<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
------------------------
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: 000-23005
----------------------------------
INSPIRE INSURANCE SOLUTIONS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2595937
--------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
300 BURNETT STREET, FORT WORTH, TX 76102-2799
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
817-348-3999
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 Exchange 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 [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 10,191,250
<PAGE> 2
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30, 1997 (unaudited)
and December 31, 1996
Condensed Statements of Operations (unaudited) for the three
months and nine months ended September 30, 1997 and 1996
Condensed Statements of Cash Flows (unaudited) for the nine
months ended September 30, 1997 and 1996
Notes to Condensed Financial Statements (unaudited)
Independent Accountants' Report
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 14,497,941 $ 363,398
Short-term investments (cost $13,157,748). . . . . . . . 13,198,953 --
Accounts receivable - net . . . . . . . . . . . . . . . 9,038,862 1,168,148
Income taxes receivable. . . . . . . . . . . . . . . . . 339,571 339,571
Deferred income taxes. . . . . . . . . . . . . . . . . . 1,261,469 --
Prepaid expenses and other current assets . . . . . . . . 1,432,587 140,950
------------ ------------
Total current assets . . . . . . . . . . . . . . . 39,769,383 2,012,067
Accounts receivable, excluding current portion. . . . . . . . 153,505 --
Property and equipment, net (accumulated depreciation
1997 $8,808,485; 1996 $1,272,011) . . . . . . . . . . . . 5,898,768 3,219,892
Intangibles and other assets. . . . . . . . . . . . . . . . . 15,372,340 --
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,193,996 $ 5,231,959
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable . . . . . . . . . . . . . . . . . . . . . . $ -- $ 2,500,000
Accounts payable . . . . . . . . . . . . . . . . . . . . 1,020,398 1,066,013
Accrued payroll and compensation . . . . . . . . . . . . 542,571 --
Other accrued expenses . . . . . . . . . . . . . . . . . 1,706,862 --
Customer deposits . . . . . . . . . . . . . . . . . . . 1,586,855 --
Deferred compensation. . . . . . . . . . . . . . . . . . 2,699,000 --
Income taxes payable . . . . . . . . . . . . . . . . . . 2,061,073 --
Current portion of long-term debt. . . . . . . . . . . . 599,534
Due to shareholder . . . . . . . . . . . . . . . . . . . -- 995,706
------------ ------------
Total current liabilities. . . . . . . . . . . . . 10,216,293 4,561,719
Deferred compensation . . . . . . . . . . . . . . . . . . . . 1,633,202 --
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . 529,674 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 2,195,000 64,000
Commitments and Contingencies (Note 7). . . . . . . . . . . . -- --
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding. . . . . . . . -- --
Common stock, $.01 par value; 50,000,000 shares
authorized and 10,191,250 shares issued and outstanding
in 1997; 1,000 shares authorized, 100 shares issued
and outstanding in 1996. . . . . . . . . . . . . . . . 101,913 1
Additional paid-in capital . . . . . . . . . . . . . . . 48,695,046 2,383,417
Accumulated deficit. . . . . . . . . . . . . . . . . . . (2,177,132) (1,777,178)
------------ ------------
Total shareholders' equity . . . . . . . . . . . . 46,619,827 606,240
------------ ------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,193,996 $ 5,231,959
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 4
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services . . . . . . . . . $ 8,178,318 $ 3,837,100 $ 22,572,215 $ 9,174,865
Software and software services . . . . 6,709,500 -- 14,271,379 --
Other. . . . . . . . . . . . . . . . . 294,133 -- 1,597,572 --
------------ ------------ ------------ ------------
Total revenues 15,181,951 3,837,110 38,441,166 9,174,865
------------ ------------ ------------ ------------
EXPENSES:
Cost of outsourcing services . . . . . 5,065,693 2,957,705 15,163,900 7,160,060
Cost of software and software
services . . . . . . . . . . . . . . 4,288,087 -- 7,209,464 --
Cost of other revenues . . . . . . . . 341,215 -- 1,037,710 --
Selling, general and administrative. . 2,180,223 -- 5,608,553 --
Research and development . . . . . . . 211,267 -- 890,867 --
Depreciation and amortization. . . . . 1,121,376 210,547 2,816,792 560,182
Purchased research and development . . -- -- 3,000,000 --
Deferred compensation. . . . . . . . . -- -- 3,949,000 --
Management fees to shareholder . . . . 45,000 600,000 1,245,000 1,800,000
------------ ------------ ------------ ------------
Total expenses. . . . . . . . . . 13,252,861 3,768,252 40,921,286 9,520,242
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS). . . . . . . . . 1,929,090 68,858 (2,480,120) (345,377)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income. . . . . . . . . . . . 186,566 -- 261,103 --
Interest expense . . . . . . . . . . . (91,640) -- (303,684) --
Other. . . . . . . . . . . . . . . . . 1,635,959 -- 1,614,588 --
------------ ------------ ------------ ------------
Total other income (expense). . . 1,730,885 -- 1,572,007 --
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES. . . . 3,659,975 68,858 (908,113) (345,377)
INCOME TAX (EXPENSE) BENEFIT . . . . . . (1,203,496) (13,771) 508,159 127,069
------------ ------------ ------------ ------------
NET INCOME (LOSS). . . . . . . . . . . . $ 2,456,479 $ 55,087 $ (399,954) $ (218,308)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE. . . . . . . $ 0.27 $ 0.01 $ (0.05) $ (0.03)
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 5
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (399,954) $ (218,308)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 2,834,265 560,182
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . (2,785,000) (184,569)
Purchased research and development . . . . . . . . . . . . . . 3,000,000 --
Gain on sale of subsidiary . . . . . . . . . . . . . . . . . . (1,634,291) --
Change in operating assets and liabilities:. . . . . . . . . .
Accounts receivable. . . . . . . . . . . . . . . . . . . . . (3,885,723) (215,765)
Income taxes receivable. . . . . . . . . . . . . . . . . . . -- 88,424
Prepaid expenses and other current assets. . . . . . . . . . (1,039,637) --
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 438,165 --
Accounts payable . . . . . . . . . . . . . . . . . . . . . . (1,580,809) 2,447,508
Accrued payroll and compensation . . . . . . . . . . . . . . (494,383) 22,171
Other accrued expenses . . . . . . . . . . . . . . . . . . . 962,816 --
Customer deposits. . . . . . . . . . . . . . . . . . . . . . 270,546 --
Income taxes payable . . . . . . . . . . . . . . . . . . . . 1,819,135 --
Deferred compensation. . . . . . . . . . . . . . . . . . . . 4,004,567 --
------------ ------------
Net cash provided by operating activities. . . . . . . . 1,509,697 2,499,643
------------ ------------
INVESTING ACTIVITIES:
Purchase of short-term investments . . . . . . . . . . . . . . . (13,198,953) --
Proceeds from sale of subsidiary, net of cash relinquished . . . 2,499,262 --
Purchases of property and equipment. . . . . . . . . . . . . . . (1,275,273) (707,768)
Capitalized research and development costs . . . . . . . . . . . (326,546) --
Acquisition of subsidiary, net of cash acquired. . . . . . . . . (17,118,849) --
------------ ------------
Net cash used in investing activities. . . . . . . . . . (29,420,359) (707,768)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . 8,677,503 --
Repayment of borrowings. . . . . . . . . . . . . . . . . . . . . (10,646,191) --
Repayment of borrowings to shareholder . . . . . . . . . . . . . (995,706) (1,569,108)
Contribution from shareholder. . . . . . . . . . . . . . . . . . 10,500,000 --
Issuance of common stock, net of issuance costs paid . . . . . . 34,244,192 --
Bank overdrafts. . . . . . . . . . . . . . . . . . . . . . . . . 265,407 --
------------ ------------
Net cash provided by (used in) financing activities. . 42,045,205 (1,569,108)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . 14,134,543 222,767
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD. . . . . . . . . . 363,398 21,868
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . $ 14,497,941 $ 244,635
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . $ 349,368 $ --
============ ============
Income taxes refunded (paid) . . . . . . . . . . . . . . . . . . $ -- $ --
============ ============
Non cash investing activities - contribution of fixed assets from
shareholder . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,308,191 $ --
============ ============
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE> 6
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General -- INSpire Insurance Solutions, Inc. ("INSpire" or the "Company")
(formerly Millers Integrated Claims Resources, Inc. and MiliRisk, Inc.) was
incorporated April 28, 1995. INSpire is a provider of policy and claims
administration outsourcing services to the property and casualty ("P&C")
insurance industry. The Company also develops, markets, licenses and supports
computer software and related services to the P&C insurance industry. The
Company sells its products directly to the customer. The majority of sales are
in North America.
Unaudited Interim Condensed Financial Statements -- The accompanying
unaudited condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the periods presented have been included. Results
of operations for the periods presented herein are not necessarily indicative of
results of operations for any subsequent quarter or the year ending December 31,
1997. The independent accountants' review report of Deloitte & Touche LLP is
included in Part I, Item 1 of this report.
The information included in this Form 10-Q should be read in conjunction
with the financial statements and notes thereto for the six months ended June
30, 1997 and the year ended December 31, 1996 included in the Company's
Registration Statement on Form S-1 (File No. 333-31173).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the Securities and Exchange
Commission's rules and regulations.
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those amounts.
2. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following at
September 30, 1997:
<TABLE>
<S> <C>
Goodwill, net of accumulated amortization of $526,600 $ 8,752,140
Acquired software, net of accumulated amortization of $666,000 5,334,000
Capitalized research and development costs, net of accumulated amortization of $5,734 320,812
Cash surrender value of life insurance 389,898
Prepaid insurance 517,282
Other 58,208
------------
$ 15,372,340
============
</TABLE>
3. NOTE PAYABLE AND LONG-TERM DEBT
NOTE PAYABLE -- On December 11, 1996, INSpire entered into a note
agreement with a bank. The note bears interest at prime (8.25% at December
31, 1996) and was repaid on February 1, 1997.
LONG-TERM DEBT -- On August 22, 1997, the Company entered into a note
agreement with a financial institution to pay the cost of three-year
professional liability and directors and officers insurance policies. The
note is payable in monthly principal and interest installments of $54,424
through July 1999. The note bears interest at an annual rate of 6.25%.
<PAGE> 7
The following represents the approximate future annual maturities of the
Company's long-term debt obligation at September 30, 1997:
<TABLE>
<S> <C>
1998 $ 599,534
1999 529,674
----------
$1,129,208
==========
</TABLE>
4. SALE OF SUBSIDIARY
On September 15, 1997, the Company sold Applied Quoting Systems, Inc.
("AQS"), a wholly owned subsidiary, for $2,500,000. The sale resulted in a gain
of $1,634,291, which is included in other income. For the period from March 12,
1997 (the date of acquisition) through September 30, 1997, AQS had revenues of
approximately $3,404,000 and net income of approximately $403,000. Net
income per common share from the separate operations of AQS for the nine months
ended September 30, 1997 was $.05. Total assets and total liabilities of AQS on
the date of sale were approximately $1,228,000 and $412,000, respectively.
5. RELATED PARTY TRANSACTIONS
The Company has agreements with The Millers Mutual Fire Insurance Company
("Millers Mutual"), a shareholder of the Company, and The Millers Casualty
Insurance Company ("Millers Casualty"), an indirect 99.47% subsidiary of Millers
Mutual, to provide outsourcing and data processing services and software and
software services. Under the terms of the agreements with Millers Mutual and
Millers Casualty, the Company earned outsourcing fees of approximately
$12,054,562 and $6,858,247 during the nine months ended September 30, 1997 and
1996, respectively. Software and software services revenues of approximately
$642,000 were recognized by the Company during the nine months ended September
30, 1997. Beginning May 1996, the Company incurred office space rental expenses,
under a month-to-month agreement with Millers Mutual, totaling $236,600 and
$128,300 for the nine months ended September 30, 1997 and 1996, respectively.
Additionally, the Company incurred fees of $1,245,000 and $1,800,000 during the
nine months ended September 30, 1997 and 1996 respectively, for management and
administrative services provided by Millers Mutual. At September 30, 1997, trade
accounts receivable from Millers Mutual and Millers Casualty combined were
approximately $2,372,000. At September 30, 1997, a net receivable of
approximately $711,000, which was included in prepaid expenses and other current
assets, was due from Millers Mutual for costs of Millers Mutual related to the
IPO paid by the Company. At December 31, 1996, there was a payable to Millers
Mutual of $995,706.
6. PRO FORMA CONDENSED STATEMENTS OF OPERATIONS DATA
Unaudited pro forma statements of operations data for the three months
ended September 30, 1996 and the nine months ended September 30, 1997 and 1996
reflect: (a) the acquisition of Strategic Data Systems, Inc. (the "SDS
Acquisition") using the purchase method of accounting as if the SDS Acquisition,
which occurred on March 12, 1997, had occurred on January 1, 1996 and (b) the
results of operations of the Company as if the Company had operated on an
independent basis separate from Millers Mutual since January 1, 1996.
Supplementary net income (loss) per share has been computed by adjusting pro
forma net income for the effect of the elimination of interest expense
associated with the repayment of $7.2 million of bank debt in conjunction with
the initial public offering on August 22, 1997. Supplementary net income (loss)
per share is not presented for historical information as there is no significant
difference from net income (loss) per share as presented. Unaudited pro forma
data follows (in thousands, except per share data):
<PAGE> 8
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 43,853 $ 26,231
Operating expenses 45,752 26,051
------------ ------------
Operating income (loss) (1,899) 180
Other income (expense) 1,453 (368)
------------ ------------
Income (loss) before income taxes (446) (188)
Income tax (expense) benefit 94 (188)
------------ ------------
Net income (loss) $ (352) $ (376)
============ ============
Net income (loss) per share $ (0.04) $ (0.05)
============ ============
Supplementary net income (loss) per share $ 0.01 $ 0.01
============ ============
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Employment Agreements -- The Company has employment agreements with certain
key officers that provide for minimum annual salaries aggregating approximately
$1,055,000 and annual bonuses based on the Company's operating performance.
Other -- In February 1997, the Philadelphia Contributionship for the
Insurance of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action
No. 97-CV-1262) against Strategic Data Systems, Inc. ("SDS") in the United
States District Court for the Eastern District of Pennsylvania. The suit alleges
that certain software systems that SDS sold to PCIHLF in 1995 did not meet
PCIHLF's specifications. PCIHLF claims damages in excess of $1.3 million. In
connection with the SDS Acquisition by INSpire, the former SDS shareholders
placed $1.5 million of the SDS purchase price in an escrow account in respect
of this claim. INSpire has no recourse against the former SDS shareholders to
the extent that the aggregate amount of any judgment, settlement and expenses
exceeds the amount of the escrowed funds. SDS filed a counterclaim against
PCIHLF for $550,000 for amounts due under its agreements with PCILHF. In
addition, the Company is involved in various other legal proceedings arising in
the normal course of business. Management believes the outcome of these matters
will not materially affect the consolidated financial position, results of
operations or cash flows of the Company.
The Company participates in a self-insurance program for certain of its
employees that provides for the payment of employee health claims. The program
provides for specific excess loss reinsurance for aggregate claims greater than
a specified amount for any one claimant. The Company accrues the estimated
liabilities for the ultimate costs of both reported claims and incurred by not
reported claims.
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solution, Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed balance sheet of INSpire Insurance
Solutions, Inc. (the "Company") as of September 30, 1997, and the related
condensed statements of operations and cash flows for the three months and nine
months ended September 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepting auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of INSpire Insurance Solutions, Inc. as of December
31, 1996, and the related statements of operations, shareholder's equity and
cash flows for the year then ended (not presented herein); and in our report
dated July 2, 1997, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 1996 is fairly stated, in all
material respects, in relation to the condensed balance sheet from which it has
been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
October 27, 1997
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Sale of Subsidiary. On September 15, 1997, the Company sold Applied Quoting
Systems, Inc. ("AQS"), a wholly owned subsidiary for $2.5 million in cash,
pursuant to an unsolicited offer from Samuel J. Fleager, the former principal
shareholder of AQS. The sale resulted in a gain of $1.6 million, which has been
included in other income in the Company's condensed statements of operations for
the three months and nine months ended September 30, 1997. AQS markets a
DOS-based commercial lines policy rating system. AQS total revenues were $3.4
million for the period January 1, 1997 through September 15, 1997 and $4.1
million for the year ended December 31, 1996.
As a result of the sale of AQS, the Company entered into a perpetual
agreement on October 29, 1997, with Cover-All Systems, Inc. ("Cover-All"), to
license Cover-All's commercial lines rating, policy issue and forms solutions
for use in the Company's software products and services offerings.
RESULTS OF OPERATIONS
The following table sets forth, with respect to the Company and for the
periods indicated, the percentage of total revenues represented by certain
revenue, expense and income items:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
---------------------------------- -----------------------------------------------
Pro Pro Pro
Forma Forma Forma
1997 1996 1996 (1) 1997 1997 (1) 1996 1996 (1)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- -------- -------- -------- --------
Operating expenses 87.3 98.2 96.6 106.5 104.3 103.8 99.3
Operating income (loss) 12.7 1.8 3.4 (6.5) (4.3) (3.8) 0.7
Other income (expense) 11.4 -- (1.6) 4.1 3.3 -- (1.4)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes 24.1 1.8 1.8 (2.4) (1.0) (3.8) (0.7)
Income tax (expense) benefit (7.9) (0.4) (1.4) 1.3 0.2 1.4 (0.7)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) 16.2% 1.4% 0.4% (1.1)% (0.8) (2.4)% (1.4)
======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Unaudited pro forma condensed statements of operations data for the three
months ended September 30, 1996 and the nine months ended September 30,
1997 and 1996 reflect: (a) the acquisition of Strategic Data Systems, Inc.
(the "SDS Acquisition") using the purchase method of accounting as if the
SDS Acquisition, which occurred on March 12, 1997, had occurred on January
1, 1996 and (b) the results of operations of the Company as if the Company
had operated on an independent basis separate from The Millers Mutual Fire
Insurance Company ("Millers Mutual") since January 1, 1996. See the
Company's Pro Forma Statements of Operations Data (unaudited) included in
this filing.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 ON AN HISTORICAL BASIS
REVENUES. The Company's revenues were $15.2 million for the three months
ended September 30, 1997 compared to $3.8 million for the three months ended
September 30, 1996, an increase of $11.4 million or 300%. Revenues for the nine
months ended September 30, 1997 were $38.4 million compared to $9.2 million for
the nine months ended September 30, 1996, an increase of $29.2 million or 317%.
These increases are primarily attributable to: (i) the SDS Acquisition and (ii)
revenues from three significant outsourcing contracts entered into during 1996
under which the Company performed significantly more outsourcing services during
1997. These three contracts included a claims administration agreement with
Interco, Inc. as administrator for the State Corporation Commission of the
Commonwealth of Virginia, and a policy administration agreement and a claims
administration agreement with Clarendon National Insurance Company through E. W.
Blanch Holdings Company, Inc.
<PAGE> 11
COST OF REVENUES. Cost of revenues, which is comprised mainly of personnel
costs, was $9.7 million for the three months ended September 30, 1997 compared
to $3.0 million for the three months ended September 30, 1996, an increase of
$6.7 million or 223%. Cost of revenues was $23.4 million for the nine months
ended September 30, 1997 compared to $7.2 million for the nine months ended
September 30, 1996, an increase of $16.2 million or 225%. These increases are
primarily attributable to: (i) the SDS Acquisition and (ii) the costs associated
with the performance of services under the three significant outsourcing
contracts described above. Cost of revenues as a percentage of total revenues
decreased from 77% for the three months ended September 30, 1996 to 64% for the
three months ended September 30, 1997, and from 78% for the nine months ended
September 30, 1996 to 61% for the nine months ended September 30, 1997. These
decreases are a result of economies of scale associated with spreading certain
fixed costs over a larger revenue base and lower personnel costs as a percentage
of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $2.2 million for the three months ended September
30, 1997 compared to $600,000 for the three months ended September 30, 1996, an
increase of $1.6 million or 266%. Selling, general and administrative expenses
were $6.9 million for the nine months ended September 30, 1997 compared to $1.8
million for the nine months ended September 30, 1996, an increase of $5.1
million or 283%. These increases are primarily due to: (i) the SDS Acquisition
and (ii) additional staffing, office space and computer equipment and software
required to expand the infrastructure to support the Company's growth.
RESEARCH AND DEVELOPMENT. Research and development expense was $211,267 and
$890,867 for the three months and nine months ended September 30, 1997,
respectively, net of capitalized research and development costs of $326,546.
This expense was comprised primarily of personnel costs related to software
development. Prior to the SDS Acquisition, the Company did not incur any
significant research and development expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$1.1 million for the three months ended September 30, 1997 compared to $210,500
for the three months ended September 30, 1996, an increase of approximately
$911,000 or 433%. For the nine months ended September 30, 1997, depreciation and
amortization expense was $2.8 million compared to $560,000 for the same period
in 1996, an increase of $2.3 million or 411%. This increase is primarily
attributable to (i) Millers Mutual's capital contribution of approximately $2.5
million in depreciable property and equipment to the Company in January 1997 and
(ii) amortization of goodwill and capitalized software recorded in connection
with the SDS Acquisition.
NONRECURRING OPERATING EXPENSES. In the purchase price allocation of the
SDS Acquisition, $3.0 million was assigned to in-process research and
development. This amount was charged to operations in March 1997. In addition,
$3.9 million was charged to operations as deferred compensation associated with
stock options granted to executive officers during 1997.
OTHER INCOME. Other income for the three months and the nine months ended
September 30, 1997 includes a $1.6 million gain on the sale of AQS. Interest
income, attributable primarily to short-term investments purchased with unused
proceeds from the IPO, was approximately $188,000 and $261,000, respectively,
for the three months and nine months ended September 30, 1997. During 1996 the
Company did not have investments that earned interest income. Interest expense,
attributable primarily to the Company's bank credit facility with NationsBank of
Texas, N.A. (the "NationsBank Facility"), was approximately $92,000 and
$304,000, respectively, for the three months and nine months ended September 30,
1997. The Company did not have any interest-bearing debt during 1996.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 ON A PRO FORMA
BASIS
REVENUES. Pro forma revenues were $43.9 million for the nine months ended
September 30, 1997 compared to $26.2 million for the nine months ended September
30, 1996, an increase of $17.6 million or 67%. Revenues from outsourcing
services were $22.6 million for the nine months ended September 30, 1997
compared to revenues of $9.2 million for the nine months ended September 30,
1996, an increase of $13.4 million or 115%, primarily as a result of the three
significant outsourcing contracts described above. Revenues from software and
software services were $19.1 million for the nine months ended September 30,
1997 compared to $14.1 million for the period ended September 30, 1996, an
increase of $5.0 million or 35%. This increase was attributable to an increased
number of software product installations and customizations, primarily of the
Windows into Property and Casualty System. Revenues from other sources were $2.2
million for the nine months ended September 30, 1997 compared to $2.9 million
for the nine months ended September 30, 1996, a decrease of $764,000 or 26%.
This decrease was attributable to decreased hardware sales during the third
quarter of 1997.
<PAGE> 12
OPERATING EXPENSES. Pro forma operating expenses were $45.8 million for the
nine months ended September 30, 1997 compared to $26.1 million for the nine
months ended September 30, 1996, an increase of $19.7 million or 75%. This
increase was primarily attributable to the increased cost of revenues associated
with increased revenues from the three new outsourcing contracts and the
increased number of software product installations and customizations described
above. Selling, general and administrative expenses also increased due to
additional staffing, office space and computer equipment and software required
to expand the infrastructure to support the Company's growth. In addition, pro
forma operating expenses for the nine months ended September 30, 1997 include
$3.0 million of purchased research and development expenses relating to the SDS
Acquisition and $3.9 million of deferred compensation expense relating to the
grant of stock options to executive officers during the period, both of which
were nonrecurring expenses.
OTHER INCOME. For the nine months ended September 30, 1997, a $1.6 million
gain on the sale of AQS is included in other income in the three months and nine
months ended September 30, 1997. Included in both periods ended September 30,
1997 and 1996 is pro forma interest expense associated with the debt incurred in
conjunction with the SDS Acquisition, excluding certain interest expense
associated with mortgage debt not assumed by the Company.
INCOME TAX. Income tax is calculated using an estimated annual effective
tax rate. Prior to the IPO, Millers Mutual filed a consolidated tax return that
included all subsidiaries of Millers Mutual, including the Company. For
financial accounting purposes, the Company recorded its pro rata share, based on
its taxable income or loss, of total consolidated taxable income or loss.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $14.5 million as of September 30, 1997
compared to approximately $363,000 as of December 31, 1996, an increase of $14.1
million or 388%. Net cash provided by operating activities was $1.5 million and
$2.5 million for the periods ended September 30, 1997 and 1996, respectively.
Net cash used in investing activities was $29.4 million for the nine months
ended September 30, 1997, primarily attributable to the SDS Acquisition,
purchases of short-term investments, and purchases of property and equipment,
compared to $708,000 for the nine months ended September 30, 1996. Net cash
provided by financing activities was $42.0 million during the nine months ended
September 30, 1997, primarily due to the IPO, compared to net cash used in
financing activities of $1.6 million during the period ended September 30, 1996.
Although the Company repaid amounts owed under the NationsBank Facility
with a portion of the proceeds from the IPO, the Company intends to keep the
$2.5 million revolving credit facility in place for future borrowings. The
revolving credit facility expires and any amounts outstanding are due and
payable on March 12, 1999. Borrowings under the NationsBank Facility are secured
by all accounts receivable, inventory, equipment, servicing contract rights, and
other personal property of the Company.
The Company believes that cash generated from operations and its net
proceeds from the IPO will satisfy the Company's anticipated working capital
requirements for at least one year. The Company, however, may require
substantial additional funds for potential acquisitions and expansion. In the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business. The Company
has no present commitments or understandings with respect to any such
transaction. The Company, however, may acquire businesses, products or
technologies in the future.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains or may contain certain "forward-looking
statements" within the meaning of Section 27A of the Securities Exchange Act of
1934 (the "Exchange Act"). All statements made in this report, other than
statements of historical fact, including but not limited to statements made
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that relate to future results and operations of the Company, and
which may be indicated by, words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, are "forward-looking statements."
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors, including but not
limited to the Company's limited operating history and dependence on major
customers, competitive factors and pricing pressures, changes in legal and
regulatory requirements, technological change, product development risks and
<PAGE> 13
general economic conditions. Such statements reflect the current views of the
Company with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of the Company. All subsequent written and oral
forward-looking statements attributable to the Company or person acting on its
behalf are expressly qualified in their entirety by this paragraph.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1997, the Philadelphia Contributionship for the Insurance
of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action No.
97-CV-1262) against Strategic Data Systems, Inc. ("SDS") in the United
States District Court for the Eastern District of Pennsylvania. The suit
alleges that certain software systems that SDS sold to PCIHLF in 1995 did
not meet PCIHLF's specifications. PCIHLF claims damages in excess of $1.3
million. In connection with the SDS Acquisition by INSpire, the former SDS
shareholders placed $1.5 million of the SDS purchase price in an escrow
account in respect of this claim. The Company has no recourse against the
former SDS shareholders to the extent that the aggregate of any judgment,
settlement and expenses exceeds the amount of the escrowed funds. SDS filed
a counterclaim against PCIHLF for $550,000 for amounts due under its
agreements with PCIHLF. There can be no assurance with respect to the
outcome of this lawsuit.
The Company is not a party to any other legal proceedings that the
Company believes could have a material adverse effect on the Company's
business, financial condition or operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Pursuant to a Registration Statement on Form S-1 (No. 333-31173) which
became effective on August 22, 1997, filed in connection with the initial public
offering of the Company's Common Stock, par value $.01 per share ("Common
Stock"), the Company sold 3,191,250 shares of Common Stock and Millers Mutual
sold 3,133,750 shares of Common Stock. The offering was managed by Raymond
James and Associates, Inc. and Southwest Securities, Inc. and closed on
September 4, 1997.
<TABLE>
<CAPTION>
Selling
Issuer Shareholder
----------- -----------
<S> <C> <C>
Shares registered and sold to date 3,191,250 3,133,750
=========== ===========
Aggregate price of the amount
offered and sold to date $38,295,000 $37,605,000
Less: Underwriting discounts
and commissions 2,680,650 2,632,350
Other estimated
issuance costs 1,009,000 991,000
----------- -----------
Net offering proceeds $34,605,350 $33,981,650
=========== ===========
</TABLE>
The net offering proceeds were used to repay approximately $2.8 million
in borrowings from Millers Mutual and $7.2 million in borrowings from
NationsBank. The remaining proceeds have been invested in commercial paper
investments with various maturity dates and will be used for general corporate
purposes, including working capital, research and development and possible
acquisitions. The Company has no present commitments or understandings with
respect to the acquisition of any business, although the Company continues to
monitor potential acquisition opportunities.
None of the expenses incurred for the Company's account in connection
with the issuance and distribution of the securities registered for
underwriting discounts and commissions, finder's fees, expenses paid to or for
underwriters, other expenses and total expenses resulted in direct or indirect
payments to directors or officers of the Company, or to persons owning 10% or
more of any class of equity securities of the Company, or to affiliates of the
Company. Other than repayments to Millers Mutual, as described above, and
salary and reimbursement paid to directors and officers, none of the offering
proceeds was paid directly or indirectly to directors, officers, general
partners of the issuer or their associates, or to persons owning 10% or more of
any class of securities of the Company, or to affiliates of the Company.
Under the terms of the NationsBank Facility, the Company cannot declare
or pay any dividends or return any capital to its shareholders or authorize or
make any other distribution, payment or delivery of property or cash to its
shareholders as such without the prior written consent of NationsBank of Texas,
N.A.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-Q:
3.1 Restated Articles of Incorporation of the Company (Incorporated
by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, File Number 333-31173 dated August 22,
1997).
3.2 Bylaws of the Company and First and Second Amendments thereto
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, File Number 333-31173 dated
August 22, 1997).
4.1 Specimen Certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, File Number 333-31173 dated
August 22, 1997).
4.2 Rights Agreement, by and between the Company and U.S. Trust
Company of Texas, N.A., dated as of July 30, 1997 (Incorporated
by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, File Number 33-31173 dated as of August
22, 1997).
10.1 Stock Purchase and Assumption Agreement between the Company
AQS, Inc., Samuel J. Fleager and Applied Quoting Systems, Inc.
11.1 Computation of Net Income (Loss) Per Share
15.1 Letter Re: Unaudited Interim Financial Information
27.1 Financial Data Schedule (EDGAR version only)
(b) The Company did not file any reports on Form 8-K during the three months
ended September 30, 1997.
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: November , 1997
Inspire Insurance Solutions, Inc.
-------------------------------------
F. George Dunham, III
President, Chief Executive Officer,
Chairman and Director
-------------------------------------
Terry G. Gaines
Executive Vice President, Chief Financial
Officer and Treasurer
Dated: November , 1997
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.1 Stock Purchase and Assumption Agreement between the Company
("Seller"), AQS, Inc. ("Purchaser"), Samuel J. Fleager and
Applied Quoting Systems, Inc. ("AQS").
11.1 Computation of Net Income (Loss) Per Share
15.1 Letter Re: Unaudited Interim Financial Information
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
STOCK PURCHASE AND ASSUMPTION AGREEMENT
THIS STOCK PURCHASE AND ASSUMPTION AGREEMENT (this "Agreement"), dated as of
September 15, 1997 between INSpire Insurance Solutions, Inc., a Texas
corporation ("Seller"), AQS, Inc., a Wisconsin corporation ("Purchaser"),
Samuel J. Fleager ("Fleager") and Applied Quoting Systems, Inc., a Wisconsin
corporation ("AQS").
Whereas, AQS was formerly owned by Fleager and other stockholders until AQS was
acquired by Strategic Data Systems, In. ("SDS") pursuant to the terms of that
certain Agreement and Plan of Merger dated August 17, 1991 (the "SDS
Agreement") by and among AQS, AQS Acquisition Corp. and SDS; and
WHEREAS, SDS was acquired by Seller and thereafter merged with and into Seller
resulting in AQS becoming a wholly-owned subsidiary of Seller; and
WHEREAS, Seller and Fleager have entered into a letter of intent dated July 1,
1997 contemplating the sale by Seller of all of the issued and outstanding
capital stock of AQS to Fleager, of which Purchaser is the assignee of Fleager;
and
WHEREAS, Seller desired to sell to Purchaser 100 shares of the common stock par
value $.01 per share of AQS (the "Shares") on the terms and conditions set
forth herein, which Shares constitute all of the issued and outstanding shares
of common stock of AQS; and
WHEREAS, Purchaser desires to purchase the Shares on the terms and conditions
set forth herein; and
WHEREAS, AQS has determined that the sale of the shares to Purchaser is in the
best interest of AQS and AQS has agreed to assume and perform certain
obligations of Seller as an additional inducement for Seller to enter into this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Purchase and Sale of Shares.
(a) Purchase Price. Subject to the terms and conditions
hereof, Seller hereby sells and transfers to Purchaser, and Purchaser
hereby purchases from Seller, the Shares. The aggregate purchase price
("Purchase Price") to be paid by the Purchaser for the Shares shall be
$2,500,000. Upon the execution and delivery of this Agreement, Seller
shall deliver to Purchaser a certificate representing the Shares which
shall be accompanied by a duly executed stock power transferring the
Shares to Purchaser. Purchaser hereby acknowledges receipt of the stock
certificate evidencing the Shares.
<PAGE> 2
(b) Payment of Purchase Price. The Purchase Price shall be
paid to Seller by wire transfer to Seller's account upon the execution
of this Agreement. Seller has heretofore delivered wire instructions to
Purchaser.
( c) Closing. The closing of the purchase and sale of the
Shares shall take place at the offices of Akin, Gump, Strauss, Hauer &
Feld, L. L. P., Dallas, Texas concurrently with the execution of this
Agreement by the parties hereto.
2. Termination of Employment Contract Guaranty Agreement and Release
by Fleager. Fleager hereby agrees that (i) this Agreement shall terminate
effective July 1, 1997 that certain Employment Contract Guaranty Agreement
between SDS and Purchaser dated as of September 25, 1991 (the "Employment
Contract Agreement") and that certain Employment and Consulting Agreement
between AQS and Fleager dated as of August 29, 1991 (the "Employment
Agreement"); (ii) Seller shall have no further obligation under the Employment
Contract Agreement from and after July 1, 1997, (iii) AQS shall have no further
obligation under the Employment Agreement from and after July 1, 1997 and (iv)
Fleager, for himself, his heirs, personal representatives, successors and
assigns, does hereby, release, acquit, discharge and covenant not to sue Seller
and AQS, their officers, directors, agents, attorneys, employees, successors
and assigns, with respect to all past, present and future claims, expenses,
losses, liabilities and obligations of any nature whatsoever, relating to the
Employment Contract Agreement and the Employment Agreement, whether accrued or
contingent, known or unknown, whether sounding in contract, to or otherwise.
3. Release by AQS. AQS hereby releases, acquits, discharges and
covenants not to sue Seller, its officers, directors, agents attorneys,
employees, successors and assigns with respect to all past, present and future
claims, expenses, losses, liabilities and obligations of any nature whatsoever,
whether accrued or contingent, known or unknown, whether sounding in contract,
tort or otherwise, based in whole or in any material part upon facts and
circumstances in existence as of the Closing Date; provided however, that
nothing herein shall be deemed to release Seller from any breach of any
representation, warranty or express obligation of Seller under this Agreement.
4. Seller's Activities. Purchaser acknowledges that the business of
Seller includes and will continue to include commercial policy processing,
including, but not limited to, quoting, rating and policy issuance and that
Seller may continue to compete with AQS.
5. Indemnification.
(a) Purchaser, AQS and Fleager jointly and severally agree to
defend, indemnify and hold harmless Seller and its affiliates,
successors and assigns (and their respective directors, officers and
other employees and all other persons or entities acting on behalf of or
under control of any of them) from and against any and all (i)
liabilities, losses, costs or damages ("Loss") and (ii) reasonable
attorneys' fees and expenses, costs of investigation and defense, court
costs and all other reasonable out-of-pocket expenses ("Expense")
incurred by Seller and its affiliates, successors and assigns (and their
respective directors, officers and other employees and all other persons
or entities acting
<PAGE> 3
on behalf of or under control of any of them) in connection with or
arising from any breach by Purchaser, AQS or Fleager to perform, any of
their covenants, agreements or obligations in this Agreement.
(b) Seller agrees to defend, indemnify and hold harmless
Purchaser, AQS and Fleager and their affiliates, successors and assigns
(and their respective directors, officers and other employees and all
other persons or entities acting on behalf of or under control of any of
them) from and against any and all (i) liabilities, losses, costs or
damages ("Loss") and (ii) reasonable attorneys' fees and expenses, costs
of investigation and defense, court costs and all other reasonable out-
of-pocket expenses ("Expenses") incurred by Purchaser, AQS and Fleager
and their affiliates, successors and assigns (and their respective
directors, officers and other employees and all other persons or
entities acting on behalf of or under control of any of them) in
connection with or arising from any breach by Seller of any of, or any
failure of Seller to perform, any of its covenants, agreements, or
obligations in this Agreement.
(c) For purposes of Sections 6 and 7 hereof, the party or
parties against whom a claim for indemnification is made pursuant to
Sections 6 and 7 hereof are called the Indemnifying Party and the party
or parties claiming indemnification are called the Indemnified Party.
6. Notice of Claims. If an Indemnified Party believes that it has suffered
or incurred any Loss or Expense and is entitled to indemnity from an
Indemnifying party under this Agreement, the Indemnified Party shall so notify
the Indemnifying Party promptly in writing describing such Loss or Expense, the
amount thereof, if known, and the method of computation of such Loss or
Expense. If any action at law or suit in equity is instituted by or against a
third party with respect to which any Indemnified Party intends to claim any
liability or expense as Loss or Expense under this Agreement, any such
Indemnified Party shall promptly notify the Indemnifying Party of such action
or suit. The amount to which an Indemnified Party shall be entitled under this
Agreement shall be determined: (i) by the written agreement between the
Indemnified Party and the Indemnifying Party (ii) by a final judgment, decree,
decision or award of any court, arbitration board or administrative agency of
competent jurisdiction, (iii) by a settlement of the claim or (iv) by any other
means to which the Indemnified Party shall agree. The judgment or decree of a
court shall be deemed final when the time for appeal, if any, shall have
expired and no appeal shall have the burden of proof in establishing the amount
of the Loss and Expense suffered by the Indemnified Party.
7. Third Party Claims.
(a) Subject to paragraph (b) of this Section 7, an Indemnifying Party
under this Agreement shall have the right to conduct and control, through
counsel of its choosing reasonably satisfactory to the Indemnified Party any
third party claim, action or suit, and such party may compromise or settle the
same without cost, obligation or liability of the Indemnified Party. The
Indemnifying Party shall permit the Indemnified Party to participate in the
defense of any such action or suit through counsel chosen by it, provided that
the fees and expenses of such counsel shall be borne by the Indemnified Party
unless (i) the Indemnifying Party shall have
<PAGE> 4
failed, within a reasonable time after having been notified by the Indemnified
Party of the existence of such claim as provided in Section 6 hereof, to assume
the defense of such claim (ii) the employment of such counsel has been
specifically authorized by the Indemnifying Party, or (iii) the named parties
to any such action (including any impleaded parties) include both such
Indemnified Party and the Indemnifying party and such Indemnified Party shall
have been advised in writing by such counsel that there may be one or more
legal defenses available to it which are different from or additional to those
available to the Indemnifying Party.
(b) The Indemnifying Party shall have 15 business days after receipt
of the notice referred to in Section 6 to notify the Indemnified Party that it
elects to conduct and control such action or suit. If the Indemnifying Party
does not give the foregoing notice, the Indemnified Party shall the right to
defend, contest, settle or compromise such action or suit in the exercise of
its exclusive discretion, and the Indemnifying Party shall, upon request from
the Indemnified Party, promptly pay to such Indemnified Party in accordance
with the other terms of this agreement the amount of any Loss resulting from
its liability to the third party claimant and all related Expense. If the
Indemnifying Party gives the foregoing notice, the Indemnifying Party shall
have the right to undertake, conduct and control, through counsel of its own
choosing reasonably satisfactory to the Indemnified Party and at the sole
expense of the Indemnifying Party, the conduct and settlement of such action or
suit, and the Indemnified Party shall cooperate with the Indemnifying Party in
connection therewith; provided that (x) the Indemnifying Party shall not
thereby permit to exist any lien, claim or encumbrance upon any asset or
property of Indemnified Party; (y) the Indemnifying Party shall permit the
Indemnified Party to participate in such conduct or settlement through counsel
chosen by the Indemnified Party, but the fees and expenses of such counsel
shall be borne by the Indemnified Party except as provided in clause (z) below;
and (z) the Indemnifying Party shall agree promptly in writing to reimburse to
the extent required under this Agreement the Indemnified Party for the full
amount of any Loss resulting from such action or suit and all related Expense
incurred by the Indemnified Party, except fees and expenses of counsel for the
Indemnified Party incurred after the assumption of the conduct and control of
such action or suit by the Indemnifying Party unless otherwise provided under
Section 7(a) hereof. So long as the indemnifying Party is conducting any such
action or suit in good faith and without increasing the potential liability of
the Indemnified Party by more than $100,000 the Indemnified Party shall not pay
or settle any such action or suit. Notwithstanding the foregoing, the
Indemnified Party shall have the right to Pay or settle any such action or
suit, provided that no Idemnifiying Party shall be liable to indemnify any
Indemnified Party for any settlement of any such action or claim effected
without the consent of the Indemnifying Party, but if settled with the written
consent of the Indemnifying Party, or if there be a final judgment for the
Plaintiff in any such action, then the Indemnifying Party shall, indemnify and
hold harmless each Indemnified Party from and against any Loss or Expense by
reason of such settlement of judgment.
8. Representations and Warranties of Seller.
(a) Ownership of Shares. Seller hereby represents and warrants that
Seller is the record and beneficial owner of the Shares free and clear of all
liens, claims and encumbrances.
<PAGE> 5
(b) Seller Authority and Binding Obligation. Seller represents and
warrants that (i) it is a corporation validly existing under the laws of the
State of Texas, (ii) is has the corporate power to execute, deliver and perform
this Agreement, (iii) the execution, delivery and performance by it of this
Agreement has been duly and validly authorized by all necessary corporate
action and (iv) this agreement constitutes the legal, valid and binding
obligations of Seller, enforceable in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditor's rights generally.
(c) Liens or Encumbrances. Seller represents and warrants that all
of the properties and assets on the June 30, 1997 balance sheet of AQS (the
"Recent Balance Sheet"), a copy of which has been initialed by Seller and
delivered to Purchaser, and all assets and properties as of the date hereof,
are free and clear of all mortgages, liens, security interests, claims,
pledges, licenses, options, conditional sales contracts, assessments, levies,
covenants, changes or encumbrances of any matter whatsoever (collectively
"Liens"), but only to the extent such Liens were specifically authorized by
Controlling Persons (as hereinafter defined). For the purposes of this
Agreement, "Controlling Persons" shall mean Seller and the officers and
directors of AQS who were not officers, directors or employees of AQS prior to
the acquisition of AQS by Seller.
(d) Absence of Undisclosed Liabilities. Except (i) as disclosed in
the Recent Balance Sheet (ii) as incurred under any contract listed on the
Exhibits hereto and (iii) as may have arisen in the ordinary course of business
to the date hereof, AQS has not incurred liabilities, commitments or
obligations (secured or unsecured, and whether accrued, absolute, contingent,
direct, indirect or otherwise) (herein called "Undisclosed Liabilities')
specifically authorized by Controlling Persons.
(e) AQS Contracts and Commitments. Seller represents and warrants
that it has executed no contracts or other documents, or taken any action or
suffered any inaction, committing AQS to any contracts, agreements, commitments
or obligation, except as set forth on Schedule 10 attached hereto.
(f) Provision for Taxes. Seller represents and warrants that the
provision made for taxes on the Recent Balance Sheet is sufficient for the
payment of all federal, state, foreign, county, local and other income, ad
valorem, excise, profits, franchise, occupation, property, payroll, sales, use,
gross receipts and other taxes (and any interest and penalties) and
assessments, whether or not disputed, at the date of the Recent Balance Sheet
and for all years and periods prior thereto. Since the date of the Recent
Balance Sheet, AQS has not incurred any taxes other than taxes incurred in the
ordinary course of business consistent in type and amount with past practices
of AQS.
(g) Tax Returns Filed. Seller represents and warrants that all
federal, state, foreign, county, local and other tax returns required to be
filed by or on behalf of AQS have been timely filed and when filed were true
and correct in all material respects, and the taxes shown as due thereon were
paid or adequately accrued. Except as otherwise disclosed herein, true and
complete copies of all tax returns or reports filed by AQS for each of its five
(5) most recent fiscal years have been delivered to Purchaser. Purchaser
acknowledges that the tax returns for
<PAGE> 6
the year ended December 31, 1996 have not been filed and that an extension for
filing such returns has been filed through September 15, 1997. AQS has duly
withheld and paid all taxes which it is required to withhold and pay relating
to salaries and other compensation heretofore paid to the employees of AQS.
(h) Tax Audits. Seller represents and warrants that to the knowledge
of the Controlling Persons, AQS has not received from the Internal Revenue
Service or from the tax authorities of any state, county, local or other
jurisdiction any notice of underpayment of taxes or other deficiency which has
not been paid nor any objection to any return or report filed by AQS. There
are outstanding no agreements or waivers extending the statutory period of
limitations applicable to any tax return or report.
(i) Consolidated Group. Seller represents and warrants that Schedule
8 (i) lists every year after the acquisition of AQS by SDS during which AQS was
a member of an affiliated group of corporations which filed a consolidated tax
return on which the statute of limitations does not bar a federal tax
assessment, and each corporation that has been part of such group. No
affiliated group of corporation of which AQS has been a member has discontinued
filing consolidated returns during the past five years. Seller represents and
warrants that AQS shall not be responsible for any federal or state income
taxes of any other member of the affiliated group of corporations for any
periods ending on the date hereof.
(j) No Changes. Seller represents and warrants that since the date
of the Recent Balance Sheet, there have been no material adverse changes in the
business, operations or financial condition of AQS except as may have occurred
in the ordinary course of business of AQS since such date, but only to the
extent any such changes (other than those made in the ordinary course of
business) were the result of actions specifically authorized by the Controlling
Persons.
9. Representations and Warranties of Purchaser, AQS and Fleager.
(a) Unregistered Shares. Purchaser hereby acknowledges and agrees
that the Shares have not been registered under the Securities Act of 1933, as
amended, and that certain restrictions on their transfer may exist.
(b) Purchaser Binding Obligation. Purchaser hereby represents and
warrants that this agreement constitutes the legal, valid and binding
obligations of Purchaser enforceable in accordance with its terms, except as
the same may be limited to bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally.
(c) AQS Authority and Binding Obligation. AQS represents and
warrants that (i) it is a corporation validly existing under the laws of the
State of Wisconsin, (ii) it has the corporate power to execute, deliver and
perform this Agreement, (iii) the execution, delivery and performance by it of
this Agreement has been duly and validly authorized by all necessary corporate
action and (iv) this Agreement constitutes the legal, valid and binding
obligations of AQS, enforceable in accordance with its terms, except as the
same may be limited by
<PAGE> 7
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors rights generally.
(d) Purchaser Knowledge. Purchaser and Fleager acknowledges that
Fleager has acted as Purchaser's representative in connection with the
negotiation and preparation of this Agreement and Purchaser's review and
investigation of AQS. Purchaser and Fleager acknowledge that Fleager has
previously owned and managed AQS and if familiar with the business, contracts,
financial condition and prospects of AQS and possesses all such knowledge and
has made all such investigations of AQS on behalf of Purchaser as Purchaser
deems necessary, appropriate and proper for Purchaser to execute and perform
into this Agreement. Purchaser hereby acknowledges and agrees that Seller
makes no representations, warranties or covenants of any kind or nature other
than as expressly set forth in Section 8 of this Agreement.
10. Continuing Obligations.
(a) Intercompany Payables and Receivables. Within 15 days after the
date of this Agreement, Seller shall pay to AQS, or AQS shall pay to Seller, as
the case may be, the net amount owed, if any, upon settlement as of the date of
this Agreement of all payables and receivables between Seller and AQS.
(b) Contract with Providence Washington Group. The parties hereto
agree that they shall use their best efforts to separate or split up the
current contract between SDS and the Providence Washington Group into two
separate contracts to provide for the separate obligations and responsibilities
of AQS and SDS. Pending any such split into separate contracts, Seller agrees
to continue to pay $9,416.67 per month to AQS as its share for services
performed by AQS under such contract, provided that Seller is not required to
pay such amount to AQS to the extent Seller has not received such amount from
Providence Washington Group with respect to any payments otherwise due AQS.
(c) Contracts for AQS Software. As additional consideration to
induce Seller to enter into this Agreement, AQS assumes, guarantees and agrees
to discharge all liabilities and obligations and perform all duties and
responsibilities of SDS or Seller under the contracts executed by SDS and which
provide for the provision of AQS software, a listing of which contracts is
attached hereto as Schedule 10(c), and Seller hereby delivers assignments of
such contracts to AQS. Purchaser agrees to use its best efforts to cause AQS
to enter into new contracts with the opposite parties to the contracts listed
in Schedule 10(c), completely releasing and replacing SDS as a party to such
contracts.
(d) Contracts for SDS and AQS Software. The parties hereto represent
that the contracts listed in as Schedule 10(d)-hereto have been executed by SDS
and provide for the supplying of SDS and AQS software to the clients under such
contracts. The parties hereto agree to use their best efforts to separate or
split such contracts to provide for the separate obligation and
responsibilities of AQS and SDS. Pending the separation or split up of such
contracts, (i) AQS agrees to provide a copy of AQS' clients' software to Seller
for testing, (ii) Seller agrees to provide access to SDS' clients' software to
AQS for testing, (iii) Seller and AQS agree to implement separate contracts at
the request of a client under such contracts, (iv) AQS agrees to
<PAGE> 8
hold harmless from and against any and all liabilities and obligations
resulting from the action or inaction of AQS under such contracts, and (v)
Seller agrees to hold AQS harmless from and against any and all liabilities and
obligations result from the action or inaction of SDS under such contracts. It
is specifically agreed between the parties hereto that the obligations of
Seller and AQS in subparagraphs (i) and (ii) above shall also apply to
contracts with clients where there may be separate agreements between the
client and AQS and SDS, but where there is a bridge in place for these clients.
A listing of such contracts is contained in Schedule 10(d)-2 attached hereto.
Neither party shall have authority to renew or extend the obligation of the
other party after the date of this Agreement under any of the contracts listed
on Schedule 10 and the obligations of the parties under this Section 10 shall
not apply to any contract (including extensions or renewals of existing
contracts) entered into after the date of this Agreement.
(e) Employee Benefits. Seller and Purchaser shall cooperate to
enable AQS to replace the current employee benefit packages at AQS as quickly
as possible and AWS shall be liable for any premiums or payments from the date
hereof until the respective employee benefit has been replaced.
Notwithstanding the foregoing, all AQS employees shall be terminated from the
Seller's pension, profit-sharing and 401(k) plans as of the date hereof.
Seller shall cooperate to transfer assets in its 401(k) plan to a separate plan
to be implemented by AQS.
(f) Tax Status of AQS. To the extent permitted by applicable tax
laws and regulations, Purchaser shall treat AQS as a new corporate entity for
federal income tax purposes from and after the Closing Date.
(g) Execution of Additional Documents and Access to Records. Each
party hereto shall make, execute, acknowledge and deliver such other
instruments and documents, and take all such other actions as may be reasonably
required in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby. After the Closing, and upon
reasonable advance notice from Seller, Purchaser and AQS shall give Seller
access to the books and records of AQS relating to periods prior to the Closing
to the extent necessary for Seller to comply with the requests or orders of
governmental authorities or courts, or for any other valid purpose relating to
Seller's ownership of, or the operations of, AQS prior to the Closing.
(h) Taxes. Seller shall prepare and file final federal income tax
return and annual proportional state tax returns and pay federal and state
income taxes of AQS from January 1, 1997 through the date hereof. Seller shall
submit its computation of taxes for the period from January 1, 1997 through the
date hereof based upon an effective tax rate of 40 percent of book net income
to Purchaser and Seller and Purchaser shall cooperate in good faith to estimate
the amount of such taxes. Purchase agrees to promptly pay to Seller the amount
of such taxes upon its review of their computation. Seller has settled all tax
years prior to fiscal 1997 as of the date hereof.
(i) Software Source Code. Neither Seller nor any affiliate of Seller
shall use the AQS software source code for the purpose of developing any new
products.
<PAGE> 9
11. Miscellaneous.
(a) Book and Records. To the extent not in AQS' possession, Seller
shall deliver the AQS minute book and stock record book to Purchaser, together
with all the records, accounts and contracts of AQS, including, specifically,
the general ledger and all other accounting records.
(b) Notices. All notices or other communications required or
permitted by this Agreement shall be sufficiently given if in writing and
personally delivered or telecopied and mailed by registered or certified mail,
return receipt requested, to the address of each party set forth below or to
such other addresses as the parties may designate.
If to Purchaser, AQS or Fleager. Applied Quoting System, Inc.
625 Walnut Ridge Drive
Hartland, Wisconsin 53029
Telecopy: (414) 367-6139
Attention: Samuel J. Fleager
If to Seller: INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Telecopy: (800) 826-9865
Attention: F. George Dunham, III
(c) Amendment and Waiver. This Agreement shall not be amended,
except pursuant to a written instrument executed by all of the parties hereto.
Any term or provision of this Agreement may be waived pursuant to a written
instrument executed by the party entitled to the benefit hereof.
(d) Severability. If any provision of this Agreement, or the
application of any such provision to any person or circumstance, shall be held
invalid by a court of competent jurisdiction, the remainder of this Agreement,
or the application of such provision to persons or circumstances other than
those as to which it is held invalid, shall not be affected thereby.
(e) Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute a single instrument.
(f) Entire Agreement. This Agreement sets forth the entire
understanding and agreement between the parties as to the matters covered
herein and supersedes any prior understanding, agreement or statement (written
or oral) of intent. No provision of this Agreement shall be construed to
confer any rights or remedies on any person other than the Seller, Purchaser or
AQS.
<PAGE> 10
(g) Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(i) Governing Law. This Agreement shall be construed in accordance
with and governed by, the laws of the State of Texas. IN WITNESS WHEREOF, this
Agreement has been executed and delivered as of the date first written above.
<PAGE> 11
IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the
date first written above.
SELLER
Applied Quoting Systems, Inc. INSpire Insurance Solutions, Inc.
Name: Terry Gaines Name: Terry Gaines
Title: Executive Vice President and Title: Executive Vice President and
Chief Financial Officer Chief Financial Officer
PURCHASER
AQS, Inc.
Samuel J. Fleager Name: Samuel J. Fleager
Title: President
<PAGE> 1
EXHIBIT 11.1
INSPIRE INSURANCE SOLUTIONS, INC.
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Weighted average number of common shares outstanding 8,355,829 7,000,000 7,456,909 7,000,000
Common stock equivalents from outstanding stock options 839,712 749,221 764,346 749,221
----------- ----------- ----------- -----------
Average common and common stock equivalents outstanding 9,195,541 7,749,221 8,221,255 7,749,221
=========== =========== =========== ===========
Net income (loss) $ 2,456,479 $ 55,087 $ (399,954) $ (218,308)
=========== =========== =========== ===========
Net income (loss) per share (1) $ 0.27 $ 0.01 $ (0.05) $ (0.03)
=========== =========== =========== ===========
</TABLE>
(1) Fully-diluted earnings per share have not been presented because the
effects are not material.
<PAGE> 1
EXHIBIT 15.1
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
November 14, 1997
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim financial
information of INSpire Insurance Solutions, Inc. for the periods ended
September 30, 1996 and 1997, as indicated in our report dated October 27, 1997;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in this
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is
incorporated by reference in Registration Statement No. 33-36271 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Fort Worth, Texas
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEET OF INSPIRE INSURANCE SOLUTIONS, INC.
AS OF AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 14,498
<SECURITIES> 13,199
<RECEIVABLES> 9,314
<ALLOWANCES> 275
<INVENTORY> 0
<CURRENT-ASSETS> 39,769
<PP&E> 14,165
<DEPRECIATION> 8,266
<TOTAL-ASSETS> 61,194
<CURRENT-LIABILITIES> 10,216
<BONDS> 1,129
0
0
<COMMON> 102
<OTHER-SE> 46,518
<TOTAL-LIABILITY-AND-EQUITY> 61,194
<SALES> 0
<TOTAL-REVENUES> 38,441
<CGS> 0
<TOTAL-COSTS> 40,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> (908)
<INCOME-TAX> 508
<INCOME-CONTINUING> (400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (400)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
