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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
COMMISSION FILE NUMBER: 000-25273
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
------------------------------------------
(Exact name of registrant as specified in its charter)
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 August 12, 1999: 12,678,743
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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, 1998
and June 30, 1999..................................................................... 1
Consolidated Statements of Income for the three months
and six months ended June 30, 1998 and 1999........................................... 2
Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1998 and the six months ended
June 30, 1999......................................................................... 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1999................................................... 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............................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 14
Item 2. Changes in Securities and Use of Proceeds............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 15
The statements contained in this report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, including statements regarding the Company's expectations, hopes,
beliefs, intentions, or strategies regarding the future. Forward-looking
statements include statements regarding, among other things: (i) the potential
loss of material customers; (ii) the failure to properly manage growth and
successfully integrate acquired businesses; (iii) the Company's financing
plans; (iv) trends affecting the Company's financial condition or results of
operations; (v) the Company's growth and operating strategies; (vi) the ability
to attract and retain qualified sales, information services and management
personnel; (vii) the impact of competition from new and existing competitors;
(viii) the financial condition of the Company's clients; (ix) potential
increases in the Company's costs; (x) the declaration and payment of dividends;
(xi) the potential for unfavorable interpretation of existing government
regulations or new government legislation; (xii) the ability of the Company and
its significant suppliers and large customers to address the Year 2000 Issue;
(xiii) the impact of general economic conditions and interest rate fluctuations
on the demand for the Company's services, including flood zone determination
services; and (xiv) the outcome of certain litigation and administrative
proceedings involving the Company's principal customer. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. All forward-looking statements included in this
document are based on information available to the Company on the date hereof
and the Company assumes no obligation to update any such forward-looking
statement. Among the factors that could cause actual results to differ
materially are the factors detailed in Item 2 of this report and the risks
discussed under the caption "Risk Factors" included in the Company's
Registration Statement on Form S-1, as amended (Reg. No. 333-57747).
Prospective investors should also consult the risks described from time to time
in the Company's Reports on Form 10-Q, 8-K and 10-K and Annual Reports to
Shareholders.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1998 1999
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,868,867 $10,210,513
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,549,044 3,732,111
Due from affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570,139 3,853,616
Note and interest receivable - affiliate . . . . . . . . . . . . . . . . . . . . 5,271,406 --
Income taxes recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,148,902 --
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . . . . 859,684 1,339,274
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,268,042 19,135,514
PROPERTY AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,507,897 7,699,212
OTHER ASSETS
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,515,785 16,402,600
Customer contracts, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,316,667 1,216,667
Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 967,191 483,391
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326,273 1,162,154
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,901,855 $46,099,538
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . $ 3,026,944 $ 550,706
Current portion of notes and interest payable - affiliates . . . . . . . . . . . 9,180,743 --
Accounts payable, trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 831,674 1,048,241
Due to affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,748,509 36,520
Employee related accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 1,804,677 2,645,910
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755,436 650,085
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 382,287
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,891 214,891
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 17,562,874 5,528,640
LONG-TERM DEBT, less current portion. . . . . . . . . . . . . . . . . . . . . . . . 7,470,539 7,088,997
NOTES PAYABLE - AFFILIATES, less current portion. . . . . . . . . . . . . . . . . . 5,527,677 --
DEFERRED REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651,602 761,850
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 20,000,000 shares
authorized, no shares issued and outstanding. . . . . . . . . . . . . . . . . -- --
Common Stock, $.01 par value; 100,000,000 shares authorized, 10,524,198
and 12,678,743 shares issued and outstanding at
December 31, 1998 and June 30, 1999, respectively . . . . . . . . . . . . . . 105,242 126,787
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,830,930 26,673,282
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,752,991 5,919,982
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 8,689,163 32,720,051
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . $39,901,855 $46,099,538
=========== ===========
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 INCOME
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES
Outsourcing services - affiliated ............ $ 8,811,470 $ 12,944,426 $ 17,305,258 $ 22,730,540
Outsourcing services ......................... 287,577 1,016,699 448,808 4,046,194
Flood zone determination services ............ 6,315,710 4,404,611 12,943,128 9,612,538
Flood zone determination services - affiliated 310,814 112,272 547,182 194,055
------------ ------------ ------------ ------------
Total revenues ....................... 15,725,571 18,478,008 31,244,376 36,583,327
------------ ------------ ------------ ------------
EXPENSES
Cost of outsourcing services ................. 6,366,739 8,328,025 12,794,276 17,297,365
Cost of flood zone determination services .... 3,015,588 2,111,891 6,082,313 4,325,325
Selling, general and administrative .......... 1,855,352 2,912,356 3,540,194 5,424,474
Management services from Parent .............. 690,445 592,795 1,369,017 1,198,355
Deferred compensation (non-recurring item) ... 728,069 -- 728,069 --
Depreciation and amortization ................ 1,131,093 1,398,693 1,764,210 2,731,949
------------ ------------ ------------ ------------
Total expenses ....................... 13,787,286 15,343,760 26,278,079 30,977,468
------------ ------------ ------------ ------------
OPERATING INCOME ................................ 1,938,285 3,134,248 4,966,297 5,605,859
------------ ------------ ------------ ------------
MINORITY INTEREST ............................... (17,190) -- (441,986) --
OTHER INCOME (EXPENSE):
Interest income .............................. 106,356 101,208 106,356 222,238
Interest expense ............................. (580,263) (140,408) (986,211) (480,506)
------------ ------------ ------------ ------------
Total other income (expense) ......... (473,907) (39,200) (879,855) (258,268)
INCOME BEFORE PROVISION FOR INCOME TAXES ........ 1,447,188 3,095,048 3,644,456 5,347,591
PROVISION FOR INCOME TAXES ...................... 598,900 1,246,600 1,687,800 2,180,600
------------ ------------ ------------ ------------
NET INCOME ...................................... $ 848,288 $ 1,848,448 $ 1,956,656 $ 3,166,991
============ ============ ============ ============
NET INCOME PER COMMON SHARE ..................... $ .08 $ .15 $ .20 $ .26
============ ============ ============ ============
Weighted average common shares outstanding ...... 10,000,000 12,678,743 10,000,000 12,213,801
============ ============ ============ ============
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 January 1, 1998 ........................ $100,000 $ 69,991 $ -- $ 169,991
Cash dividends to Parent ...................... -- -- (1,100,000) (1,100,000)
Issuance of Common Stock as partial
consideration for the acquisition of
Geotrac, Inc. ............................... 5,242 5,760,939 -- 5,766,181
Net income .................................... -- -- 3,852,991 3,852,991
-------- ----------- ----------- ------------
Balance at December 31, 1998 ...................... 105,242 5,830,930 2,752,991 8,689,163
Issuance of Common Stock as partial
consideration for the acquisition of ........ 1,545 1,698,455 -- 1,700,000
Colonial Claims (Note 3) (unaudited) ........
Initial public offering of Common Stock,
net of offering costs (Note 2) (unaudited) .. 20,000 19,143,897 -- 19,163,897
Net income (unaudited) ........................ -- -- 3,166,991 3,166,991
-------- ----------- ----------- ------------
Balance at June 30, 1999 (unaudited) .............. $126,787 $26,673,282 $ 5,919,982 $ 32,720,051
======== =========== =========== ============
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
SIX MONTHS ENDED JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 1,956,656 $ 3,166,991
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 1,036,724 2,731,949
Loss on disposal of property and equipment .............. 37,501 47,485
Equity in earnings of Geotrac, Inc. ..................... (485,034) --
Deferred income taxes, net .............................. (160,200) 377,411
Changes in assets and liabilities:
Accounts receivable ................................... 65,667 817,826
Income taxes recoverable .............................. -- 1,148,902
Prepaid expenses and other current assets ............. (570,572) (151,272)
Other assets .......................................... (518,149) 101,420
Accounts payable, trade ............................... (135,182) 198,742
Employee related accrued expenses ..................... (41,423) 841,233
Other accrued expenses ................................ 739,988 (789,443)
Income taxes payable .................................. 1,232,358 382,287
Deferred revenue ...................................... 121,551 110,248
------------ ------------
Net cash provided by operating activities .......... 3,279,885 8,983,779
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Colonial Claims, net of cash acquired ....... -- 1,092
Repayment of acquisition debt .............................. -- (500,000)
Payment of dividend to prior Colonial Claims shareholders .. -- (670,000)
Purchases of property and equipment ........................ (723,616) (1,346,862)
------------ ------------
Net cash used in investing activities .............. (723,616) (2,515,770)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds received from initial public offering ......... -- 19,163,897
Net borrowings under line of credit ........................ -- 6,668,322
Repayment of debt .......................................... (1,101,035) (9,526,102)
Repayment of affiliated notes and interest payable ......... -- (14,708,420)
Collection of affiliated note and interest receivable ...... -- 5,271,406
Cash dividends paid to Parent .............................. (1,100,000) --
Net repayments to affiliates ............................... (263,061) (4,995,466)
------------ ------------
Net cash provided by (used in) financing activities (2,464,096) 1,873,637
------------ ------------
INCREASE IN CASH AND CASH
EQUIVALENTS ................................................. 92,173 8,341,646
CASH AND CASH EQUIVALENTS, beginning of period ................ 115,070 1,868,867
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ...................... $ 207,243 $ 10,210,513
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
ACTIVITIES:
Cash paid for interest.................................. $ 172,527 $ 940,922
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Purchase of net assets of Colonial Claims:
Total consideration consists of:
Common Stock................................................................. $ 1,700,000
Cash......................................................................... 500,000
Short term obligation........................................................ 500,000
------------
2,700,000
============
Fair value of assets acquired................................................ 1,846,555
Liabilities assumed.......................................................... 1,478,306
------------
Net assets................................................................... 368,249
Goodwill..................................................................... 2,331,751
------------
$ 2,700,000
============
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, accordingly, do
not include all of the disclosures required by generally accepted accounting
principles. In the opinion of management, the accompanying unaudited
consolidated financial statements include all adjustments, consisting of normal
and recurring adjustments necessary for a fair presentation of the consolidated
financial position, results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission on
March 31,1999. The results of operations for the three month and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
should be expected for a full fiscal year.
Principles of Consolidation
During July, 1998, the Company acquired the remaining 51% interest in
Geotrac, Inc. For the three month and six month periods ended June 30, 1998,
the operations of Geotrac, Inc. have been consolidated in the Company's
statements of income, with minority interest deductions representing the net
income of Geotrac, Inc. allocable to the 51% interest held by the majority
stockholders prior to the Company acquiring the remaining interest.
Net Income Per Common Share
Net income per common share, which represents both basic and diluted
earnings per share ("EPS"), is computed by dividing net income by the weighted
average common shares outstanding. The following table reconciles the numerator
and denominator of the basic and dilutive EPS computation:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1999 1998 1999
----------- ----------- ----------- -----------
Numerator:
Net income ................................... $ 848,288 $ 1,848,448 $ 1,956,656 $ 3,166,991
=========== =========== =========== ===========
Denominator:
Weighted average number of Common Shares
used in basic EPS ........................ 10,000,000 12,678,743 10,000,000 12,213,801
Diluted stock options ........................ -- -- -- --
----------- ----------- ----------- -----------
Weighted average number of Common Shares
and diluted potential Common Shares used in
diluted EPS ............................... 10,000,000 12,678,743 10,000,000 12,213,801
=========== =========== =========== ===========
For the six months ended June 30, 1999, options to purchase 719,000
shares of Common Stock were outstanding during the period but were not included
in the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the Common Stock, and
therefore, the effect would be antidilutive.
NOTE 2. INITIAL PUBLIC OFFERING
In February, 1999, the Company completed an initial public offering
("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the
3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation, a
Cayman Islands company. The IPO generated net proceeds to the Company of
approximately $19,164,000, after deducting offering expenses paid by the
Company of approximately $1,296,000. Such offering expenses were charged to
additional paid-in capital against the proceeds from the IPO. Refer to notes 6,
7, and 8 in the Company's consolidated financial statements included in the
Annual Report on Form 10-K for the year ended December 31, 1998, for a
description of the use of the net proceeds from the IPO.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 3. ACQUISITION
Effective January 7, 1999, the Company, through a wholly-owned
subsidiary, acquired all of the issued and outstanding capital stock of
Colonial Catastrophe Claims Corporation, a Florida corporation ("Colonial
Catastrophe"), in exchange for (i) 154,545 shares of Common Stock, (ii) cash in
the amount of $500,000, (iii) a promissory note in the principal amount of
$500,000, and (iv) an additional payment of $300,000, payable in additional
shares of Common Stock, based upon the net income before taxes of Colonial
Claims (as hereinafter defined) for the year ending December 31, 1999. On
January 15, 1999, Colonial Catastrophe was merged into the acquiring subsidiary
and the name of the acquiring subsidiary was changed to "Colonial Claims
Corporation" (hereinafter "Colonial Claims"). The total purchase price of the
acquisition was allocated in accordance with the provisions of Accounting
Principles Board Opinion No. 16, "Business Combinations", and accordingly was
based on the fair value of the net tangible assets acquired on the date of
acquisition. Had the acquisition of Colonial Claims occurred on January 1,
1998, the pro forma results of operations for the three and six month periods
ended June 30, 1998 and 1999 would not have been materially different from the
Company's historical results of operations.
NOTE 4. LONG-TERM DEBT
In June, 1999, the Company entered into a revolving line of credit
agreement ("LOC") with a financial institution that provides for borrowings of
up to two times the rolling four quarter earnings before interest, taxes,
depreciation and amortization ("EBITDA"), but in no event more than
$12,000,000. The LOC bears interest at a specified percentage over LIBOR (6.70%
at June 30, 1999) based on the ratio of funded debt (as defined) to EBITDA.
Interest payments are payable monthly and the remaining unpaid principal
balance is due in full in July, 2001. The LOC is collateralized by
substantially all of the Company's assets and is subject to certain quarterly
financial covenants requiring the Company to maintain the following minimum
ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0, (ii)
total liabilities to tangible net worth of not more than 1.0 to 1.0, and (iii)
fixed charge coverage (as defined) of not less than 2.5 to 1.0. Net borrowings
under the LOC, which totaled $6,664,084 as of June 30, 1999, are included in
"Long-term debt, less current portion" in the accompanying June 30, 1999
consolidated balance sheet.
NOTE 5. CONTINGENCIES
Bankers Insurance Company ("BIC"), the Company's principal customer
and a wholly-owned subsidiary of Bankers Insurance Group, Inc. (together with
its subsidiaries, "BIG"), is currently subject to an investigation by the
Florida Department of Insurance (the "DOI"), the principal regulator of
insurance activities in the State of Florida, stemming from BIC's use of a
private investigator to gather information on a DOI employee and the private
investigator's unauthorized use of illegal wiretaps in connection therewith. In
addition, BIC and certain of its employees (one of whom is now an officer of
Insurance Management Solutions, Inc. and several of whom are now employees of
the Company) have been subpoenaed on behalf of the Federal Emergency Management
Agency ("FEMA") to produce documentation or testify in connection with its
investigation of certain cash management and claims processing practices of
BIC. BIC is currently involved in discussions relating to the resolution of
certain matters raised in the investigation. If the parties are unable to reach
agreement in these matters, the United States could file suit under the False
Claims Act and/or various common law and equitable theories. In the event
either or both of these investigations or any consequence thereof materially
adversely affects the business or operations of BIC, it could result in the
loss or material decrease in the Company's business from BIC, which would have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company, based on information provided by BIG, does
not believe the outcome of these investigations will have a material adverse
effect on the business, financial condition or results of operations of BIC or
the Company. It is impossible at this time to predict the ultimate outcome of
these investigations.
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INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 6. RELATED PARTY TRANSACTIONS
Effective April 1, 1999, the Company amended its existing service
agreements with affiliated insurers to provide for minimum aggregate quarterly
service fee payments through December 31, 1999 with respect to certain lines of
business, provided that certain key tasks are performed timely. If such minimum
service fee requirements with respect to said lines of business under the
agreements had not been implemented as of April 1, 1999, aggregate affiliated
outsourcing services revenues, which totaled $12.9 million and $22.7 million
for the three month and six month periods ended June 30, 1999, respectively,
would have been $11.1 million and $20.9 million for the three and six month
periods ended June 30, 1999, respectively, in accordance with the terms of the
affiliated service agreements as in effect prior to April 1, 1999.
During the quarter ended June 30, 1999, the Company also entered into
a Technical Support Services Agreement with BIG pursuant to which the Company
provides BIG with certain technical support services, computer programming and
systems analysis services. Under this agreement, such services are charged to
BIG on a time and materials basis. During the quarter ended June 30, 1999,
revenue from technical support services provided to BIG under this agreement
totaled approximately $1.3 million, which is included in affiliated outsourcing
services revenue in the accompanying consolidated statements of income.
NOTE 7. 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 JUNE 30, 1998
- - (UNAUDITED)
Operating revenues - affiliated .. $ 9,189,502 $ 310,814 $ (378,032) $ 9,122,284
Operating revenues - unaffiliated 287,577 6,315,710 -- 6,603,287
Operating income ................. 562,177 1,376,108 -- 1,938,285
Identifiable assets .............. 18,663,358 13,071,726 (3,220,856) 28,514,228
THREE MONTHS ENDED JUNE 30, 1999
- - (UNAUDITED)
Operating revenues - affiliated .. $13,070,948 $ 112,272 $ (126,522) $ 13,056,698
Operating revenues - unaffiliated 1,016,699 4,404,611 -- 5,421,310
Operating income ................. 2,375,694 758,554 -- 3,134,248
Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538
SIX MONTHS ENDED JUNE 30, 1998
- - (UNAUDITED)
Operating revenues - affiliated .. $17,992,154 $ 547,182 $ (686,896) $ 17,852,440
Operating revenues - unaffiliated 448,808 12,943,128 -- 13,391,936
Operating income ................. 1,260,824 3,705,473 -- 4,966,297
Identifiable assets .............. 18,663,358 13,071,726 (3,220,856) 28,514,228
SIX MONTHS ENDED JUNE 30, 1999
- - (UNAUDITED)
Operating revenues - affiliated .. $22,953,095 $ 194,055 $ (222,555) $ 22,924,595
Operating revenues - unaffiliated 4,046,194 9,612,538 -- 13,658,732
Operating income ................. 3,486,993 2,118,866 -- 5,605,859
Identifiable assets .............. 31,800,787 25,469,111 (11,170,360) 46,099,538
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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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1999 1998 1999
----- ----- ----- -----
REVENUES
Outsourcing services ................... 57.9% 75.6% 56.8% 73.2%
Flood zone determination services ...... 42.1 24.4 43.2 26.8
----- ----- ----- -----
Total revenues ..................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
EXPENSES
Cost of outsourcing services ............. 40.5 45.1 40.9 47.3
Cost of flood zone determination services 19.2 11.4 19.5 11.8
Selling, general and administrative ...... 11.8 15.8 11.3 14.8
Management services from Parent .......... 4.4 3.2 4.4 3.3
Deferred compensation (non-recurring item) 4.6 -- 2.3 --
Depreciation and amortization ............ 7.2 7.6 5.6 7.5
----- ----- ----- -----
Total expenses ..................... 87.7 83.1 84.0 84.7
----- ----- ----- -----
Operating income ......................... 12.3 16.9 16.0 15.3
Minority interest ........................ (0.1) -- (1.4) --
Interest income .......................... 0.7 0.5 0.3 0.6
Interest expense ......................... (3.7) (0.8) (3.2) (1.3)
----- ----- ----- -----
Income before provision for income taxes . 9.2 16.6 11.7 14.6
Provision for income taxes ............... 3.8 6.6 5.4 5.9
----- ----- ----- -----
Net income ............................... 5.4% 10.0% 6.3% 8.7%
===== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1999
Outsourcing Services Revenues. Outsourcing services revenues for the
second quarter of 1999 increased 53.4% to $14.0 million from $9.1 million for
the comparable period in 1998. The increase was primarily attributable to (i)
revenue generated under an affiliated technical support services arrangement
for both personal and commercial lines of insurance entered into effective
April 1, 1999, (ii) growth in affiliated and unaffiliated flood premium
processed by the Company, and (iii) incremental revenues from the recently
acquired Colonial Claims. Effective April 1, 1999, the Company amended its
existing service agreements with affiliated insurers to provide for minimum
aggregate quarterly service fee payments through December 31, 1999 with respect
to certain lines of business, provided that certain key tasks are performed
timely. If such minimum service fee requirements with respect to said lines of
business under the agreements had not been implemented as of April 1, 1999,
aggregate affiliated outsourcing services revenues, which totaled $12.9 million
for the three months ended June 30, 1999, would have been $11.1 million in
accordance with the terms of the affiliated service agreements as in effect
prior to April 1, 1999. Such minimums were established to compensate the Company
for maintaining an infrastructure to process certain lines of business of
affiliated insurers that have not grown as rapidly as originally forecasted.
Flood Zone Determination Services Revenues. Flood zone determination
services revenues for the second quarter of 1999 decreased 31.8% to $4.5
million from $6.6 million for the comparable period in 1998. The decrease in
flood zone determination revenue was primarily attributable to a decrease in
the demand for refinancing of mortgage loans which began in the second half of
1998 and has continued through the first half of 1999. Additionally, during the
second quarter of 1999, the Company experienced a reduction in flood zone
determination revenue from several large customers that are experiencing
financial difficulties.
Cost of Outsourcing Services. Cost of outsourcing services for the
second quarter of 1999 increased 30.8% to $8.3 million from $6.4 million for
the comparable period in 1998. As a percentage of outsourcing services
revenues, cost of outsourcing services decreased during the second quarter of
1999 to 59.7% from 70.0% for the comparable period in 1998. The increase in
cost of outsourcing services was primarily attributable to (i) incremental
expenses incurred by the recently acquired Colonial Claims, (ii) increases in
information technology costs due to staff additions and use of contract
programmers to develop new unaffiliated programs, and (iii) incremental direct
costs (primarily personnel) incurred to service the growth of both affiliated
and unaffiliated flood premium business.
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Cost of Flood Zone Determination Services. Cost of flood zone
determination services for the second quarter of 1999 decreased 30.0% to $2.1
million from $3.0 million for the comparable period in 1998. As a percentage of
flood zone determination revenues, cost of flood zone determination services
increased during the second quarter of 1999 to 46.8% from 45.5% for the
comparable period in 1998. The decrease in cost of flood zone determination
services resulted primarily from the merger of Bankers Hazard Determination
Services, Inc. ("BHDS") and Geotrac, Inc. in July, 1998 and a subsequent
elimination of certain duplicated functions and facilities, as well as a
redesign of certain production workflows in April, 1999 that enabled the
Company to increase employee productivity and reduce expenses.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the second quarter of 1999 increased 57.0% to $2.9
million from $1.9 million for the comparable period in 1998. The increase in
selling, general and administrative expenses was primarily attributable to (i)
additional wages and related benefits associated with adding executive
management, accounting, sales and marketing and other administrative staff to
support the Company's expanded operations, (ii) incremental expenses incurred
by the Company's direct marketing subsidiary, which was formed in August, 1998,
(iii) incremental expenses incurred by the recently acquired Colonial Claims,
and (iv) incremental expenses related to the addition of certain accounting and
internal audit functions which were previously provided to the Company under
the management service agreement with BIG.
Management Services from Parent. Management services from Parent
(i.e., BIG) for the second quarter of 1999 decreased 14.1% to $593,000 from
$690,000 for the comparable period in 1998. The decrease was primarily related
to an amendment to the management service agreement, which became effective
January 1, 1999, pursuant to which certain accounting and internal audit
functions are no longer performed by the Parent (such functions are currently
performed by the Company directly).
Depreciation and Amortization Expense. Depreciation and amortization
expense for the second quarter of 1999 increased 23.7% to $1.4 million from
$1.1 for the comparable period in 1998. The increase was primarily related to
(i) additional goodwill amortization recognized during the second quarter of
1999 as a result of the purchase of the remaining 51% of Geotrac, Inc. in July,
1998 and (ii) goodwill amortization resulting from the purchase of Colonial
Claims in January, 1999.
Minority Interest. During July, 1998, the Company purchased the
remaining 51% of Geotrac, Inc. However, the Company has elected to reflect the
operations of Geotrac, Inc. prior to the July, 1998 acquisition on a
consolidated basis with the Company, with the net income of Geotrac, Inc.
allocable to the 51% interest held by the prior majority stockholders during
the three months ended June 30, 1998 reflected as minority interest.
Provision for Income Taxes. The Company's effective income tax rates
were 41.4% and 40.3% for the three months ended June 30, 1998 and 1999,
respectively. Income before provision for income taxes in 1998, excluding
minority interest which is presented net of tax in the accompanying unaudited
consolidated financial statements, resulted in an effective income tax rate of
40.9% for the three months ended June 30, 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Outsourcing Services Revenues. Outsourcing services revenues for the
first six months of 1999 increased 50.8% to $26.8 million from $17.8 million
for the comparable period in 1998. The increase was primarily attributable to
(i) incremental revenues from the recently acquired Colonial Claims, (ii)
growth in both affiliated and unaffiliated flood premium, (iii) revenue
generated under an affiliated software development and maintenance arrangement
for both personal and commercial lines of insurance entered into effective
April 1, 1999, (iv) revenue generated under an affiliated technical support
services arrangement for both personal and commercial lines of insurance
entered into on April 1, 1999, and (v) claims fee income associated with the
settlement of flood and wind damage claims resulting from Hurricane Georges in
late September, 1998. Effective April 1, 1999, the Company amended its existing
service agreements with affiliated insurers to provide for minimum aggregate
quarterly service fee payments through December 31, 1999 with respect to
certain lines of business, provided that certain key tasks are performed
timely. If such minimum service fee requirements with respect to said lines of
business under the agreements had not been implemented as of April 1, 1999,
aggregate affiliated outsourcing services revenues, which totaled $22.7 million
for the six months ended June 30, 1999, would have been $20.9 million in
accordance with the terms of the affiliated service agreements as in effect
prior to April 1, 1999. Such minimums were established to compensate the Company
for maintaining an infrastructure to process certain lines of business of
affiliated insurers that have not grown as rapidly as originally forecasted.
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Flood Zone Determination Services Revenues. Flood zone determination
services revenues for the first six months of 1999 decreased 27.3% to $9.8
million from $13.5 million for the comparable period in 1998. The decrease in
flood zone determination revenue was primarily attributable to a decrease in
the demand for refinancing of mortgage loans which began in the second half of
1998 and has continued through the first half of 1999. Additionally, during the
first six months of 1999, the Company experienced a reduction in flood zone
determination revenue from several large customers that are experiencing
financial difficulties. The decrease in flood zone determination services
revenues during the first six months of 1999 was partially offset by a novation
of the Company's life-of-loan insurance policy in which an estimate of the
present value of future losses to be claimed under the policy (approximately
$500,000) was paid to the Company in exchange for a release of liability for
such future losses under the policy.
Cost of Outsourcing Services. Cost of outsourcing services for the
first six months of 1999 increased 35.2% to $17.3 million from $12.8 million
for the comparable period in 1998. As a percentage of outsourcing services
revenues, cost of outsourcing services decreased during the first six months of
1999 to 64.6% from 72.1% for the comparable period in 1998. The increase in
cost of outsourcing services was primarily attributable to (i) incremental
expenses incurred by the recently acquired Colonial Claims, (ii) increases in
information technology costs due to staff additions and use of contract
programmers to develop new unaffiliated programs, and (iii) incremental direct
costs (primarily personnel) incurred to service the growth of both affiliated
and unaffiliated flood premium. These increases were partially offset by a
decrease in the lease cost of fixed assets that were purchased by the Company
from BIG on April 1, 1998. Prior to April 1, 1998, the depreciation for such
equipment, which totaled $282,015 during the three months ended March 31, 1998,
was charged to the Company under an arrangement similar to an operating lease
and is included in cost of outsourcing services. Such costs are now included in
depreciation and amortization.
Cost of Flood Zone Determination Services. Cost of flood zone
determination services for the first six months of 1999 decreased 28.9% to $4.3
million from $6.1 million for the comparable period in 1998. As a percentage of
flood zone determination revenues, cost of flood zone determination services
decrease during the first six months of 1999 to 44.1% from 45.1% for the
comparable period in 1998. The decrease in cost of flood zone determination
services resulted primarily from the merger of Bankers Hazard Determination
Services, Inc. ("BHDS") and Geotrac, Inc. in July, 1998 and a subsequent
elimination of certain duplicated functions and facilities, as well as a
redesign of certain production workflows in April, 1999 that enabled the
Company to increase employee productivity and reduce expenses.
Selling, General and Administrative Expense. Selling, general and
administrative expenses for the first six months of 1999 increased 53.2% to
$5.4 million from $3.5 million for the comparable period in 1998. The increase
in selling, general and administrative expenses was primarily attributable to
(i) additional wages and related benefits associated with adding executive
management, accounting, sales and marketing and other administrative staff to
support the Company's expanded operations, (ii) incremental expenses incurred
by the Company's direct marketing subsidiary, which was formed in August, 1998,
(iii) incremental expenses incurred by the recently acquired Colonial Claims,
and (iv) incremental expenses related to the addition of certain accounting and
internal audit functions which were previously provided to the Company under
the management service agreement with BIG.
Management Services from Parent. Management services from Parent for
the first six months of 1999 decreased 12.5% to $1.2 million from $1.4 million
for the comparable period in 1998. The decrease was primarily related to an
amendment to the management service agreement, which became effective January
1, 1999, pursuant to which certain accounting and internal audit functions are
no longer performed by the Parent (such functions are currently performed by
the Company directly).
Depreciation and Amortization Expense. Depreciation and amortization
expense for the first six months of 1999 increased 54.9% to $2.7 million from
$1.8 million for the comparable period in 1998. The increase was primarily
related to (i) additional goodwill amortization recognized during 1999 as a
result of the purchase of the remaining 51% of Geotrac, Inc. in July, 1998,
(ii) goodwill amortization resulting from the purchase of Colonial Claims in
January, 1999, and (iii) depreciation related to assets, consisting of
telephone equipment and computer hardware and software that were purchased by
the Company from BIG in April, 1998 for use in its business. Prior to April 1,
1998, the depreciation for such equipment, which totaled $282,015 during the
three months ended March 31, 1998, was charged to the Company under an
arrangement similar to an operating lease and was included in cost of
outsourcing services.
Minority Interest. During July, 1998, the Company purchased the
remaining 51% of Geotrac, Inc. However, the Company has elected to reflect the
operations of Geotrac, Inc. prior to the July, 1998 acquisition on a
consolidated basis with the Company, with the net income of Geotrac, Inc.
allocable to the 51% interest held by the prior majority stockholders during
the six months ended June 30, 1998 reflected as minority interest.
10
13
Provision for Income Taxes. The Company's effective income tax rates
were 46.3% and 40.8% for the six months ended June 30, 1998 and 1999,
respectively. Income before provision for income taxes in 1998, excluding
minority interest which is presented net of tax in the accompanying unaudited
consolidated financial statements, resulted in an effective income tax rate of
41.3% for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, 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. Prior to 1999, the Company
funded its operations through cash generated from operations and receipt of
service fees advanced from BIG. Bank borrowings were used to finance fixed
asset purchases.
In February, 1999, the Company completed an initial public offering
("IPO") of 3,350,000 shares of Common Stock at a price of $11 per share. Of the
3,350,000 shares sold, 1,350,000 were sold by Venture Capital Corporation (the
"Selling Shareholder"), a Cayman Islands company. The offering generated net
proceeds to the Company of approximately $19.2 million after deducting offering
expenses paid by the Company of approximately $1.3 million. The Company used a
portion of the net proceeds from the offering, together with funds received
from BIG from proceeds made available to BIG by a subsidiary of the Selling
Shareholder, to repay all obligations with BIG and its affiliates.
Additionally, the Company used a portion of the IPO proceeds to repay certain
debt obligations.
In June, 1999, the Company entered into a revolving line of credit
agreement ("LOC") with a financial institution that provides for borrowings of
up to two times the rolling four quarter earnings before interest, taxes,
depreciation and amortization ("EBITDA"), but in no event more than
$12,000,000. The LOC bears interest at a specified percentage over LIBOR (6.70%
at June 30, 1999) based on the ratio of funded debt (as defined) to EBITDA.
Interest payments are payable monthly and the remaining unpaid principal
balance is due in full in July, 2001. The LOC is collateralized by
substantially all of the Company's assets and is subject to certain quarterly
financial covenants requiring the Company to maintain the following minimum
ratios: (i) interest bearing debt to EBITDA of not more than 2.0 to 1.0, (ii)
total liabilities to tangible net worth of not more than 1.0 to 1.0, and (iii)
fixed charge coverage (as defined) of not less than 2.5 to 1.0. On June 11,
1999, the Company used $6,664,084 of the available LOC to repay an existing
term loan. Subsequent to June 30, 1999, the Company used the remaining IPO
proceeds, together with excess cash reserves, to repay the LOC.
The Company believes that cash on-hand, cash flows from operations and
available borrowings under the Company's LOC facility will be sufficient to
satisfy currently anticipated working capital and capital expenditure
requirements for the next twelve months. Unanticipated rapid expansion,
business or systems development, or potential acquisitions may cause the
Company to require additional funds. In addition, prior to the IPO, the Company
at times relied upon advances against the future service fees it charged its
affiliates to support working capital needs, which primarily included payroll
costs. Since the IPO, the Company has discontinued this practice. The Company
identifies and assesses, in the normal course of business, potential
acquisitions of technologies or businesses which it believes to strategically
fit its business plan. The Company may enter into such transactions should
opportunities present themselves in the future.
YEAR 2000 COMPLIANCE
The Company is currently addressing a universal situation commonly
referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to Year 2000 and beyond, and the
inability of non-information technology systems to function properly when the
Year 2000 arrives.
Information concerning the Company's (1) state of readiness, (2) cost
of addressing Year 2000 issues, (3) risk of Year 2000 issues, and (4)
contingency plans is provided below. The discussion is divided into two parts:
the first part addresses the Company's outsourcing operations, and the second
part addresses the Company's flood zone determination operations.
Outsourcing Operations. With respect to both information technology
("IT") and non-information technology ("non-IT") systems associated with its
outsourcing operations, the Company has developed a detailed Year 2000 Project
Plan (the "Plan") and is in the process of carrying out the Plan. During
January, 1999, an independent accounting firm was engaged to validate the Plan.
The recommendations stemming from their review have been incorporated into the
Plan, which calls for testing, validation and modification of the Company's
systems in order to ensure Year 2000 compliance. For IT hardware systems, the
Plan addresses the Year 2000 Problem with respect to: production servers;
imaging servers; communication servers; development servers; Q&A servers;
wide-area network and network infrastructure; AS/400 processors and tape
drives; desk-top personal computers; telecommunications
11
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equipment, including voice, fax and modems; and printers. For IT software
systems, this Plan addresses the Year 2000 Problem with respect to: AS/400
operating and applications systems; personal computer applications software,
including spreadsheets, "macros," "uploads" and "downloads"; and electronic
forms. Testing has commenced and is expected to continue through the fourth
quarter of 1999. The Company is already issuing policies with terms extending
beyond the Year 2000 and believes it will not experience any difficulty in
processing business on its core processing systems.
For non-IT systems, the Plan provides for testing of elevators,
generators, utilities, card key access, alarms, uninterrupted power source, air
conditioning/heating units and thermostats. Non-IT systems testing is underway
and is expected to be completed during the third quarter of 1999.
The Plan also provides for certification of Year 2000 compliance by
the Company's business partners. Such partners provide office supplies, paper
supplies, copy center support, off-site tape management and disaster recovery
services. The Plan also provides for detailed questionnaires and follow-up
letters to be sent to all outside software vendors requiring responses, and
ultimately certification, as to their Year 2000 readiness. A review of these
responses by Company management will lead to decisions regarding the retention
or replacement of vendors and/or their products. Such decisions are expected to
be made prior to September 30, 1999. The Company will replace such vendors and
products if it believes their state of Year 2000 readiness poses a risk to the
Company sufficient to warrant doing so. The Company does not anticipate any
difficulty in securing adequate replacements for such vendors or products.
Costs associated with addressing the Year 2000 Problem were immaterial
prior to 1998. For internally built applications software, the Company has
consistently accounted for the Year 2000 date as a normal part of program
development. Nearly all costs associated with addressing the Year 2000 Problem
are internal expenses, with the exception of the costs of engaging the
independent accounting firm. The Company currently estimates direct costs
associated with addressing the Year 2000 Problem for its outsourcing operations
to be in the range of $300,000 to $400,000. The Company does not anticipate the
total replacement of any core system. In the event an outside vendor's software
is targeted for replacement, the Company may incur additional costs relating to
the purchase price of new software (which may be inflated if demand is high),
conversion of data to the new system, and training of personnel on the new
system. Management does not expect these costs to materially adversely affect
the Company's business or financial condition.
The most reasonably likely worse case scenario for the Company's
outsourcing operation is the possibility that the Company will be required to
manually process applications for insurance, which will result in increased
costs of issuing insurance policies. Manually-processed applications would
increase data entry and also increase customer service intervention as
representatives of the Company seek to obtain complete and accurate customer
information in order to issue correct insurance policies. These increased
responsibilities may require overtime on the part of customer service
representatives and supervisors. Moreover, the Company may be required to
perform additional internal cash processing if its lockbox vendor is required
to operate in a manual environment. The flood insurance product may require
manual flood zone searches in lieu of automatic determinations in the event
such automated flood zone processes become unavailable. In addition, the
Company may be required, for a period of time, to issue manual checks for
return premiums, claims payments and producers' commissions as well as to
perform manual policy assembly. Such activities may result in a substantial
increase in overtime wages for a significant percentage of the Company's
workforce as well as require the addition of a significant number of temporary
employees. Non-computer generated forms, manual check stock, retrieval of
physical records rather than electronic facsimiles and manual processing would
supplant computer processing until such systems are adapted to address the Year
2000 Problem. Risks associated with a manual environment as described above
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The Company is in the process of developing a contingency plan to deal
with situations that may require manual processing. This plan, expected to be
substantially completed by the end of the third quarter of 1999, will
incorporate each processing department's needs in the event it must convert to
manual systems from automated systems. Such needs may include overtime hours,
temporary employees, additional space, paper forms in replacement of computer
generated forms, blank paper stock, physical file space, additional copiers and
fax machines, additional equipment, greater support for data reconciliation and
cash reconciliation processes in the absence of computer-generated production
data, and greater use of fiche and fiche readers.
Flood Zone Determination Operations. The Company has also adopted a
detailed plan (the "Project Plan") to address the Year 2000 Problem with
respect to its flood zone determination operation. The Project Plan also calls
for testing, validation and modification of the IT and non-IT systems
associated with the Company's flood zone determination operations in order to
ensure Year 2000 compliance.
12
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For IT hardware systems, the Project Plan addresses the Year 2000
Problem with respect to: IBM AS/400 processors and tape drives; production
servers; communication servers; development servers; wide area network and
network infrastructure hardware; modems; printers; tape drives; desktop
personal computers; and fax servers. For IT software systems, the Plan
addresses the Year 2000 Problem with respect to: network operating systems;
software development packages and third-party vendor software packages;
in-house developed software packages; GeoCompass(R), the Company's flood zone
determination electronic ordering and delivery package; and GMaS internal
production routing.
The Company has reviewed and validated the Year 2000 compliance of the
IBM AS/400 business system used in its flood zone determination operations.
This process involved reviewing all internally developed application code,
modules, databases, and reports for correct date handling, changing all date
fields to handle the four digit century format, and upgrading the operating
system to the Year 2000 compliant version. The Company's internally developed
GeoCompass(R) and GMaS software packages have also been assessed for Year 2000
readiness and were upgraded to Year 2000 compliant versions during the second
quarter of 1999. The Company's flood zone determination network operating
systems were also upgraded to Year 2000 compliant versions during the second
quarter of 1999. The Company is in the process of having its other flood zone
determination hardware and software components validated for Year 2000
compliance by the vendors that supply those products.
The non-IT systems used in the Company's flood zone determination
operations include: internal telephone systems, auxiliary power supplies,
security systems, environmental control systems, and postal equipment. The
Company has contacted the various vendors providing such systems regarding
validation of their systems.
Testing methodology of existing internal systems includes the
identification of programs and Year 2000 critical dates for date rollover
testing. An initial test was completed in February, 1999 of a mirrored
production environment. This environment tested AS/400 applications,
communication and data transfer systems, electronically generated faxes and
data files, LAN and WAN connections, and production flow within the Company.
All tests have been documented, errors corrected and retested, signed-off.
The Company has a number of flood zone determination clients with
which it electronically exchanges data. The clients that use a proprietary
method for communicating data have been contacted by the Company regarding
their need to upgrade their interfaces. Most of the Company's flood zone
determination clients utilize its Compass product line. Version 3.x of that
software has been tested and verified for Year 2000 compliance. Users of
non-compliant versions of such software are expected to be upgraded to Year
2000 compliant versions by September 30, 1999.
The Company currently estimates direct costs (computing costs, network
and telephone support, office supplies, programming support and project
coordination) associated with addressing the Year 2000 Problem for its flood
zone determination operations to be in the range of $150,000 to $250,000.
Nearly all costs, whether incurred or to be incurred, are internal to the
Company. The Company does not anticipate the total replacement of any core
system. In the event an outside vendor's software is targeted for replacement,
the Company may incur additional costs relating to acquisition of replacement
software, conversion of data, and personnel training. Management does not
expect these costs to materially adversely affect the Company's business or
financial condition.
The most reasonably likely worst case scenario for the Company's flood
zone determination operations is the possibility that the Company will be
unable to electronically exchange data with its clients. Such circumstances
would require the Company to revert to manually exchanging requests for
searches and remitting completed determinations to clients. This increase in
manual operations would likely result in significant increases in the cost of
clerical support (temporary employees), data entry (overtime wages), paper
supplies, fax machines and telephone customer service support (overtime wages).
Moreover, the inability to electronically exchange data with certain clients
could result in a material loss of revenue.
The Company is in the process of developing a contingency plan
relating to manual preparedness in the event of the impairment of its flood
zone determination IT systems. This plan involves construction of adequate
staffing models that provide an accurate indication of the number of additional
employees required to process determinations manually on a short-term basis.
The plan also addresses potential alternative forms of data exchange, such as
faxes and data tapes.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative
financial instruments or derivative commodity instruments and believes that its
exposure to market risk associated with other financial instruments (such as
variable rate debt) are not material.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no material change to the disclosure set forth under
the caption "Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 11, 1999, the Company entered into a revolving line of credit
agreement ("LOC") with a financial institution that provides for borrowings of
up to $12,000,000. Under the LOC, the Company is restricted from making any
distributions or dividends payable in cash or capital stock of the Company on
any shares of any class of its capital stock or apply any of its property or
assets to the purchase, redemption or other retirement of any shares of any
class of capital stock or any partnership interest when the ratio of interest
bearing debt to earnings before interest, taxes, depreciation, and
amortization exceeds 1.0 either before or as a result of the distribution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1999 Annual Meeting of Shareholders held on May 25,
1999, one matter was submitted to a vote of shareholders. David K. Meehan,
Daniel J. White and John A. Grant, Jr. were elected as Directors of the Company
for three-year terms expiring in 2002. The following table sets forth certain
information with respect to the election of directors at the 1999 Annual
Meeting of Shareholders:
Shares Withholding
Name of Nominee Shares Voted For Authority
--------------- ---------------- ---------
David K. Meehan 10,509,745 9,600
Daniel J. White 10,510,095 9,250
John A. Grant, Jr. 10,515,645 3,700
The following table sets forth the other Directors of the Company
whose terms of office continued after the 1999 Annual Meeting of Shareholders:
Name of Director Term Expires
---------------- ------------
Robert M. Menke 2000
William D. Hussey 2000
E. Ray Solomon, Ph.D., CLU 2000
Jeffrey S. Bragg 2001
Robert G. Menke 2001
Alejandro M. Sanchez 2001
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
EXHIBIT NO. DESCRIPTION
10.1 Second Addendum to Service Agreements,
effective as of April 1, 1999, by and
between Insurance Management Solutions,
Inc. and each of Bankers Insurance Company,
First Community Insurance Company and
Bankers Security Insurance Company.
10.2 Technical Support Services Agreement, dated
April 1, 1999, by and between Insurance
Management Solutions, Inc. and Bankers
Insurance Group, Inc. and its subsidiaries.
10.3 Loan Agreement, dated June 11, 1999, by and
between Insurance Management Solutions
Group, Inc. (including its Subsidiaries)
and NationsBank, N.A.
10.4 Security Agreement, dated June 11, 1999,
by and between Insurance Management
Solutions Group, Inc. (including its
Subsidiaries) and NationsBank, N.A.
10.5 Promissory Note of Insurance Management
Solutions Group, Inc. (including its
Subsidiaries), dated June 11, 1999, in
favor of NationsBank, N.A.
27.1 Financial Data Schedule (for SEC use only)
b) Reports on Form 8-K
None
15
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 16, 1999 INSURANCE MANAGEMENT SOLUTIONS GROUP, INC.
(Registrant)
By: /s/ DAVID K. MEEHAN
---------------------------------------
David K. Meehan
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Officer)
By: /s/ KELLY K. KING
---------------------------------------
Kelly K. King
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and
Accounting Officer)
19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 -- Second Addendum to Service Agreements, effective as of April
1, 1999, by and between Insurance Management Solutions, Inc. and
each of Bankers Insurance Company, First Community Insurance
Company and Bankers Security Insurance Company.
10.2 -- Technical Support Services Agreement, dated April 1, 1999, by
and between Insurance Management Solutions, Inc. and Bankers
Insurance Group, Inc. and its subsidiaries.
10.3 -- Loan Agreement, dated June 11, 1999, by and between Insurance
Management Solutions Group, Inc. (including its Subsidiaries)
and NationsBanks, N.A.
10.4 -- Security Agreement, dated June 11, 1999, by and between
Insurance Management Solutions Group, Inc. (including its
Subsidiaries) and NationsBank, N.A.
10.5 -- Promissory Note of Insurance Management Solutions Group, Inc.
(including its Subsidiaries), dated June 11, 1999, in favor of
NationsBank, N.A.
27.1 -- Financial Data Schedule (for SEC use only)