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 10
Item 5. Other Information......................................................... 10
Item 6. Exhibits and Reports on Form 8-K.......................................... 11
The statements contained in this report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes, beliefs,
intentions, or strategies regarding the future. Forward-looking statements
include statements regarding, among other things: (i) the potential loss of
material customers; (ii) the failure to properly manage growth and successfully
integrate acquired businesses; (iii) the Company's financing plans; (iv) trends
affecting the Company's financial condition or results of operations; (v) the
Company's growth and operating strategies; (vi) the ability to attract and
retain qualified sales, information services and management personnel; (vii) the
impact of competition from new and existing competitors; (viii) the financial
condition of the Company's clients; (ix) potential increases in the Company's
costs; (x) the declaration and payment of dividends; (xi) the potential for
unfavorable interpretation of existing government regulations or new government
legislation; (xii) the impact of general economic conditions and interest rate
fluctuations on the demand for the Company's services, including flood zone
determination services; (xiii) the outcome of certain litigation and
administrative proceedings involving the Company's principal customer; (xiv)
uncertainties regarding the market acceptance of the Company's new services;(xv)
the ability to establish positive name recognition in the market place; (xvi)
the ability to develop new technological solutions for current and prospective
customers; (xvii) changes in existing service agreements; (xviii) the ability to
obtain new customers and retain existing customers; (xix) the ability to obtain
third-party information technology outsourcing services on a timely basis and at
reasonable costs; and (xx) 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
2000 2001
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 5,192,161 $ 5,599,118
Accounts receivable, net .......................................... 3,789,288 3,117,734
Due from affiliates ............................................... 2,615,699 3,329,289
Prepaid expenses and other assets ................................. 1,573,037 1,488,479
------------ ------------
Total current assets ......................................... 13,170,185 13,534,620
PROPERTY AND EQUIPMENT, net .......................................... 9,116,552 9,798,787
OTHER ASSETS
Goodwill, net ..................................................... 15,352,001 15,125,586
Customer contracts, net ........................................... 916,667 866,667
Deferred tax assets, net .......................................... 682,081 682,081
Capitalized software costs, net ................................... 1,044,846 955,776
Other ............................................................. 483,216 427,961
------------ ------------
Total assets ................................................ $ 40,765,548 $ 41,391,478
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt ................................. $ 219,857 $ 140,877
Accounts payable, trade ........................................... 2,370,825 2,570,526
Due to affiliates ................................................. -- 10,649
Employee related accrued expenses ................................. 1,693,823 2,045,206
Other accrued expenses ............................................ 2,008,201 1,800,367
Income taxes payable .............................................. 557,676 735,685
------------ ------------
Total current liabilities ......................................... 6,850,382 7,303,310
DEFERRED REVENUE ..................................................... 802,578 778,015
COMMITMENTS AND CONTINGENCIES
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 March 31, 2001 ............................ 128,002 128,002
Additional paid-in capital ........................................ 27,545,901 27,590,901
Retained earnings ................................................. 5,438,685 5,591,250
------------ ------------
Total shareholders' equity .................................... 33,112,588 33,310,153
------------ ------------
Total liabilities and shareholders' equity .................... $ 40,765,548 $ 41,391,478
============ ============
The accompanying notes are an integral part of these consolidated statements.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 2001
------------ ------------
(UNAUDITED)
REVENUES
Outsourcing services - affiliated .................. $ 9,205,313 $ 9,363,252
Outsourcing services ............................... 1,529,314 1,219,534
Flood zone determination services .................. 3,722,929 4,294,168
Flood zone determination services - affiliated ..... 230,003 218,711
------------ ------------
Total revenues ............................... 14,687,559 15,095,665
------------ ------------
EXPENSES
Cost of outsourcing services ....................... 8,677,506 8,173,780
Cost of flood zone determination services .......... 1,858,529 2,034,394
Selling, general and administrative ................ 2,650,446 2,851,590
Management services from Parent .................... 503,537 370,556
Depreciation and amortization ...................... 1,307,570 1,366,151
------------ ------------
Total expenses ............................... 14,997,588 14,796,471
------------ ------------
OPERATING INCOME (LOSS) ............................... (310,029) 299,194
------------ ------------
OTHER INCOME (EXPENSE):
Interest income .................................... 67,050 61,572
Interest expense ................................... (17,421) (2,501)
------------ ------------
Total other income (expense) ................. 49,629 59,071
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES ....................................... (260,400) 358,265
PROVISION (BENEFIT) FOR INCOME TAXES .................. (39,900) 205,700
------------ ------------
NET INCOME (LOSS) ..................................... $ (220,500) $ 152,565
============ ============
NET INCOME (LOSS) PER COMMON SHARE .................... $ (.02) $ .01
============ ============
Weighted average common shares outstanding ............ 12,774,889 12,800,261
============ ============
The accompanying notes are an integral part of these consolidated statements.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
-------- ------------ ------------ ------------
Balance at December 31, 1999 ..................... $126,787 $ 26,810,282 $ 5,948,051 $ 32,885,120
Issuance of Common Stock in
connection with earn-out computation for
Colonial Claims ............................. 1,215 298,785 -- 300,000
Non-cash compensation expense related to
phantom stock plans ......................... -- 338,200 -- 338,200
Compensation expense related to stock
options issued to non-employees ........... -- 98,634 -- 98,634
Net 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) ................................. -- 45,000 -- 45,000
Net income (unaudited) ......................... -- -- 152,565 152,565
-------- ------------ ------------ ------------
Balance at March 31, 2001 (unaudited) ............ $128,002 $ 27,590,901 $ 5,591,250 $ 33,310,153
======== ============ ============ ============
The accompanying notes are an integral part of this consolidated statement.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------------
2000 2001
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................................... $ (220,500) $ 152,565
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ........................................ 1,307,570 1,366,151
Loss on disposal of property and equipment ........................... 57,439 52,207
Deferred income taxes, net ........................................... 7,700 --
Non-employee stock options ........................................... -- 45,000
Changes in assets and liabilities:
Accounts receivable ................................................ 3,135 671,554
Prepaid expenses and other current assets .......................... 189,095 (52,739)
Other assets ....................................................... (301,031) 76,070
Accounts payable, trade ............................................ 219,296 199,701
Employee related accrued expenses .................................. 274,199 351,383
Other accrued expenses ............................................. (151,541) (207,834)
Income taxes payable ............................................... (368,887) 178,009
Deferred revenue ................................................... (69,909) (24,563)
------------ ------------
Net cash provided by operating activities ........................ 946,566 2,807,504
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................... (1,209,954) (1,689,736)
Collection of note receivable .......................................... -- 71,110
------------ ------------
Net cash used in investing activities ........................ (1,209,954) (1,618,626)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit .................................... 114,561 --
Repayment of debt ...................................................... (137,713) (78,980)
Net repayments to affiliates ........................................... (69,704) (702,941)
------------ ------------
Net cash used in financing activities .................................. (92,856) (781,921)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................................ (356,244) 406,957
CASH AND CASH EQUIVALENTS, beginning of period ............................ 4,702,861 5,192,161
------------ ------------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 4,346,617 $ 5,599,118
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for interest .................................................. $ 17,421 $ 2,501
============ ============
Cash paid for income taxes .............................................. $ 325,000 $ 113,750
============ ============
The accompanying notes are an integral part of these consolidated statements.
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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,
2000, as filed with the Securities and Exchange Commission on April 17, 2001.
The results of operations for the three-month period ended March 31, 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 MARCH 31,
------------------------------
2000 2001
------------ ------------
Numerator:
Net income (loss) .................................. $ (220,500) $ 152,565
============ ============
Denominator:
Weighted average number of Common Shares
used in basic EPS ................................ 12,774,889 12,800,261
Diluted stock options .............................. -- --
------------ ------------
Weighted average number of Common Shares
and diluted potential Common Shares used in
diluted EPS ...................................... 12,774,889 12,800,261
============ ============
As of March 31, 2000 and 2001, options to purchase 852,750 and 550,250
shares, respectively, of Common Stock were outstanding but were not included in
the computation of diluted earnings per share as the inclusion of such shares
would have an anti-dilutive effect.
NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS
In conjunction with the Company's acquisition of Geotrac, 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 then majority shareholder, setting forth certain terms and conditions
pertaining to the operation of Geotrac. This agreement contains a provision,
among other things, 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.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 2. RESTRICTED NET ASSETS AND RETAINED EARNINGS - (CONTINUED)
As of March 31, 2001, the Company had total consolidated net assets of
approximately $33.3 million, of which approximately $21.2 million represents the
net assets of Geotrac. The tangible net assets of Geotrac consist primarily of
cash of $1.5 million, other current assets of $4.0 million, including $1.2
million due from affiliates, and current liabilities of $2.9 million, including
$1.1 million due to affiliates. As a result of the restrictions set forth in the
preceding paragraph of this note, the Company's consolidated retained earnings
as of March 31, 2001, which totaled $5.6 million, are not completely available
for dividend distribution. However, the Company did not pay any dividends during
the year ended December 31, 2000 or the three months ended March 31, 2001 and
does not anticipate declaring or paying cash dividends in the foreseeable
future. As such, all future earnings are expected to be retained for operating
purposes.
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 ("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. (On April 6, 2001, the plaintiffs' filed a Notice of
Scrivener's Error notifying all parties to the litigation and the court that
Geotrac was inadvertently referenced as a defendant in one paragraph of the
complaint). 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 March 26, 2001, the Company, BIG and the five inside
director defendants filed a motion to dismiss the plaintiffs' Consolidated
Amended Class Action Complaint for, among other things, failure to allege
material misstatements and/or omissions in the roadshow presentations,
registration statement and/or prospectus relating to the IPO. Similar motions
have been filed by Venture Capital Corporation and the underwriters. Management
of the Company believes the material allegations of the 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. On February 19, 2001, the DOI filed a Motion
for Leave to File Amended Complaint. On March 29, 2001, the court issued an
order granting the DOI's motion.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. CONTINGENCIES - (CONTINUED)
BIC, BLIC and BSIC have informed the Company that they intend to
vigorously defend against such action, but no assurances can be given as to the
outcome thereof. In the event the DOI were to enter an order suspending or
revoking the certificates of authority of BIC, BLIC and BSIC to conduct business
as insurance companies in the State of Florida, or impose other significant
penalties on any of them, it would materially adversely affect the business
and/or operations of BIG and, in turn, could result in the loss of or a 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 Agency ("FEMA"), filed a civil action against BIC in the
United States 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 stayed pending arbitration following a decision by the United States
Court of Appeals for the Fourth Circuit in favor of BIC on its motion to stay
the litigation pending arbitration. BIC has informed the Company that BIC is not
aware of the government's intentions for further appeal of the order regarding
arbitration. BIC has further 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 has advised the Company that an adverse judgment in this
action should 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 either unable
to reach agreement in these matters or resolve their disagreement in
arbitration, 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 a 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 other legal proceedings arising in
the ordinary course of business. Management believes that the ultimate
resolution of these proceedings 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
------------ -------------- ------------ ------------
MARCH 31, 2000 - (UNAUDITED)
Operating revenues - affiliated ............. $ 9,865,066 $ 230,003 $ (659,753) $ 9,435,316
Operating revenues - unaffiliated ........... 1,529,314 3,722,929 -- 5,252,243
Operating income (loss) ..................... (814,924) 504,895 -- (310,029)
Identifiable assets ......................... 29,583,281 25,591,496 (15,920,081) 39,254,696
MARCH 31, 2001 - (UNAUDITED)
Operating revenues - affiliated ............. $ 9,581,963 $ 218,711 $ (218,711) $ 9,581,963
Operating revenues - unaffiliated ........... 1,219,534 4,294,168 -- 5,513,702
Operating income (loss) ..................... (454,482) 753,676 -- 299,194
Identifiable assets ......................... 37,632,044 24,699,555 (20,940,121) 41,391,478
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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
------------------
MARCH 31,
2000 2001
------ ------
REVENUES
Outsourcing services ....................................... 73.1% 70.1%
Flood zone determination services .......................... 26.9 29.9
------ ------
Total revenues ......................................... 100.0 100.0
------ ------
EXPENSES
Cost of outsourcing services ............................... 59.1 54.1
Cost of flood zone determination services .................. 12.7 13.5
Selling, general and administrative ........................ 18.0 18.9
Management services from Parent ............................ 3.4 2.5
Depreciation and amortization .............................. 8.9 9.0
------ ------
Total expenses ......................................... 102.1 98.0
------ ------
Operating income (loss) ......................................... (2.1) 2.0
Interest income ................................................. 0.4 0.4
Interest expense ................................................ (0.1) 0.0
------ ------
Income (loss) before provision (benefit) for income taxes ....... (1.8) 2.4
Provision (benefit) for income taxes ............................ (0.3) 1.4
------ ------
Net income (loss) ............................................... (1.5)% 1.0%
====== ======
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
Overview. On April 13, 2001 the Company entered into the Letter Agreement with
BIG. Pursuant to the Letter Agreement, the parties agreed to extend the term of
each of the service agreements until December 1, 2002. To obtain BIG's agreement
to such extensions, the Company, in turn, agreed to certain service fee
modifications. Under the service agreements, as amended, BIG will pay 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, shall 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 million on an
actual basis, would have been approximately $30 million on a pro forma basis.
The Company believes that any anticipated reduction in affiliated outsourcing
revenues resulting from the implementation of such service fee changes will be
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, although no assurances can be given in this regard.
Outsourcing Services Revenues. Outsourcing services revenues decreased
$152,000, or 1.4%, to $10.6 million for the three months ended March 31, 2001
from $10.7 million for the corresponding period in 2000. The decrease was
primarily attributable to a decrease in the volume of flood and wind damage
claims administered by the Company's outsourcing operations during the first
quarter of 2001 as compared to the corresponding period in 2000. During the
first quarter of 2001, the Company recognized revenues totaling approximately
$380,000 from the administration of property damage claims resulting from a
tropical depression that caused extensive flooding in south Florida, which storm
occurred during the fourth quarter of 2000. In comparison, the Company
recognized revenues of approximately $950,000 during the first quarter of 2000
from the administration of property damage claims resulting from Hurricanes
Floyd and Irene, which occurred during the fourth quarter of 1999. Additionally,
outsourcing services revenues decreased during the first quarter of 2001 as
compared to the corresponding period in 2000 as a result of the sale of the
Company's direct marketing subsidiary, effective July 31, 2000, which subsidiary
contributed approximately $300,000 in outsourcing revenue during the
quarter-ended March 31, 2000. These decreases in outsourcing services revenues
were partially offset by an increase in the volume of flood, homeowners and
automobile premium processed on behalf of the Company's affiliated customers
during the first quarter of 2001.
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Flood Zone Determination Services Revenues. Flood zone determination
services revenues increased approximately $560,000, or 14.2%, to $4.5 million
for the three months ended March 31, 2001 from $4.0 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 first 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 a corresponding
increase in mortgage refinancings and loan originations, which have historically
driven the demand for flood zone determinations from the Company's customers.
Cost of Outsourcing Services. Cost of outsourcing services decreased
$504,000, or 5.8%, to $8.2 million for the three months ended March 31, 2001
from $8.7 million for the corresponding period in 2000. As a percentage of
outsourcing services revenues, cost of outsourcing services decreased to 77.2%
for the three months ended March 31, 2001 from 80.8% for the corresponding
period in 2000 as a result of both an increase in dollar amount of outsourcing
services revenues and a decrease in the cost of outsourcing services during
three months ended March 31, 2001 as compared to the corresponding period in
2000. The decrease in the dollar amount of cost of outsourcing services was
primarily attributable to a decrease in revenue from Colonial Claims Corporation
("Colonial Claims"), the Company's claims catastrophe subsidiary, of which
approximately 70.0% of each dollar of revenue is paid to its independent
adjusters who adjust claims on the Company's behalf. Additionally, cost of
outsourcing services decreased during the three months ended March 31, 2001 as a
result of a 53-employee staffing reduction completed in February, 2001.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services increased $176,000, or 9.5%, to $2.0 million for the
three months ended March 31, 2001 from $1.9 million for the corresponding period
in 2000. As a percentage of flood zone determination services revenues, however,
cost of flood zone determination services decreased to 45.1% for the three
months ended March 31, 2001 from 47.0% for the corresponding period in 2000
primarily as a result of increased utilization of third party vendors, located
in India and Mexico, to perform data entry services and manual flood zone
determinations, respectively, at costs significantly below U.S. market rates.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased $201,000, or 7.6%, to $2.8 million for the
three months ended March 31, 2001 from $2.7 million for the corresponding period
in 2000. The increase in selling, general and administrative expenses was
primarily attributable to (i) the assumption of the human resources function by
the Company, effective April 1, 2000, which function was previously provided to
the Company by BIG under a management services agreement, and (ii) additional
legal expenses relating to the Company's shareholder action and various other
legal matters. Partially offsetting these increases was a decrease in selling,
general and administrative expenses as a result of the sale of substantially all
of the assets of a direct marketing subsidiary of the Company, effective July
31, 2000.
Management Services from Parent. Management services from Parent
decreased $133,000, or 26.4%, to $371,000 for the three months ended March 31,
2001 from $504,000 for the corresponding period in 2000. The decrease was
primarily related to the assumption of the human resources function by the
Company, effective April 1, 2000, which function was previously provided to the
Company by BIG under a management services agreement.
Provision (Benefit) for Income Taxes. The Company's effective income
tax (benefit) rates were 57.4% and (15.3%) the three months ended March 31, 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 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, cash flows from operations, and
available borrowings under the Company's revolving credit facility, which line
was terminated in December, 2000, as described below. Prior to January 1, 2000,
the Company funded its operations through cash generated from operations,
receipt of service fees advanced from BIG and available borrowings under the
Company's line of credit. Bank borrowings were used to finance fixed asset
purchases.
In June, 1999, the Company entered into a revolving line of credit
agreement ("LOC)" with a financial institution (the "Bank") that provided for
borrowings of up to two times the Company's rolling four quarter earnings before
interest, taxes, depreciation and amortization ("EBITDA"), but in no event more
than $12.0 million. In December, 2000, the Company received notification from
the Bank that it would no longer honor any requests by the Company for advances
under the LOC due to the fact that the Bank believed the Company had experienced
a material adverse change in its financial condition. Although the Company
attempted to seek a replacement facility, it has since largely ceased its
efforts to secure a new LOC as it has been unable to negotiate such an
arrangement upon acceptable terms.
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In conjunction with the Company's acquisition of Geotrac, it entered
into a Corporate Governance Agreement, dated July 31, 1998, with Geotrac and
Daniel J. White ("Mr. White"), Geotrac's president and then majority
shareholder, 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 the Geotrac 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, unanimous board approval
under the Corporate Governance Agreement is required in order to make cash
distributions to the Company, whether by dividend or otherwise. 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. 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 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 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 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 next twelve months. Unanticipated rapid expansion, business
or systems development, or potential acquisitions may cause the Company to
require additional funds, however, which may not be available to the Company
upon acceptable terms. The Company identifies and assesses, in the normal course
of business, potential acquisitions of technologies or businesses that it
believes strategically fit its business plan. The Company may enter into such
transactions should opportunities present themselves in the future and should it
be able to obtain the necessary financing upon acceptable terms, although no
assurances can be made 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) is not material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes to the disclosure set forth under
the caption "Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 2000, as filed with the Securities and
Exchange Commission on April 17, 2001.
ITEM 5. OTHER INFORMATION
Effective May 7, 2001, Anthony R. Marando was appointed as Chief
Financial Officer of the Company. Mr. Marando's appointment fills the vacancy
created by the departure of Christopher P. Breakiron, who resigned as Vice
President, Chief Financial Officer, Secretary and Treasurer of the Company
effective April 17, 2001.
Mr. Marando, age 44, joins the Company after serving as Chief Operating
Officer of the e-Insurance division of Selectica, Inc. a software development
and e-commerce company, from August 2000 to March 2001. Prior to that time, he
served as Director of U.S. Financial Reporting for Canada Life Assurance Co.
from May, 1999 to May 2000 and in various capacities, most recently as Assistant
Vice President of Finance, with MetLife, Inc., from 1986 to December 1998.
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Effective April 1, 2001, the Company entered into an employment
agreement with Mr. Marando pursuant to which he is currently paid a salary at a
rate of $171,080 annually. Mr. Marando's employment agreement provides for a
term of six months, commencing April 9, 2001, provided that the agreement may be
terminated (i) by the Company at any time for "cause" (as defined therein) or
(ii) by either party prior to the expiration of such term upon 30 days prior
notice (except that the Company may not give any such termination notice during
the first 60 days of employment). Mr. Marando's employment shall continue after
the expiration of such term only upon mutual agreement of the parties.
Mr. Marando's employment agreement further provides that he shall be
provided benefits, such as health, life and disability insurance, on the same
basis as the Company's other employees.
On April 25, 2001, the Board of Directors of the Company appointed
Richard G. Torra as Secretary of the Company to fill the vacancy created by the
departure of Mr. Breakiron. Mr. Torra is also Corporate Legal Counsel of the
Company and has served in such capacity since August, 2000. Prior to that time,
Mr. Torra served as Assistant Corporate Secretary and Associate General Counsel
of BIG from July 1996 to July 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 Employment Agreement, dated May 7, 2001, between
Anthony R. Marando and Insurance Management Solutions
Group, Inc.
10.2 Letter Agreement, dated April 13, 2001, by and
between Insurance Management Solutions, Inc., Bankers
Insurance Group, Inc., Bankers Insurance Company,
First Community Insurance Company and Bankers
Security Insurance Company.*
10.3 Commitment Letter to advance service fee payments,
dated April 13, 2001, between Insurance Management
Solutions, Inc. and Bankers Insurance Group, Inc.*
* Previously filed as part of the Company's Form 10-K for the
year ended December 31, 2000, and incorporated by reference
herein.
b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the three months ended
March 31, 2001:
(1) The Company filed a Report on Form 8-K on February 15, 2001, to
report that: (a) January 30, 2001, the Company's Board of Directors unanimously
elected John S. McMullen as a Class III director to fill the vacancy created by
the resignation of Jeffrey S. Bragg in January, 2000; and (b) on February 13,
2001, the Company reduced its overall workforce by approximately 10% by
eliminating approximately 50 positions primarily in the areas of information
technology and claims administration.
(2) The Company filed a Report on Form 8-K on February 26, 2001 to
report that: (a) its Common Stock was delisted from trading on the Nasdaq
National Market at the opening of business on February 26, 2001, as a result of
the failure of the Company's Common Stock to satisfy the maintenance criteria
for continued listing on the Nasdaq National Market; and (b) William R. Hough &
Co., a registered broker-dealer based in St. Petersburg, Florida, had advised
the Company that it intended to register as a "market maker" for the Company's
Common Stock on the OTC Bulletin Board.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 15, 2001 INSURANCE MANAGEMENT SOLUTIONS
GROUP, INC.
(Registrant)
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)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.1 Employment Agreement, dated May 7, 2001, between Anthony R. Marando and
Insurance Management Solutions Group, Inc.
10.2 Letter Agreement, dated April 13, 2001, by and between Insurance
Management Solutions, Inc., Bankers Insurance Group, Inc., Bankers
Insurance Company, First Community Insurance Company and Bankers
Security Insurance Company.*
10.3 Commitment Letter to advance service fee payments, dated April 13,
2001, between Insurance Management Solutions, Inc. and Bankers
Insurance Group, Inc.*
* Previously filed as part of the Company's Form 10-K for the year ended
December 31, 2000, and incorporated by reference herein.
E-1