SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(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, 1998
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 (I.R.S. Employer
incorporation 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 [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 10, 1998: 12,214,306. On July 21,
1998, the registrant approved a three-for-two stock split, to be effected
in the form of a stock dividend, payable on August 17, 1998 to shareholders
of record as of the close of business on July 31, 1998. After giving
effect to such stock dividend, the number of shares outstanding of the
issuer's classes of common stock would be 18,321,459.
This Amendment No. 1 to Form 10-Q amends and supplements the quarterly
report on Form 10-Q for the quarterly period ended June 30, 1998, filed
with the Securities and Exchange Commission on August 14, 1998 (the "Form
10-Q"), of INSpire Insurance Solutions, Inc. (the "Company"). Capitalized
terms used herein have the meanings ascribed to such terms in the Form 10-Q
unless otherwise defined herein.
The Form 10-Q is hereby amended and supplemented by amending and
restating Part I, Item 2 of the Form 10-Q. The only change from the Form
10-Q is an addition to the "Recent Developments - Stock Split" section of
Part I, Item 2 to clarify the number of shares of common stock of the
Company both before and after giving effect to the three-for-two stock
split approved by the Company on July 21, 1998.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
PARAGON INTERFACE, INC. ACQUISITION - On April 20, 1998, the Company
acquired (the "Paragon Acquisition") all of the outstanding shares of
common stock of Paragon Interface, Inc. ("Paragon") for $4.25 million and
costs and expenses of approximately $100,000. This acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets acquired and liabilities
assumed based on their relative fair market value.
STOCK SPLIT - On July 21, 1998, the Board of Directors approved a
three-for-two stock split, to be effected in the form of a stock dividend,
payable on August 17, 1998 to shareholders of record as of the close of
business on July 31, 1998. As of August 10, 1998, there were 12,214,306
outstanding shares of common stock, par value $.01 per share, of the
Company (the "Common Stock"). After giving effect to this stock dividend,
there would be 18,321,459 outstanding shares of Common Stock. Due to this
stock dividend, a transfer of approximately $61,000 from retained earnings
to common stock will be reflected in the July 31, 1998 balance sheet. Pro
forma net income (loss) per share (basic), giving retroactive effect to
this stock dividend, would have been $.06 for each of the three month
periods ended June 30, 1998 and 1997, and $.20 and ($.27) for the six
months ended June 30, 1998 and 1997, respectively. Pro forma net income
(loss) per share (diluted), giving retroactive effect to this stock
dividend, would have been $.05 for each of the three month periods ended
June 30, 1998 and 1997, and $.18 and ($.27) for the six months ended June
30, 1998 and 1997, respectively.
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:
Three months ended Six months ended
June 30, June 30,
------------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
REVENUES:
Outsourcing services 54.4% 50.8% 54.8% 61.9%
Software and software
services 42.4 43.0 42.0 32.5
Other 3.2 6.2 3.2 5.6
------ ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
------ ----- ----- -----
EXPENSES:
Cost of outsourcing services 28.0 34.5 29.3 43.4
Cost of software and
software services 23.1 24.0 22.7 18.7
Cost of other revenues 2.1 3.4 2.2 3.0
Selling, general and
administrative 18.2 11.5 17.9 8.6
Research and development 3.2 3.7 2.8 2.9
Depreciation and amortization 6.8 7.7 6.7 7.3
Purchased research and
development 9.5 -- 5.1 12.9
Deferred compensation -- 5.9 -- 17.0
Management fees to
shareholder -- 3.8 -- 5.2
------ ----- ----- -----
Total expenses 90.9 94.5 86.7 119.0
------ ----- ----- -----
OPERATING INCOME (LOSS) 9.1 5.5 13.3 (19.0)
OTHER INCOME (EXPENSE) 4.1 (0.7) 3.2 (0.7)
------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAX 13.2 4.8 16.5 (19.7)
INCOME TAX BENEFIT (EXPENSE) (8.1) (0.5) (7.9) 7.4
------ ----- ----- -----
NET INCOME (LOSS) 5.1% 4.3% 8.6% (12.3)%
====== ===== ===== =====
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. Total revenues were $21.0 million for the three months ended
June 30, 1998 compared to $15.1 million for the three months ended June 30,
1997, an increase of $5.9 million or 39%. Outsourcing services revenues
were $11.4 million for the three months ended June 30, 1998 compared to
$7.7 million for the three months ended June 30, 1997, an increase of $3.7
million or 48%. The growth in outsourcing services revenues is due
primarily to: (i) the Company performing outsourcing services under eight
significant outsourcing contracts that it entered into after June 30, 1997
and (ii) an increase in outsourcing services after June 30, 1997 provided
under two significant claims administration agreements. Software and
software services revenues were $8.9 million for the three months ended
June 30, 1998 compared to $6.5 million for the three months ended June 30,
1997, an increase of $2.4 million or 37%. The growth in software and
software services revenues during the three months ended June 30, 1998 is
primarily attributable to increased license fees and consulting services
revenues resulting from an increase of in-process installations of the
Windows into Property and Casualty System ("WPC") and increases in license
fees and consulting rates. This growth was slightly offset by the sale of
a subsidiary, which had software and software services revenues of
approximately $1.2 million during the three months ended June 30, 1997, in
September 1997.
COST OF REVENUES. Cost of revenues, which is comprised mainly of
personnel costs, was $11.2 million for the three months ended June 30, 1998
compared to $9.3 million for the three months ended June 30, 1997, an
increase of $1.9 million or 20%. Cost of outsourcing services was $5.9
million for the three months ended June 30, 1998 compared to $5.2 million
for the three months ended June 30, 1997, an increase of $700,000 or 13%.
This increase is primarily attributable to costs associated with the
performance of the ten significant outsourcing contracts described above.
Cost of outsourcing services as a percentage of outsourcing services
revenues decreased to 51% for the three months ended June 30, 1998 from 68%
for the three months ended June 30, 1997. This decrease is 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.
Cost of software and software services was $4.8 million for the three
months ended June 30, 1998 compared to $3.6 million for the three months
ended June 30, 1997, an increase of $1.2 million or 33%. This increase is
primarily attributable to the costs associated with the increased
consulting services related to the WPC installations described above.
Cost of software and software services as a percentage of software and
software services revenues decreased to 54% for the three months ended June
30, 1998 from 56% for the three months ended June 30, 1997. This decrease
is a result of economies of scale associated with spreading certain fixed
costs over a larger revenue base.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses, including management fees paid to shareholder,
were $3.8 million for the three months ended June 30, 1998 compared to $2.3
million for the three months ended June 30, 1997, an increase of $1.5
million or 65%. Selling, general and administrative expenses as a
percentage of total revenues increased to 18% for the three months ended
June 30, 1998 from 15% for the three months ended June 30, 1997. This
increase is primarily due to: (i) increased marketing costs and (ii)
additional executive management, 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
$676,000 for the three months ended June 30, 1998 compared to $554,000 for
the three months ended June 30, 1997, an increase of $122,000 or 22%. This
increase is due to the Company's increased focus on the development of new
software products and the expansion of the functionality of current
software products. This expense is comprised primarily of personnel,
equipment and occupancy costs related to software development. Research
and development expense for the three months ended June 30, 1998 is net of
capitalized software development costs of $486,000. There were no
capitalized software development costs during the three months ended June
30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $1.4 million for the three months ended June 30, 1998 compared to $1.2
million for the three months ended June 30, 1997, an increase of
approximately $200,000 or 17%. This increase is primarily attributable to:
(i) amortization of goodwill and capitalized software recorded in
connection with the Paragon Acquisition and (ii) acquisitions of property
and equipment of $3.9 million in the aggregate since June 30, 1997 as a
result of the expansion in infrastructure to support the Company's growth.
NONRECURRING OPERATING EXPENSES. In the purchase price allocation of
the Paragon Acquisition, $2.0 million was assigned to purchased research
and development. This amount, which is not deductible for tax purposes, was
charged to operations in April 1998. In addition, $884,000 was charged to
operations as deferred compensation associated with stock options granted
to executive officers in May 1997.
OTHER INCOME. Other income (expense) increased to $859,000 for the
three months ended June 30, 1998 from $(108,000) for the three months ended
June 30, 1997. This increase is primarily attributable to an increase of
$819,000 in interest income due to an increase in short-term investments
purchased with net proceeds from the Company's initial public offering in
August 1997 and follow-on public offering in March 1998. During the three
months ended June 30, 1997, the Company did not have significant
investments that earned interest income.
NET INCOME. Net income was $1.1 million, or $.08 per diluted share
($.09 per basic share), for the three months ended June 30, 1998, compared
to net income of $639,000, or $.08 per diluted share ($.09 per basic
share), for the six months ended June 30, 1997. Excluding the impact on
net income resulting from the $2.0 million write-off of purchased research
and development associated with the Paragon Acquisition, net income would
have been $3.1 million, or $.23 per diluted share ($.25 per basic share),
for the three months ended June 30, 1998. Excluding the impact on net
income resulting from the charge to operation of $884,000 (or $566,000, net
of tax) of deferred compensation associated with stock options granted to
executive officers, net income would have been $1.2 million, or $.16 per
diluted share ($.17 per basic share), for the three months ended June 30,
1997.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
REVENUES. Total revenues were $39.3 million for the six months ended
June 30, 1998 compared to $23.3 million for the six months ended June 30,
1997, an increase of $16.0 million or 69%. Outsourcing services revenues
were $21.5 million for the six months ended June 30, 1998 compared to $14.4
million for the six months ended June 30, 1997, an increase of $7.1 million
or 49%. The growth in outsourcing services revenues is due primarily to:
(i) the Company performing outsourcing services under eight significant
outsourcing contracts entered into after June 30, 1997 and (ii) an increase
in outsourcing services after June 30, 1997 provided under two other
significant claims administration agreements. Software and software
services revenues were $16.5 million for the six months ended June 30, 1998
compared to $7.6 million for the six months ended June 30, 1997, an
increase of $8.9 million or 117%. The growth in software and software
services revenues during the six months ended June 30, 1998 is primarily
attributable to: (i) the acquisition of Strategic Data Systems, Inc.
("SDS") on March 12, 1997 by the Company (the "SDS Acquisition") and (ii)
is primarily attributable to increased license fees and consulting services
revenues resulting from an increase of in-process installations of WPC and
increases in license fees and consulting rates. This growth was slightly
offset by the sale of a subsidiary, which had software and software
services revenues of approximately $1.4 million during the six months ended
June 30, 1997, in September 1997.
COST OF REVENUES. Cost of revenues, which is comprised mainly of
personnel costs, was $21.2 million for the six months ended June 30, 1998
compared to $15.1 million for the six months ended June 30, 1997, an
increase of $6.1 million or 40%. Cost of outsourcing services was $11.5
million for the six months ended June 30, 1998 compared to $10.1 million
for the six months ended June 30, 1997, an increase of $1.4 million or 14%.
This increase is primarily attributable to the increased costs associated
with the performance of the ten significant outsourcing contracts described
above. Cost of outsourcing services as a percentage of outsourcing services
revenues decreased to 53% for the six months ended June 30, 1998 from 70%
for the six months ended June 30, 1997. This decrease is 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.
Cost of software and software services was $8.9 million for the six months
ended June 30, 1998 compared to $4.4 million for the six months ended June
30, 1997, an increase of $4.5 million or 102%. This increase is primarily
attributable to the additional cost of revenues associated with the SDS
Acquisition and the costs associated with the increased consulting services
related to the WPC installations described above. Cost of software and
software services as a percentage of software and software services
revenues decreased to 54% for the six months ended June 30, 1998 from 58%
for the six months ended June 30, 1997. This decrease is a result of
economies of scale associated with spreading certain fixed costs over a
larger revenue base.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses, including management fees paid to shareholder,
were $7.1 million for the six months ended June 30, 1998 compared to $3.2
million for the six months ended June 30, 1997, an increase of $3.9 million
or 122%. Selling, general and administrative expenses as a percentage of
total revenues increased to 18% for the six months ended June 30, 1998 from
14% for the six months ended June 30, 1997. This increase is primarily due
to: (i) increased marketing costs (ii) the SDS Acquisition and (iii)
additional executive management, 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 $1.1
million for the six months ended June 30, 1998 compared to $680,000 for the
six months ended June 30, 1997, an increase of $420,000 or 62%. This
increase is due to the Company not incurring any significant research and
development expenses prior to the SDS Acquisition and the Company's
increased focus on the development of new software products and the
expansion of the functionality of current software products. This expense
is comprised primarily of personnel, equipment and occupancy costs related
to software development. Research and development expense for the six
months ended June 30, 1998 is net of capitalized software development costs
of $964,000. There were no capitalized software development costs during
the six months ended June 30, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $2.6 million for the six months ended June 30, 1998 compared to $1.7
million for the six months ended June 30, 1997, an increase of
approximately $900,000 or 53%. This increase is primarily attributable to:
(i) amortization of goodwill and capitalized software recorded in
connection with the SDS Acquisition and the Paragon Acquisition and (ii)
acquisitions of property and equipment of $4.3 million in the aggregate
since June 30, 1997 as a result of the expansion in infrastructure to
support the Company's growth.
NONRECURRING OPERATING EXPENSES. In the purchase price allocation of
the SDS Acquisition, $3.0 million was assigned to purchased research and
development. This amount, which is not deductible for tax purposes, 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 the six months ended June 30, 1997.
In the purchase price allocation of the Paragon Acquisition, $2.0 million
was assigned to in-process research and development. This amount was
charged to operations in April 1998.
OTHER INCOME. Other income (expense) increased to $1.3 million for
the six months ended June 30, 1998 from $(159,000) for the six months ended
June 30, 1997. This increase is primarily attributable to an increase of
$1.2 million in interest income due to an increase in short-term
investments purchased with net proceeds from the Company's initial public
offering in August 1997 and follow-on public offering in March 1998.
During the six months ended June 30, 1997, the Company did not have
significant investments that earned interest income.
NET INCOME. Net income was $3.4 million, or $.27 per diluted share
($.30 per basic share), for the six months ended June 30, 1998, compared to
a net loss of $2.9 million, or $.41 per diluted share ($.41 per basic
share), for the six months ended June 30, 1997. Excluding the impact on
net income resulting from the $2.0 million write-off of purchased research
and development associated with the Paragon Acquisition, net income would
have been $5.4 million, or $.43 per diluted share ($.48 per basic share),
for the six months ended June 30, 1998. Excluding the impact on the net
loss resulting from the charge to operations of $3.9 million of deferred
compensation associated with stock options granted to executive officers
and the write-off of purchased research and development of $3.0 million (or
$4.5 million, net of tax) net income would have been $1.6 million, or $.21
per diluted share ($.23 per basic share), for the six months ended June 30,
1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $66.1 million as of June 30, 1998
compared to $28.0 million as of December 31, 1997, an increase of $38.1
million. Net cash provided by operating activities was $4.9 million for the
six months ended June 30, 1998 compared to net cash provided by operating
activities of $1.4 million for the six months ended June 30, 1997. Net cash
used in investing activities was $19.1 million for the six months ended
June 30, 1998, which is primarily attributable to: (i) the purchase of
$11.3 million in short-term investments, (ii) the purchase of $2.6 million
in property and equipment and (iii) the Paragon Acquisition. Net cash used
in investing activities was $18.0 million for the six months ended June 30,
1997, which is primarily attributable to the SDS Acquisition. Net cash
provided by financing activities was $52.3 million for the six months ended
June 30, 1998, which is primarily attributable to the follow-on public
offering on March 27, 1998, compared to net cash provided by financing
activities of $16.7 million for the six months ended June 30, 1997, which
is primarily due to capital contributions from a shareholder and borrowings
of $18.1 million to fund the SDS Acquisition.
The Company entered into a bank credit facility (the "NationsBank
Facility") with Nationsbank of Texas, N.A. ("NationsBank") on March 12,
1997, pursuant to which the Company borrowed $5.0 million under a term
credit facility and $2.5 million under a $4.0 million revolving credit
facility, subject to a borrowing base formula, to finance in part the SDS
Acquisition. The Company must pay a commitment fee of 0.25% per annum on
the average daily unused portion of the revolving credit facility. In
addition, the NationsBank Facility contains certain restrictive covenants
that require the Company to meet certain requirements, such as maintaining
a minimum net worth, and that, without the prior written consent of
NationsBank, prohibit the Company from incurring indebtedness other than
pursuant to the NationsBank Facility or declaring or paying dividends or
other distributions. The revolving credit facility matures 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. As of June 30, 1998, there are no
outstanding borrowings under the NationsBank Facility and the Company is in
compliance with its covenants under the NationsBank Facility.
The Company believes that cash generated from operations and its net
proceeds from the initial public offering and follow-on public offering
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.
YEAR 2000 ISSUES
The Company believes that the computer equipment and software used and
sold by the Company will function properly with respect to dates in the
Year 2000 and thereafter. The Company is in the process of communicating
with and distributing questionnaires to its significant suppliers and
customers to determine the extent to which interfaces with such entities
are vulnerable to Year 2000 issues and the extent to which any products
purchased by or from, or internal systems of, such entities are vulnerable
to Year 2000 issues. The Company presently believes that the Year 2000
issues will not require the Company to incur any material costs or pose
significant operational problems for the Company directly or as a result of
any Year 2000 issues of suppliers or customers. The Company believes that
Year 2000 issues of its customers or potential customers provide
opportunities to the Company to market its products and services as a
solution to such Year 2000 issues.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In October 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of
Position No. 97-2, Software Revenue Recognition ("SOP 97-2"). SOP 97-2 is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The adoption of SOP 97-2 did not have a material effect
on the Company's financial position or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains or may contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 difficulties associated with growth,
the Company's dependence on major customers and limited operating history,
technological change, competitive factors and pricing pressures, product
development risks, changes in legal and regulatory requirements, and
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: September 9, 1998 INSPIRE INSURANCE SOLUTIONS, INC.
/S/F. GEORGE DUNHAM, III
------------------------------------------
F. George Dunham, III
Chief Executive Officer, Chairman and
Director
Date: September 9, 1998 /S/TERRY G. GAINES
------------------------------------------
Terry G. Gaines
Executive Vice President, Chief Financial
Officer and Treasurer
