<PAGE> 1
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT December 1, 1998
(Date of Earliest Event Reported)
INSpire Insurance Solutions, Inc.
(Exact name of registrant as specified in its charter)
Commission File No. 000-23005
Texas 75-2595937
- ------------------------ ---------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
300 Burnett Street, Fort Worth, Texas 76102-2799
- --------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (817) 332-7761
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
<TABLE>
<S> <C>
(a) Financial Statements of Business Acquired.
Independent Auditors' Report-Deloitte & Touche LLP F-3
Balance Sheets of Arrow Claims Management ("ACM"), Inc. as of December 31, 1996 F-4
and 1997 and as of September 30, 1998 (unaudited).
Statements of Operations of ACM for the twelve months ended December 31, 1996 F-5
and 1997 and for the nine months ended September 30, 1997 and 1998 (unaudited).
Statements of Shareholders' Equity of ACM for the twelve month periods ended F-6
December 31, 1996 and 1997 and for the nine month period ended September 30, 1998
(unaudited)
Statements of Cash Flows of ACM for the twelve months ended December 31, 1996 F-7
and 1997 and for the nine months ended September 30, 1997 and 1998 (unaudited).
Notes to Financial Statements F-8
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed consolidated financial
statements are filed with this report:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1998. F-13
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine
Months Ended September 30, 1998. F-14
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year
Ended December 31, 1997. F-15
Unaudited Notes to Pro Forma Financial Statements. F-16
</TABLE>
F-1
<PAGE> 3
(c) Exhibits.
*2.1 Stock Purchase Agreement, dated as of October 29, 1998, by
and among INSpire Insurance Solutions, Inc. ("INSpire") and
Arrow Claims Management, Inc. and the Shareholders signatory
thereto. A list identifying the contents of the Schedules to
the Stock Purchase Agreement is attached.
*2.2 Asset Purchase Agreement, dated as of October 29, 1998,
by and between INSpire and Arrowhead General Insurance Agency,
Inc. ("AGIA"). A list identifying the contents of the
Schedules to the Asset Purchase Agreement is attached.
*10.1 Option Agreement, dated as of December 1, 1998, between
INSpire and AGIA.
*10.2 Registration Rights Agreement, dated as of December 1, 1998,
between the Company and AGIA.
- ---------------
* Incorporated by reference. Previously filed as an Exhibit to INSpire's report
on Form 8-K, dated December 1, 1998 and filed on December 14, 1998.
F-2
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
Board of Directors
Arrow Claims Management, Inc.
We have audited the accompanying balance sheets of Arrow Claims Management, Inc.
as of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Arrow Claims Management, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 29, 1999
Fort Worth, Texas
F-3
<PAGE> 5
ARROW CLAIMS MANAGEMENT, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------- 1998
ASSETS 1996 1997 (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 27,870 $ 49,396 $ 61,157
Accounts receivable - net 1,198,878 1,024,604 1,177,856
Prepaid expenses and other current assets 16,305 30,893 38,965
------------- ------------- -------------
Total current assets 1,243,053 1,104,893 1,277,978
Property, plant and equipment - net 881,208 706,653 756,576
Other assets 17,224 18,418 13,953
------------- ------------- -------------
TOTAL $ 2,141,485 $ 1,829,964 $ 2,048,507
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 629,388 $ 871,638 $ 519,863
Accrued expenses 204,289 223,898 233,034
Income taxes payable 80,000
Notes payable 42,880 11,362
Loan payable to affiliate 1,374,898 1,006,802 1,129,152
Current portion of long-term obligations 63,636 62,965
------------- ------------- -------------
Total current liabilities 2,315,091 2,165,303 1,973,411
Long-term obligations 65,360 2,395
Deferred income taxes payable 28,000
Commitments and contingencies (Note 8)
Shareholders' equity:
Common stock, $.01 par value; 3,000 shares authorized; 1,000
shares issued and 730 outstanding at December 31, 1996, 1997
and September 30, 1998, respectively 10 10 10
Additional paid-in capital 181,940 181,940 181,940
Accumulated deficit (371,789) (470,557) (85,727)
Treasury stock, 270 shares at cost (49,127) (49,127) (49,127)
------------- ------------- -------------
Total shareholders' equity (deficit) (238,966) (337,734) 47,096
------------- ------------- -------------
TOTAL $ 2,141,485 $ 1,829,964 $ 2,048,507
============= ============= =============
</TABLE>
See notes to financial statements.
F-4
<PAGE> 6
ARROW CLAIMS MANAGEMENT, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------------------
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues - Claims management
fee income $ 13,814,895 $ 13,829,989 $ 10,057,595 $ 12,165,536
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of claims management services 9,281,344 8,962,875 6,592,989 7,943,378
Selling, general and administrative 3,004,786 2,942,187 2,199,811 2,054,968
Depreciation and amortization 228,947 272,644 203,047 211,950
Management fee 1,242,654 1,649,704 1,162,998 1,381,064
------------- ------------- ------------- -------------
Total operating costs and
expenses 13,757,731 13,827,410 10,158,845 11,591,360
------------- ------------- ------------- -------------
Operating income (loss) 57,164 2,579 (101,253) 574,176
Other income (expense):
Interest expense (146,088) (109,558) (87,777) (58,526)
Other income (expense) 8,234 8,211 2,145 (22,820)
------------- ------------- ------------- -------------
Total other income (expense) (137,854) (101,347) (85,632) (81,346)
------------- ------------- ------------- -------------
Income (loss) before income taxes (80,690) (98,768) (186,885) 492,830
Income taxes -- -- -- 108,000
------------- ------------- ------------- -------------
Net income (loss) $ (80,690) $ (98,768) $ (186,885) $ 384,830
============= ============= ============= =============
</TABLE>
See notes to financial statements.
F-5
<PAGE> 7
ARROW CLAIMS MANAGEMENT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDERS'
COMMON PAID-IN TREASURY ACCUMULATED EQUITY
STOCK CAPITAL STOCK DEFICIT (DEFICIT)
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ 10 $ 181,940 $ -- $ (291,099) $ (109,149)
Purchase of treasury stock, 270 shares (49,127) (49,127)
Net loss (80,690) (80,690)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 10 181,940 (49,127) (371,789) (238,966)
Net loss (98,768) (98,768)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 10 181,940 (49,127) (470,557) (337,734)
Net income (unaudited) 384,830 384,830
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998
(unaudited) $ 10 $ 181,940 $ (49,127) $ (85,727) $ 47,096
============ ============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE> 8
ARROW CLAIMS MANAGEMENT, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (80,690) $ (98,768) $ (186,885) $ 384,830
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 228,947 272,644 203,047 211,950
Deferred income taxes 28,000
Changes in operating assets and
liabilities:
Accounts receivable (699,629) 174,274 420,109 (153,252)
Prepaid expenses and other current assets (8,729) (15,782) (56,907) (3,607)
Accounts payable 315,132 242,250 68,111 (351,775)
Accrued expenses 83,336 19,609 8,960 9,136
Income taxes payable 80,000
Net cash provided by (used in) ------------ ------------ ------------ ------------
operating activities (161,633) 594,227 456,435 205,282
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (674,432) (98,089) (76,780) (261,873)
Proceeds from sale of property and
equipment 15,103
------------ ------------ ------------ ------------
Net cash used in investing
activities (659,329) (98,089) (76,780) (261,873)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net short-term borrowings (102,545) (106,516)
Net borrowings from (repayments to) affiliate 949,455 (368,096) (256,066) 122,350
Principal payments on long-term obligations (89,755) (53,998)
Purchase of treasury stock (49,127)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 797,783 (474,612) (345,821) 68,352
------------ ------------ ------------ ------------
Increase (decrease) in cash and cash equivalents (23,179) 21,526 33,834 11,761
Cash and cash equivalents at beginning of period 51,049 27,870 27,870 49,396
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 27,870 $ 49,396 $ 61,704 $ 61,157
============ ============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 146,088 $ 127,720 $ 103,100 $ 63,399
============ ============ ============ ============
Income taxes $ -- $ -- $ -- $ --
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-7
<PAGE> 9
ARROW CLAIMS MANAGEMENT, INC
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. BACKGROUND AND ORGANIZATION
Arrow Claims Management, Inc. ("ACM") is a provider of claims
administration services to the property and casualty insurance industry.
The Company is a member of a group of various affiliated companies with
the ultimate controlling interest held by a majority individual
shareholder, Mr. Patrick J. Kilkenny.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL - 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 estimates
CASH AND CASH EQUIVALENTS - All highly liquid debt instruments purchased
with a maturity of three months or less are considered to be cash
equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is computed on the straight-line method over the estimated
useful lives of the various classes of assets (generally five years).
Repairs and maintenance are charged to expense as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS - ACM assesses potential impairment to its
long-lived assets when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may not be
recovered. If management concludes that the carrying value will not be
recovered, an impairment write-down is recorded to reduce the asset to its
estimated fair value.
INCOME TAXES - Deferred tax assets and liabilities are recognized based
upon temporary differences between financial statement and tax bases of
assets and liabilities using presently enacted tax rates.
INTERIM FINANCIAL STATEMENTS (UNAUDITED) - The interim financial
statements as of September 30, 1998 and for the nine month periods ended
September 30, 1997 and 1998, are unaudited and reflect all normal and
recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position, operating results and
cash flows for the interim periods. The results of operations for the
nine-month period ended September 30, 1997 and 1998, are not necessarily
indicative of the results to be achieved for any future period.
REVENUE RECOGNITION - Revenues are recognized as services are rendered.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS - The recorded amounts
of ACM's financial instruments, consisting of cash and cash equivalents,
trade receivables, accounts payable, and borrowings under various debt
agreements approximate their fair values due to the short-term maturities
of these instruments.
CONCENTRATION OF CREDIT RISK - ACM's principal customers are insurance
companies. For 1996 and 1997 and the unaudited nine months ended September
30, 1998, one customer accounted for approximately 67%, 89% and 78% of
revenue, respectively.
F-8
<PAGE> 10
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ 1998
1996 1997 (UNAUDITED)
<S> <C> <C> <C>
Computer equipment $ 689,496 $ 751,014 $ 893,550
Furniture and office equipment 652,919 689,489 750,952
Leasehold improvements 17,709 17,709 31,718
------------ ------------ ------------
1,360,124 1,458,212 1,676,220
Accumulated depreciation (478,915) (751,559) (919,644)
------------ ------------ ------------
Total $ 881,209 $ 706,653 $ 756,576
============ ============ ============
</TABLE>
Included in the above categories are assets recorded under capital leases
with original costs totaling $58,725 at December 31, 1996 and December 31,
1997.
4. DEBT OBLIGATIONS
Debt obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------- 1998
1996 1997 (UNAUDITED)
<S> <C> <C> <C>
Loan payable to affiliate, 8% interest rate,
principal and interest payable in full
upon demand $ 1,374,898 $ 1,006,802 $ 1,129,152
Capital lease obligations, interest at
rates ranging from 11.76% to 18.90%,
principal and interest payments due monthly
monthly through January 1999 128,996 65,360
Other 42,880 11,362
------------ ------------ ------------
1,546,774 1,072,162 1,140,514
Less current portion 1,481,414 1,069,767 1,140,514
------------ ------------ ------------
Long-term obligations $ 65,360 $ 2,395 $ --
============ ============ ============
</TABLE>
F-9
<PAGE> 11
5. RELATED PARTY TRANSACTIONS
ACM is provided a variety of services by affiliated entities including
human resources, facilities management, corporate accounting, risk
management, and overall corporate leadership. Fees related to these
services are based upon a percentage of ACM's operating expenses to the
operating expenses of the affiliated group as a whole. Total fees charged
for the above activities were $1,242,653, $1,649,704, $1,162,998 and
$1,381,064 for the years ended December 31, 1996 and 1997 and the
unaudited nine months ended September 30, 1997 and 1998, respectively.
Additionally, ACM has amounts due to an affiliate on December 31, 1996 and
1997 and September 30, 1998 of $1,374,898, $1,006,802 and $1,129,152,
respectively. The amounts due to the affiliate primarily represent working
capital advances. Total interest incurred on these advances was $146,088,
$109,558, $87,768 and $58,626 during the years ended December 31, 1996 and
1997 and the unaudited nine months ended September 30, 1997 and 1998,
respectively.
6. INCOME TAXES
The tax benefit (expense) is allocated as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ -- $ -- $ (45,000)
State (35,000)
------------ ------------ ------------ ------------
(80,000)
Deferred (28,000)
------------ ------------ ------------ ------------
$ -- $ -- $ -- $ (108,000)
============ ============ ============ ============
</TABLE>
Following is a reconciliation of the income tax benefit (expense) expected
(based on the statutory federal income tax rate) to the actual income tax
benefit (provision) recorded:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Federal income tax benefit (expense)
computed at the statutory federal
rate of 34% $ 27,000 $ 33,000 $ 64,000 $ (168,000)
State income tax benefit (expense), net
of federal income tax effect 4,000 (2,000) (6,000) (41,000)
Expenses not deductible for
income tax purposes (6,000) (5,000) (3,000) (2,000)
Change in valuation allowance
for deferred income tax assets (25,000) (26,000) (55,000) 103,000
------------ ------------ ------------ ------------
Provision for income taxes $ -- $ -- $ -- $ 108,000
============ ============ ============ ============
</TABLE>
F-10
<PAGE> 12
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Net operating loss carryforwards and
alternative minimum tax credits $ 51,000 $ 107,000 $ 135,000 $ 15,000
Other reserves not deductible 53,000 35,000 35,000
Fixed assets (28,000) (39,000) (39,000) (43,000)
------------ ------------ ------------ ------------
Net deferred tax assets 76,000 103,000 131,000 (28,000)
Valuation allowance for net deferred
tax assets (76,000) (103,000) (131,000)
------------ ------------ ------------ ------------
Total $ -- $ -- $ -- $ (28,000)
============ ============ ============ ============
</TABLE>
At December 31, 1996 and 1997, ACM has net operating loss carryforwards
for federal income tax purposes of approximately $147,000 and $313,000,
respectively, available to offset future federal taxable income which
expire during the years 2011 and 2012. In the event of certain ownership
changes, the Tax Reform Act of 1986 imposes certain restrictions on the
amount of net operating loss carryforwards which may be used in any year
by ACM.
ACM has recorded a valuation allowance equal to the net deferred tax
assets as of December 31, 1996 and 1997. The realization of these net
deferred tax assets is dependent upon the timing and amount of future
earnings. A valuation allowance is established when management determines
that it is more likely than not that some portion or all of the tax assets
will not be realized.
7. COMMITMENTS AND CONTINGENCIES
ACM leases office buildings under operating leases and certain equipment
under capital leases, which expire at various dates through July, 2008.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
Year ended December 31, LEASES LEASES
<S> <C> <C>
1998 $ 68,117 $ 367,660
1999 2,433 308,088
2000 315,379
2001 315,379
2002 330,153
Thereafter 1,498,552
------------- -------------
Total 70,550 $ 3,135,211
=============
Less portion representing interest 5,190
-------------
Net present value of capital lease obligation $ 65,360
=============
</TABLE>
Lease expense under operating leases amounted to approximately $317,000,
$425,000, $309,000 and $343,000 for the years ended December 31, 1996 and
1997 and the unaudited nine months ended September 30, 1997 and 1998,
respectively.
F-11
<PAGE> 13
9. SUBSEQUENT EVENT
On December 1, 1998, ACM was acquired by INSpire Insurance Solutions, Inc.
for $13.5 million in cash.
******
F-12
<PAGE> 14
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INSpire Insurance Arrow Claims Pro Forma
Solutions, Inc. Management, Inc. Adjustments Pro Forma
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 58,647,587 61,157 (21,513,558) a 37,195,186
Short-term investments 15,603,278 - 15,603,278
Accounts receivable, net 13,986,096 1,177,856 (1,173,897) a 13,990,055
Income taxes receivable 121,076 - 121,076
Deferred income taxes 721,997 - 721,997
Prepaid expenses and other current assets 7,629,213 38,965 (36,385) a 7,631,793
------------- ----------- ------------
Total current assets 96,709,247 1,277,978 75,263,385
Accounts receivable, excluding current portion
Property and equipment, net 9,856,114 756,576 350,733 a 10,963,423
Intangibles and other assets: 20,066,820 13,953 20,604,923 b 40,685,696
------------- ----------- ------------
Total $ 126,632,181 $ 2,048,507 $126,912,504
============= =========== ============
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 654,580 $ 519,863 $ (519,863) a $ 654,580
Accrued payroll and compensation 837,774 - 280,323 a 1,118,097
Other accrued expenses 2,075,131 233,034 (233,034) a 2,075,131
Unearned revenue 2,030,323 - - 2,030,323
Deferred compensation 2,201,296 - - 2,201,296
Income taxes payable 2,106,657 80,000 (80,000) a 2,106,657
Current portion of long-term debt 565,214 11,362 (11,362) a 565,214
Due to shareholder 1,129,152 (1,129,152) a -
------------- ----------- ------------
Total current liabilities 10,470,975 1,973,411 10,751,298
Deferred compensation 406,846 - - 406,846
Long-term debt - - -
Deferred income taxes 3,087,030 28,000 (28,000) a 3,087,030
------------- ----------- ------------
Total liabilities 13,964,851 2,001,411 14,245,174
Shareholders' equity:
Common stock 184,330 10 (10) j 184,330
Additional paid-in capital 105,976,535 181,940 (181,940) j 105,976,535
Retained earnings 6,506,465 (85,727) 85,727 j 6,506,465
Treasury Stock (49,127) 49,127 j -
------------- ----------- ------------
Total shareholders' equity 112,667,330 47,096 112,667,330
------------- ----------- ------------
Total $ 126,632,181 $ 2,048,507 $126,912,504
============= =========== ============
</TABLE>
F-13
<PAGE> 15
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INSpire Insurance Arrow Claims Pro Forma
Solutions, Inc. Management, Inc. Adjustments Pro Forma
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services $ 34,846,030 $ 12,165,536 $10,263,362 c $ 57,274,928
Software and software services 24,863,884 - 24,863,884
Other 1,690,662 - 1,690,662
------------ ------------ ------------
Total revenues 61,400,576 12,165,536 83,829,474
------------ ------------ ------------
EXPENSES:
Cost of outsourcing services 17,206,778 7,943,378 8,878,295 d 34,028,451
Cost of software and software services 14,379,706 - 14,379,706
Cost of other revenues 1,150,078 - 1,150,078
Selling, general and administrative 11,094,537 2,054,968 (1,966,918) e 11,182,587
Research and development 1,895,486 - 1,895,486
Depreciation and amortization 4,270,524 211,950 1,075,508 f 5,557,982
Purchase R&D 2,000,000 - 2,000,000
Deferred compensation - - -
Management fee to shareholder - 1,381,064 (1,381,064) g -
------------ ------------ ------------
Total expenses 51,997,109 11,591,360 70,194,290
------------ ------------ ------------
OPERATING INCOME $ 9,403,467 $ 574,176 $ 13,635,184
OTHER INCOME (EXPENSE): -
Interest income 2,127,437 - (948,750) h 1,178,687
Interest expense (48,750) (58,526) 58,526 h (48,750)
Other - (22,820) 22,820 g -
------------ ------------ ------------
Total other income (expense) 2,078,687 (81,346) 1,129,937
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,482,154 492,830 14,765,121
INCOME TAXES (4,853,510) - (1,181,868) I (6,035,378)
------------ ------------ ------------
NET INCOME $ 6,628,644 $ 492,830 $ 8,729,743
============ ============
Weighted average shares outstanding (basic) 17,370,488 279,000 17,649,488
NET INCOME PER COMMON SHARE (BASIC) $ 0.38 $ 0.49
============ ============
Weighted average shares outstanding (diluted) 19,372,827 279,000 19,651,827
NET INCOME PER COMMON SHARE (DILUTED) $ 0.34 $ 0.44
============ ============
</TABLE>
F-14
<PAGE> 16
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INSpire Insurance Arrow Claims Pro Forma
Solutions, Inc. Management, Inc. Adjustments Pro Forma
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services $ 32,458,600 $ 13,829,989 $ 13,028,522 c $ 59,317,111
Software and software services 21,100,899 - 21,100,899
Other 3,009,960 - 3,009,960
------------ ------------ ------------
Total revenues 56,569,459 13,829,989 83,427,970
------------ ------------ ------------
EXPENSES:
Cost of outsourcing services 20,797,969 8,962,875 10,811,396 d 40,572,240
Cost of software and software services 10,680,787 - 10,680,787
Cost of other revenues 2,413,170 - 2,413,170
Selling, general and administrative 8,714,192 2,942,187 (2,814,831) e 8,841,548
Research and development 1,190,114 - 1,190,114
Depreciation and amortization 4,001,260 272,644 1,434,010 f 5,707,914
Purchase R&D 3,000,000 - 3,000,000
Deferred compensation 3,949,000 - 3,949,000
Management fee to shareholder 1,290,000 1,649,704 (1,649,704) g 1,290,000
------------ ------------ ------------
Total expenses 56,036,492 13,827,410 77,644,773
------------ ------------ ------------
OPERATING INCOME 532,967 2,579 5,783,197
OTHER INCOME (EXPENSE):
Interest income 680,508 - (421,667) h 258,841
Interest expense (348,007) (109,558) (1,423,775) h (1,881,340)
Other 1,651,830 8,211 (8,211) g 1,651,830
------------ ------------ ------------
Total other income (expense) 1,984,331 (101,347) 29,331
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,517,298 (98,768) 5,812,528
INCOME TAXES (801,218) - (1,292,918) i (2,094,136)
------------ ------------ ------------
NET INCOME $ 1,716,080 $ (98,768) $ 3,718,392
============ ============ ============
Weighted average shares outstanding (basic) 16,274,740 279,000 16,553,740
NET INCOME PER COMMON SHARE (BASIC) $ 0.11 $ 0.22
============ ============
Weighted average shares outstanding (diluted) 17,564,994 279,000 17,843,994
NET INCOME PER COMMON SHARE (DILUTED) $ 0.10 $ 0.21
------------ ------------
</TABLE>
F-15
<PAGE> 17
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the consolidated financial position or results of operations for future periods
or the results that actually would have been realized had Arrow Claims
Management, Inc. ("ACM") and INSpire Insurance Solutions, Inc. ("INSpire") been
a combined company during the specified periods. The unaudited pro forma
condensed consolidated financial statements, including the notes thereto, should
be read in conjunction with the audited and unaudited historical financial
statements of INSpire, including the notes thereto, which have been previously
filed, and the audited and unaudited historical financial statements of ACM,
including the notes thereto, included herein.
The unaudited pro forma condensed consolidated financial statements
give effect to the acquisition of Arrow using the purchase method of accounting.
The unaudited pro forma condensed consolidated financial statements are based on
the respective historical audited and unaudited financial statements and the
notes thereto of INSpire, which have been previously filed, and the audited and
unaudited financial statements of ACM, including the notes thereto, included
herein. The purchase price was allocated to the estimated fair value of assets
acquired and liabilities assumed.
The unaudited pro forma condensed consolidated statements of operations
for the year ended December 31, 1997 and for the nine months ended September 30,
1998 reflect the acquisition of ACM, which occurred on December 1, 1998, as if
the business combination took place on January 1, 1997. The unaudited pro forma
condensed consolidated balance sheet gives effect to the acquisition of ACM as
if the transaction was consummated on September 30, 1998.
NOTE 2. PRO FORMA ADJUSTMENTS
(a) Adjustments to record the components of the purchase price of ACM of
$13.5 million in cash and the fair value of assets acquired and
liabilities assumed pursuant to the Stock Purchase Agreement filed as
an exhibit herein.
Adjustments to record the components of the purchase price of certain
assets from Arrowhead General Insurance Agency, Inc. ("AGIA")
consisting of cash of $6.5 million and INSpire Common Stock options
valued at $7 million on October 29, 1998, such options are subject to
vesting based upon obtaining certain performance criteria set forth in
the Option Agreement, dated as of December 1, 1998, between INSpire and
AGIA and incorporated herein by reference.
(b) Estimated intangible assets calculated based on the fair value of
assets acquired and liabilities assumed. The purchase price exceeds the
net assets acquired by approximately $18.5 million plus certain
additional acquisition costs totaling $2.1 million The impact of the
fees and expenses has been reflected in the pro forma combined balance
sheet and statement of income as an increase in the purchase price of
the transaction and is allocated to the assets acquired and liabilities
assumed, based upon their estimated fair values.
(c) Adjustments relating to outsourcing services revenues to reflect the
revenue that would have been realized if the AGIA service agreements
had been in effect beginning January 1, 1997.
F-16
<PAGE> 18
(d) The estimated cost of outsourcing associated with the AGIA service
agreements as if service agreements were effective January 1, 1997.
Additionally, adjustments were made to reclassify ACM expenses
consistent with INSpire's historical classification.
(e) Adjustment to eliminate selling, general, and administrative expenses
of ACM because such costs were absorbed by INSpire.
(f) The estimated annual amortization charge to income related to
intangible assets of $20.6 million and depreciation expense resulting
from the fair market valuation of property and equipment of
approximately $400,000.
(g) Adjustments to eliminate management fees incurred for services provided
by AGIA that ceased due to the acquisition of ACM by INSpire.
(h) Adjustment to reflect interest expense for debt that would have been
required to consummate the transaction on December 1, 1997 and the
reversal of interest income and related tax effect on the pro forma
adjustment to cash resulting from the acquisition. The assumed cost of
debt was 10% and the assumed rate of return on the cash balance was 5%.
(i) Adjustment to income tax expense to record project tax expense that
would have been recorded if INSpire and Arrow had filed consolidated
tax returns during the pro forma periods. Income tax is calculated at
an incremental rate of 42%. The pro forma combined provision for income
taxes may not represent the amounts that would have resulted had
INSpire and ACM filed consolidated income tax returns during the period
presented.
(j) Adjustment to eliminate the shareholders' equity of ACM.
NOTE 2. PRO FORMA EARNINGS PER COMMON SHARE
Basic pro forma earnings per common share for the periods presented
were calculated based on inclusion of 279,000 equivalent INSpire common shares
of stock options attributable to AGIA. Diluted earnings per common share on
December 31, 1997 and September 30 1998 included 279,000 equivalent INSpire
common shares attributable to AGIA stock options.
F-17
<PAGE> 19
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 hereunto duly authorized.
INSPIRE INSURANCE SOLUTIONS, INC.
By: /s/ WILLIAM J. SMITH, III
--------------------------------------
William J. Smith, III
President and Chief Operating Officer
Dated: February 15, 1999
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
*2.1 Stock Purchase Agreement, dated as of October 29, 1998, by and
among INSpire, ACM and the Shareholders signatory thereto. A
list identifying the contents of the Schedules to the Stock
Purchase Agreement is attached.
*2.2 Asset Purchase Agreement, dated as of October 29, 1998, by and
between INSpire and AGIA. A list identifying the contents of the
Schedules to the Asset Purchase Agreement is attached.
*10.1 Option Agreement, dated as of December 1, 1998, between INSpire
and AGIA.
*10.2 Registration Rights Agreement, dated as of December 1, 1998,
between INSpire and AGIA.
</TABLE>
* Incorporated by reference. Previously filed as an Exhibit to INSpire's report
on Form 8-K, dated December 1, 1998 and filed on December 14, 1998.
