<PAGE> 1
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 ................................March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to _________________
Commission file number ............................................ 000-23005
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)
817-348-3900
(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 May 3, 1999: 18,961,751
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION.................................................................... 1
Item 1. Financial Statements...................................................................... 1
Condensed Consolidated Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998..................................................................... 1
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1999 and 1998................................................ 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1999 and 1998................................................ 3
Notes to Condensed Consolidated Financial Statements (unaudited).......................... 4
Independent Accountants' Report........................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................ 11
PART II - OTHER INFORMATION........................................................................ 11
Item 5. Other Information......................................................................... 11
Item 6. Exhibits and Reports on Form 8-K.......................................................... 12
Signatures......................................................................................... 12
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 35,416,446 $ 27,599,967
Investments ........................................................................ 17,965,226 20,494,443
Accounts receivable, net ........................................................... 22,837,281 18,601,724
Income taxes receivable ............................................................ 140,272 1,830,868
Deferred income taxes .............................................................. 1,091,914 1,176,686
Prepaid expenses and other current assets .......................................... 9,034,070 7,279,985
------------- -------------
Total current assets ......................................................... 86,485,209 76,983,673
Property and equipment, net (accumulated depreciation
1999 $14,564,623; 1998 $13,679,322) .................................................... 12,772,421 11,824,787
Intangibles and other assets ............................................................ 44,379,684 43,999,890
------------- -------------
TOTAL ................................................................................... $ 143,637,314 $ 132,808,350
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................................... $ 2,360,668 $ 1,386,440
Accrued payroll and compensation ................................................... 992,171 632,691
Other accrued expenses ............................................................. 3,318,872 2,455,309
Unearned revenue ................................................................... 6,045,616 1,831,406
Deferred compensation .............................................................. 1,383,206 1,907,389
Income taxes payable ............................................................... 324,301 --
Current portion of long-term debt .................................................. 168,025 383,402
------------- -------------
Total current liabilities .................................................... 14,592,859 8,596,637
Deferred compensation ................................................................... 260,047 260,047
Deferred income taxes ................................................................... 3,606,945 3,606,945
Commitments and contingencies (Note 3) .................................................. -- --
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, 18,915,558 shares issued and outstanding
in 1999; 18,685,813 shares issued and outstanding in 1998 ........................ 189,155 186,858
Additional paid-in capital ......................................................... 110,139,158 108,710,195
Retained earnings .................................................................. 14,849,150 11,447,668
------------- -------------
Total shareholders' equity ................................................... 125,177,463 120,344,721
------------- -------------
TOTAL ................................................................................... $ 143,637,314 $ 132,808,350
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Outsourcing services ................................ $ 20,629,185 $ 10,131,963
Software and software services ...................... 10,169,355 7,625,048
Other ............................................... 577,991 598,770
------------ ------------
Total revenues ................................. 31,376,531 18,355,781
------------ ------------
EXPENSES:
Cost of outsourcing services, net ................... 13,155,457 5,634,863
Cost of software and software services, net ......... 5,004,687 4,076,635
Cost of other revenues .............................. 395,236 424,743
Selling, general and administrative ................. 4,449,653 3,243,521
Research and development, net ....................... 972,204 422,270
Depreciation and amortization ....................... 2,177,558 1,212,840
------------ ------------
Total expenses ................................ 26,154,795 15,014,872
------------ ------------
OPERATING INCOME ...................................... 5,221,736 3,340,909
OTHER INCOME (EXPENSE):
Interest income ..................................... 458,058 418,770
Interest expense .................................... (10,658) (19,038)
------------ ------------
Total other income (expense) ........................ 447,400 399,732
------------ ------------
INCOME BEFORE INCOME TAX .............................. 5,669,136 3,740,641
INCOME TAX EXPENSE .................................... (2,267,654) (1,421,444)
------------ ------------
NET INCOME ............................................ $ 3,401,482 $ 2,319,197
============ ============
NET INCOME PER SHARE (BASIC) .......................... $ .18 $ .15
============ ============
NET INCOME PER SHARE (DILUTED) ........................ $ .17 $ .13
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................... $ 3,401,482 $ 2,319,197
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .............................. 2,177,558 1,212,840
Change in operating assets and liabilities:
Accounts receivable ...................................... (4,235,557) 663,293
Prepaid expenses and other current assets ................ (63,489) 2,538,139
Other assets ............................................. (681,046) 76,492
Accounts payable ......................................... 974,228 (278,884)
Accrued payroll and compensation ......................... 276,121 (167,993)
Other accrued expenses ................................... 872,544 (386,522)
Unearned revenue ......................................... 4,214,210 (4,196,275)
Income taxes payable ..................................... 702,189 (225,189)
Deferred compensation .................................... 40,000 (303,557)
------------ ------------
Net cash provided by operating activities ....................... 7,678,240 1,251,541
------------ ------------
INVESTING ACTIVITIES:
Sales/(purchases) of investments ............................. 2,529,217 (8,541,035)
Purchases of property and equipment .......................... (1,836,466) (387,432)
Capitalized research and development costs ................... (495,868) (477,331)
Deferred contract costs ...................................... (491,604) --
------------ ------------
Net cash used in investing activities ........................... (294,721) (9,405,798)
------------ ------------
FINANCING ACTIVITIES:
Repayment of borrowings ...................................... (215,377) (199,487)
Proceeds from exercises under stock plans, net ............... 648,337 35,875
------------ ------------
Net cash provided by/(used in) financing activities ............. 432,960 (163,612)
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS ............ 7,816,479 (8,317,869)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD .................................................... 27,599,967 28,039,323
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 35,416,446 $ 19,721,454
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................................ $ 10,659 $ 19,947
============ ============
Income taxes paid (refunded) ................................. $ (125,653) $ (1,653,173)
============ ============
Noncash investing activities - proceeds receivable from
sale of common stock ....................................... $ -- $ 44,415,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - INSpire Insurance Solutions, Inc. ("INSpire" or the
"Company") is a provider of policy and claims administration and information
technology 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 Consolidated Financial Statements - The
accompanying unaudited condensed consolidated 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 herein
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, 1999. 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 consolidated financial statements and notes thereto for the
year ended December 31, 1998 included in the Company's Form 10-K (File No
000-23005).
Certain information and note disclosures normally included in
consolidated 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.
Intangibles and Other Assets - Goodwill is amortized over a period of
five to twenty years using the straight-line method. The realizability of
goodwill is evaluated periodically to assess recoverability and, if warranted,
impairment would be recognized. Acquired software and other intangibles are
amortized over a period of three to ten years using the straight-line method.
Deferred contract costs are comprised of the incremental fees and direct costs
associated with long-term outsourcing service agreements and are amortized over
the related contract period over a period of up to ten years using a units of
production method based on the total premiums or claims processed under the
terms of the respective agreements. The realizability of deferred contract costs
is evaluated periodically and, if warranted, an impairment would be recognized.
Net Income Per Share - Net income per share of the Company is computed
by dividing net income by the weighted average number of shares outstanding. The
weighted average number of shares (basic) was 18,767,930 and 15,462,000 for the
three months ended March 31, 1999 and 1998, respectively. The weighted average
number of shares (diluted) was 20,314,281 and 17,581,500 for the three months
ended March 31, 1999 and 1998, respectively. The weighted average number of
shares amounts have been adjusted to reflect all stock splits in the form of
stock dividends.
Recently Issued Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for transactions
entered into in fiscal years beginning after December 31, 1998. The adoption of
SOP 98-1 did not have a material effect on the Company's consolidated financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 is effective for the Company's
fiscal year ending December 31, 1999. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. Adoption did not
have a material effect on the Company's consolidated financial statements.
4
<PAGE> 7
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15,
1999. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company does not expect that
the adoption of SFAS 133 will have a material impact on its consolidated
financial statements because the Company does not currently hold any derivative
instruments.
2. RELATED PARTY TRANSACTIONS
The Company provides outsourcing services and software and software
services to The Millers Mutual Fire Insurance Company ("Millers Mutual"), a
shareholder of the Company, and The Millers Casualty Insurance Company ("Millers
Casualty"), an indirect 99.4% subsidiary of Millers Mutual, under the terms of
various agreements. For the three months ended March 31, 1999 and 1998, under
such agreements, the Company earned total fees of $7,537,012 and $5,615,980,
respectively.
Effective January 1, 1998, the Company and Millers Mutual entered into
an agreement whereby the Company provides benefits administration services to
Millers Mutual and Millers Casualty for a monthly fee of $15,000. Total fees
earned under this agreement were $45,000 for each of the three month periods
ending March 31, 1999 and 1998.
The Company incurred rental expenses to Millers Mutual for office
space, totaling approximately $79,000 for the three month period ended March 31,
1998. In November 1998, Millers Mutual sold the building in which INSpire's
headquarters is located to a partnership which is 100% owned by members of the
Company's Board of Directors and the Company's chief executive officer. For the
three months period ended March 31, 1999, INSpire incurred $192,318 of rental
expense under this agreement.
There was a net receivable due from Millers Mutual of approximately
$3,465,958 and $3,235,611 as of March 31, 1999 and 1998, respectively.
3. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings that the Company
believes could have a material adverse effect on the Company's business,
financial condition or operating results.
4. SUBSEQUENT EVENT
Pending Acquisition of Certain Assets of Freedom General Agency, Inc.,
Material Damage Adjustment Corporation of California, Material Damage Adjustment
Corporation of Florida, The Robert Plan of California Corporation, The Robert
Plan of Florida Corporation, The Robert Plan of New Jersey Corporation, Jersey
Central Insurance Agency, Inc., and The Robert Plan of New York Corporation
(collectively, "The Robert Plan") - The Company entered into an asset purchase
agreement (the "Asset Purchase Agreement") effective April 1, 1999, with The
Robert Plan, pursuant to which the Company agreed to acquire from The Robert
Plan certain assets and employees used in the conduct of its policy and claims
administration. Upon the consummation of the transaction contemplated as a part
of this Asset Purchase Agreement, the Company will enter into a policy and
claims administration agreement with The Robert Plan to provide certain policy
and claims administration services for the so-called "voluntary" lines of
automobile, homeowners and commercial automobile insurance for a period of ten
years beginning April 1, 1999.
5
<PAGE> 8
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solutions, Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet
of INSpire Insurance Solutions, Inc. and subsidiary (the "Company") as of March
31, 1999, and the related condensed consolidated statements of operations and
cash flows for the three month periods ended March 31, 1999 and 1998. 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 accepted 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 consolidated 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 consolidated balance sheet of INSpire Insurance
Solutions, Inc. and subsidiary as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended (not presented herein); and in our report dated February 25,
1999, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1998 is fairly stated,
in all material respects, in relation to the condensed consolidated financial
statements from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
April 21, 1999
6
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
Pending Acquisition of Certain Assets of Freedom General Agency, Inc.,
Material Damage Adjustment Corporation of California, Material Damage Adjustment
Corporation of Florida, The Robert Plan of California Corporation, The Robert
Plan of Florida Corporation, The Robert Plan of New Jersey Corporation, Jersey
Central Insurance Agency, Inc., and The Robert Plan of New York Corporation
(collectively, "The Robert Plan") - The Company entered into an asset purchase
agreement (the "Asset Purchase Agreement") effective April 1, 1999, with The
Robert Plan, pursuant to which the Company agreed to acquire from The Robert
Plan certain assets and employees used in the conduct of its policy and claims
administration. Upon the consummation of the transaction contemplated as a part
of this Asset Purchase Agreement, the Company will enter into a policy and
claims administration agreement with The Robert Plan to provide certain policy
and claims administration services for the so-called "voluntary" lines of
automobile, homeowners and commercial automobile insurance for a period of ten
years beginning April 1, 1999.
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
March 31,
------------------
1999 1998
----- -----
<S> <C> <C>
REVENUES:
Outsourcing services ................................ 65.7% 55.2%
Software and software services ...................... 32.4 41.5
Other ............................................... 1.8 3.3
----- -----
Total revenues ................................. 100.0 100.0
----- -----
EXPENSES:
Cost of outsourcing services, net ................... 41.9 30.7
Cost of software and software services, net ......... 16.0 22.2
Cost of other revenues .............................. 1.3 2.3
Selling, general and administrative ................. 14.2 17.7
Research and development, net ....................... 3.1 2.3
Depreciation and amortization ....................... 6.9 6.6
----- -----
Total expenses ................................. 83.4 81.8
----- -----
OPERATING INCOME ...................................... 16.6 18.2
OTHER INCOME .......................................... 1.4 2.2
----- -----
INCOME BEFORE INCOME TAX .............................. 18.1 20.4
INCOME TAX EXPENSE .................................... (7.2) (7.7)
----- -----
NET INCOME ............................................ 10.8% 12.6%
===== =====
</TABLE>
7
<PAGE> 10
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues. Total revenues were $31.4 million for the three months ended
March 31, 1999 compared to $18.4 million for the three months ended March 31,
1998, an increase of $13.0 million or 71%. Outsourcing services revenues were
$20.6 million for the three months ended March 31, 1999 compared to $10.1
million for the three months ended March 31, 1998, an increase of $10.5 million
or 104%. The growth in outsourcing services revenues is due primarily to: (i)
the Company performing outsourcing services under a policy administration
agreement and a claims administration agreement with Arrowhead General Insurance
Agency, Inc. ("Arrowhead") entered into effective December 1, 1998, (ii)
outsourcing services performed under nine other outsourcing contracts entered
into after March 31, 1998, and (ii) the Company performing additional services
under an information system services contract with Millers Mutual and Millers
Casualty. Software and software services revenues were $10.2 million for the
three months ended March 31, 1999 compared to $7.6 million for the three months
ended March 31, 1998, an increase of $2.6 million or 34%. The growth in software
and software services revenues is primarily attributable to (i) the acquisition
of the outstanding capital stock of Paragon Interface, Inc. on April 20, 1998
(the "Paragon Acquisition") and the related license fees and service revenues
from its primary product, TransFluent, (ii) and (ii) an increase in in-process
installations of the Windows into Property and Casualty System ("WPC") and other
software productivity tools, resulting in increased services and license fee
revenues.
Cost of Revenues. Cost of revenues, which is comprised mainly of
personnel costs, was $18.6 million for the three months ended March 31, 1999
compared to $10.1 million for the three months ended March 31, 1998, an increase
of $8.5 million or 84%. Cost of outsourcing services was $13.2 million for the
three months ended March 31, 1999 compared to $5.6 million for the three months
ended March 31, 1998, an increase of $7.6 million or 136%. This increase is
primarily attributable to costs associated with the performance of services
under the outsourcing contracts described above. Cost of outsourcing services as
a percentage of outsourcing services revenues increased to 64% for the three
months ended March 31, 1999 from 56% for the three months ended March 31, 1998.
This increase is a result of increased staffing and equipment to support the
growth of the outsourcing division, and lower operating margins during the
initial phases of the new outsourcing contracts described above, particularly
the Arrowhead agreements. Cost of software and software services was $5.0
million for the three months ended March 31, 1999 compared to $4.1 million for
the three months ended March 31, 1998, an increase of $900,000 or 22%. This
increase is primarily attributable to the costs associated with the increased
consulting services related to the software installations described above. Cost
of software and software services as a percentage of software and software
services revenues decreased to 49% for the three months ended March 31, 1999
from 53% for the three months ended March 31, 1998 due to increased productivity
of software personnel.
Selling, General and Administrative. Selling, general and
administrative expenses were $4.4 million for the three months ended March 31,
1999 compared to $3.2 million for the three months ended March 31, 1998, an
increase of $1.2 million or 38%. This increase is primarily due to additional
executive management, staffing, office space and computer equipment and software
required to expand the infrastructure to support the Company's growth. For the
three months ended March 31, 1999, selling, general and administrative expenses
also include approximately $200,000 severance expense for a former executive
officer of the Company. Selling, general and administrative expenses as a
percentage of total revenues decreased to 14% for the three months ended March
31, 1999 from 18% for the three months ended March 31, 1998. This decrease is
due to the increased revenue base over which to spread these costs.
Research and Development. Research and development expense was $972,000
for the three months ended March 31, 1999 compared to $422,000 for the three
months ended March 31, 1998, an increase of $550,000 or 130%. This increase is
primarily due to increased personnel expanding 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 March 31, 1999 and 1998 is net of capitalized
software development costs of approximately $496,000 and $477,000, respectively.
8
<PAGE> 11
Depreciation and Amortization. Depreciation and amortization expense
was $2.2 million for the three months ended March 31, 1999 compared to $1.2
million for the three months ended March 31, 1998, an increase of approximately
$1.0 million or 83%. This increase is primarily attributable to: (i)
amortization of goodwill and capitalized software recorded in connection with
the Paragon Acquisition, (ii) amortization of goodwill and depreciation on fixed
assets recorded in connection with the acquisition of the outstanding capital
stock of Arrow Claims Management, Inc. and certain assets of Arrowhead General
Insurance Agency, Inc., on December 1, 1998 and (iii) acquisitions of additional
property and equipment since March 31, 1998 as a result of the expansion in
infrastructure to support the Company's growth.
Other Income. Other income, consisting principally of investment
income, increased to $447,000 for the three months ended March 31, 1999 from
$400,000 for the three months ended March 31, 1998. The increase of $47,000, or
12%, is due to an increase in cash equivalents and investments purchased with
net proceeds from the Company's follow-on public offering in March 1998 and cash
from operations.
Net Income. Net income was $3.4 million, or $.17 per diluted share
($.18 per basic share), for the three months ended March 31, 1999 compared to
net income of $2.3 million, or $.13 per diluted share ($.15 per basic share),
for the three months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $35.4 million as of March 31, 1999
compared to $27.6 million as of December 31, 1998, an increase of $7.8 million.
Net cash provided by operating activities was $7.7 million for the three months
ended March 31, 1999 compared to net cash provided by operating activities of
$1.3 million for the three months ended March 31, 1998. For the three months
ended March 31, 1999, cash flow provided by operating activities included
depreciation and amortization expense of approximately $2.2 million and an
increase in unearned revenue of approximately $4.2 million, which was offset by
an increase in accounts receivable of approximately $4.2 million. Net cash used
in investing activities was $295,000 for the three months ended March 31, 1999,
which is primarily attributable to: (i) the sale of $2.5 million in investments,
and (ii) the purchase of $1.8 million in property and equipment. Net cash used
in investing activities was $9.4 million for the three months ended March 31,
1998, which is primarily attributable to the purchase of $8.5 million in
investments. Net cash provided by financing activities was $433,000 for the
three months ended March 31, 1999, primarily attributable to exercises under
stock plans of $648,000 compared to $164,000 of cash used in financing
activities for the three months ended March 31, 1998, primarily relating to the
repayment of borrowings.
The Company believes that cash generated from operations 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. Except for the acquisition of certain assets of The
Robert Plan relating to its policy and claims administration business, 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.
YEAR 2000 ISSUES
The Company is continuing its assessment of Year 2000 issues and taking
steps to prevent these issues from adversely affecting its future operating
results. This readiness process includes, but is not limited to, preparing an
inventory of potential Year 2000 issues, determining functions affected,
performing remediation as necessary, developing testing and recording results.
In its assessment of Year 2000 issues, the Company is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems. The
Company has not yet completed its Year 2000 compliance testing of, and
remediation efforts on, if necessary, these items. There can be no assurance
that these items will be Year 2000 compliant by December 31, 1999. If any of
these items are not Year 2000 compliant by December 31, 1999, then the Year 2000
issue could have a material adverse effect on the financial condition and
results of operations of INSpire. INSpire has, however, made upgrades to its
facilities, communications equipment, and security systems that, it believes,
will make them completely operational after December 31, 1999.
9
<PAGE> 12
In addition to evaluating its own systems for Year 2000 compliance, the Company
is also communicating with 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. There can be no
assurance that such entities, or interfaces with or products purchased from such
entities, will not be vulnerable to Year 2000 issues or that such vulnerability
will not have a material adverse effect on the financial condition or results of
operations of INSpire.
Total costs associated with the Company's Year 2000 readiness process,
consisting of both internal and external resources, are expected to range
between $2.0 and $2.5 million. The Company anticipates financing these costs
with cash generated from operations. The Company estimates that its Year 2000
compliance efforts are approximately 80% complete. The estimated time to
complete assessment, testing and remediation is September 30, 1999. INSpire
will develop contingency plans as it finds that, through compliance testing,
any of its applications, products, hardware, facilities, communication
equipment or security systems are not Year 2000 compliant or that any of its
significant suppliers or customers are significantly vulnerable to Year 2000
issues, and that such noncompliance or vulnerability cannot be remedied in a
timely manner.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1998, the Accounting Standards Executive Committee of the
AICPA issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for transactions entered into in fiscal years beginning after
December 31, 1998. The adoption of SOP 98-1 did not have a material effect on
the Company's consolidated financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 is effective for the Company's
fiscal year ending December 31, 1999. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. Adoption did not
have a material effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15,
1999. SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is the type of hedge transaction. The Company does not expect that
the adoption of SFAS 133 will have a material impact on its financial statements
because the Company does not currently hold any derivative instruments.
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.
10
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no quantitative or qualitative changes with respect to
market risk exposure during the three months ended March 31, 1999.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On January 11, 1999, Kenneth J. Meister was elected as Executive Vice
President and Chief Financial Officer of INSpire. From June 1996 to January
1999, Mr. Meister served as a senior vice president in the investment banking
group of Raymond James & Associates, Inc. Mr. Meister was previously a
practicing corporate and securities attorney for over five years, most recently
with Foley & Lardner.
On February 18, 1999, B.L. Buatt was elected Senior Vice President -
Outsourcing. Mr. Buatt joined INSpire after fourteen years at Computer Sciences
Corporation, where he most recently held the position of senior vice president
of services and outsourcing.
On March 29, 1999, Daniel Berce was elected to the Board of Directors.
Mr. Berce currently holds the position of vice chairman and chief financial
officer for AmeriCredit Corp. and has held other key positions with AmeriCredit
since joining the company in 1990. Mr. Berce was previously a partner with
PricewaterhouseCoopers LLP for fourteen years.
On April 2, 1999, Eric Yerina was elected Senior Vice President -
Professional Services. Mr. Yerina joined INSpire after six years at IBM, where
he most recently held the position of National Industry Principal, IBM Insurance
Industry Integration Services.
11
<PAGE> 14
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 and Articles
of Amendment No. 1 thereto (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form
S-1, Registration No. 333-31173).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, Registration No. 333-31173).
3.3 Form of First Amendment to the Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the Company's
Form 10-Q for the three months ended March 31, 1998 filed on
May 14, 1998).
4.1 Specimen Certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1, Registration No.
333-31173).
4.2 Form of 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 of the Company's
Registration Statement on Form S-1, Registration No.
333-31173).
4.3 Form of First Amendment to Rights Agreement (Incorporated by
reference to Exhibit 4.3 of the Company's Form 10-Q for the
three months ended March 31, 1998 filed on May 14, 1998).
11.1 Statement regarding Computation of Per Share Earnings.
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 March 31, 1999.
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: May 14, 1999
INSPIRE INSURANCE SOLUTIONS, INC.
/s/ F. GEORGE DUNHAM, III
----------------------------------------
F. George Dunham, III
Chief Executive Officer,
Chairman and Director
/s/ KENNETH J. MEISTER
----------------------------------------
Kenneth J. Meister
Executive Vice President and Chief
Financial Officer
12
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company and Articles
of Amendment No. 1 thereto (Incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form
S-1, Registration No. 333-31173).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, Registration No. 333-31173).
3.3 Form of First Amendment to the Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the Company's
Form 10-Q for the three months ended March 31, 1998 filed on
May 14, 1998).
4.1 Specimen Certificate for shares of Common Stock of the Company
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-1, Registration No.
333-31173).
4.2 Form of 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 of the Company's
Registration Statement on Form S-1, Registration No.
333-31173).
4.3 Form of First Amendment to Rights Agreement (Incorporated by
reference to Exhibit 4.3 of the Company's Form 10-Q for the
three months ended March 31, 1998 filed on May 14, 1998).
11.1 Statement regarding Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule (EDGAR version only).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Basic
Average shares outstanding ................................... 18,768 15,462
======== ========
Net income ................................................... $ 3,401 $ 2,319
======== ========
Per share amount ............................................. $ .18 $ .15
======== ========
Diluted
Average shares outstanding ................................... 18,768 15,462
Net effect of dilutive stock options based on the
treasury stock method using the average market price ....... 1,546 2,120
-------- --------
Total ........................................................ 20,314 17,582
======== ========
Net income ................................................... $ 3,401 $ 2,319
======== ========
Per share amount ............................................. $ .17 $ .13
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15.1
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
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
condensed consolidated financial information of INSpire Insurance Solutions,
Inc. for the period ended March 31, 1999, as indicated in our report dated April
21, 1999; 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 March 31, 1999, is
incorporated by reference in Registration Statement No. 333-36271 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule
436(c) under the Securities Act of 1933, as amended, 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
May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET OF INSPIRE INSURANCE
SOLUTIONS, INC. AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 35,416
<SECURITIES> 17,965
<RECEIVABLES> 23,193
<ALLOWANCES> 356
<INVENTORY> 0
<CURRENT-ASSETS> 86,485
<PP&E> 27,337
<DEPRECIATION> 14,565
<TOTAL-ASSETS> 143,637
<CURRENT-LIABILITIES> 14,593
<BONDS> 0
0
0
<COMMON> 189
<OTHER-SE> 124,988
<TOTAL-LIABILITY-AND-EQUITY> 143,637
<SALES> 0
<TOTAL-REVENUES> 31,377
<CGS> 0
<TOTAL-COSTS> 26,155
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 5,669
<INCOME-TAX> 2,268
<INCOME-CONTINUING> 3,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,401
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
