UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 2)
(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 (I.R.S. Employer
of incorporation or organization) Identification No.)
300 BURNETT STREET, FORT WORTH, TX 76102-2799
(Address of principal executive offices, including 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 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. 2 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, and
Amendment No. 1 to Form 10-Q for the quarterly period ended June 30, 1998,
filed with the Securities and Exchange Commission on September 11, 1998
(collectively 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 1 and Item 2 of the Form 10-Q. The primary changes
from the Form 10-Q are (i) the financial statements in Item 1 are being
restated to reflect the restatement of the purchase price allocation to in-
process research and development relating to the acquisition of Paragon
Interface, Inc., and (ii) Item 2 is amended to reflect these restatements
in management's discussion and analysis.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
-------- -----------
(unaudited)
(As restated
see Note 4)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . $ 66,119,787 $28,039,323
Investments . . . . . . . . . . . . . . . . . . . 11,335,455 --
Accounts receivable, net. . . . . . . . . . . . . 12,917,429 10,976,672
Income taxes receivable . . . . . . . . . . . . . 149,041 149,041
Deferred income taxes . . . . . . . . . . . . . . 883,212 1,434,000
Prepaid expenses and other current assets . . . . 5,639,716 4,154,417
------------ -----------
Total current assets. . . . . . . . . . . . . . . 97,044,640 44,753,453
Accounts receivable, excluding current portion. . -- 74,258
Property and equipment, net (accumulated
depreciation 1998 $9,642,245; 1997 $7,687,109). 7,322,634 6,029,973
Intangibles and other assets. . . . . . . . . . . 21,427,154 17,039,634
------------ -----------
TOTAL . . . . . . . . . . . . . . . . . . . . . . $125,794,428 $67,897,318
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable. . . . . . . . . . . . . . . . . $ 633,007 $ 834,418
Accrued payroll and compensation. . . . . . . . . 754,653 633,252
Other accrued expenses. . . . . . . . . . . . . . 1,774,633 1,485,543
Unearned revenue. . . . . . . . . . . . . . . . . 4,033,194 5,053,165
Deferred compensation . . . . . . . . . . . . . . 2,717,707 2,699,000
Income taxes payable . . . . . . . . . . . . . . 2,151,058 3,063,000
Current portion of long-term debt . . . . . . . . 631,502 609,658
------------ -----------
Total current liabilities . . . . . . . . . . . . 12,695,754 14,378,036
------------ -----------
Deferred compensation . . . . . . . . . . . . . . 406,846 1,657,017
Long-term debt. . . . . . . . . . . . . . . . . . -- 373,151
Deferred income taxes . . . . . . . . . . . . . . 3,087,030 2,723,000
Commitments and contingencies . . . . . . . . . . -- --
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, 18,431,701 shares issued and
outstanding in 1998; 15,286,875 shares issued
and outstanding in 1997 . . . . . . . . . . . . 121,986 101,913
Additional paid-in capital. . . . . . . . . . . . 104,653,512 48,725,299
Retained earnings (accumulated deficit) . . . . . 4,829,300
(61,098)
------------ -----------
Total shareholders' equity. . . . . . . . . . . . 109,604,798 48,766,114
------------ -----------
TOTAL $125,794,428 $67,897,318
============ ===========
See accompanying notes to condensed financial statements.
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
(unaudited) (unaudited)
(As restated (As restated
see Note 4) see Note 4)
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services . . . . . . . . . .$ 11,399,713 $ 7,657,596 $ 21,531,676 $14,393,897
Software and software services . . . . . 8,891,894 6,481,969 16,516,942 7,561,879
Other. . . . . . . . . . . . . . . . . . 669,020 928,573 1,267,790 1,303,437
------------ ----------- ------------ -----------
Total revenues. . . . . . . . . . . . 20,960,627 15,068,138 39,316,408 23,259,215
------------ ----------- ------------ -----------
EXPENSES:
Cost of outsourcing services . . . . . . 5,867,302 5,206,861 11,502,165 10,098,207
Cost of software and software services . 4,845,153 3,613,816 8,921,788 4,352,487
Cost of other revenues . . . . . . . . . 441,055 513,958 865,798 696,495
Selling, general and administrative. . . 3,807,120 1,737,701 7,050,641 1,997,220
Research and development . . . . . . . . 676,295 553,600 1,098,565 679,600
Depreciation and amortization. . . . . . 1,422,744 1,160,813 2,635,584 1,695,416
In-process research and development. . . 500,000 -- 500,000 3,000,000
Deferred compensation. . . . . . . . . . -- 884,000 -- 3,949,000
Management fees to shareholder . . . . . -- 573,714 -- 1,200,000
------------ ----------- ------------ -----------
Total expenses. . . . . . . . . . . . 17,559,669 14,244,463 32,574,541 27,668,425
------------ ----------- ------------ -----------
OPERATING INCOME (LOSS). . . . . . . . . . 3,400,958 823,675 6,741,867 (4,409,210)
OTHER INCOME (EXPENSE):
Interest income. . . . . . . . . . . . . 879,398 60,792 1,298,168 74,537
Interest expense . . . . . . . . . . . . (20,746) (146,956) (39,784) (212,044)
Other. . . . . . . . . . . . . . . . . . -- (21,371) -- (21,371)
------------ ----------- ------------ -----------
Total other income (expense). . . . . 858,652 (107,535) 1,258,384 (158,878)
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX. . . . . . 4,259,610 716,140 8,000,251 (4,568,088)
INCOME TAX BENEFIT (EXPENSE) . . . . . . . (1,688,409) (77,345) (3,109,853) 1,711,655
------------ ----------- ------------ -----------
NET INCOME (LOSS). . . . . . . . . . . . .$ 2,571,201 $ 638,795 $ 4,890,398 $(2,856,433)
============ =========== ============ ===========
NET INCOME (LOSS) PER SHARE (BASIC). . . .$ .14 $ .09 $ .43 $ (.41)
============ =========== ============ ===========
NET INCOME (LOSS) PER SHARE (DILUTED). . .$ .13 $ .08 $ .39 $ (.41)
============ =========== ============ ===========
See accompanying notes to condensed financial statements.
</TABLE>
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Six months ended
June 30,
----------------------------
1998 1997
------------- ------------
(unaudited)
(As restated
see Note 4)
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . $ 4,890,398 $(2,856,433)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . 2,635,584 1,695,416
Deferred income taxes. . . . . . . . . . . -- (2,785,000)
In-process research and development. . . . 500,000 3,000,000
Change in operating assets and liabilities:
Accounts receivable. . . . . . . . . . . (1,642,129) (281,026)
Prepaid expenses and other current
assets. . . . . . . . . . . . . . . . (1,446,134) (442,267)
Other assets . . . . . . . . . . . . . . 143,741 100,462
Accounts payable . . . . . . . . . . . . (213,938) (1,291,495)
Accrued payroll and compensation . . . . 140,420 (417,543)
Other accrued expenses . . . . . . . . . 81,379 945,457
Unearned revenue . . . . . . . . . . . . (1,116,846) (867,220)
Income taxes payable . . . . . . . . . . 1,173,354 615,638
Deferred compensation. . . . . . . . . . (256,891) 3,980,753
------------ -----------
Net cash provided by operating activities . . . 4,888,938 1,396,742
------------ -----------
INVESTING ACTIVITIES:
Purchase of investments . . . . . . . . . . . (11,335,455) --
Proceeds from sale of subsidiary, net of
cash relinquished . . . . . . . . . . . . . -- --
Purchases of property and equipment . . . . . (2,611,743) (882,627)
Capitalized research and development costs. . (963,553) --
Acquisition of subsidiary, net of cash
acquired. . . . . . . . . . . . . . . . . . (4,237,161) (17,118,849)
------------ ------------
Net cash used in investing activities . . . . . (19,147,912) (18,001,476)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings. . . . . . . . . . . -- 7,500,000
Repayment of borrowings . . . . . . . . . . . (880,334) (3,410,396)
Repayment of borrowings from shareholder. . . -- 1,837,347
Contribution from shareholder . . . . . . . . -- 10,500,000
Issuance of common stock, net of issuance . .
costs paid. . . . . . . . . . . . . . . . . 52,980,824 --
Proceeds from exercises under stock plans,
net . . . . . . . . . . . . . . . . . . . . 238,948 --
Bank overdrafts . . . . . . . . . . . . . . . -- 265,407
------------ ------------
Net cash provided by financing activities . . . 52,339,438 16,692,358
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . 38,080,464 87,624
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD. . . . . . . . . . . . . . . . . . . . 28,039,323 363,398
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . $ 66,119,787 $ 451,022
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . $ 31,398 $ 112,947
============ ============
Income taxes paid . . . . . . . . . . . . . . $ 1,942,173 $ --
============ ============
Noncash investing activities -
contribution of fixed assets from
shareholder . . . . . . . . . . . . . . . . $ -- $ 1,308,191
============ ============
See accompanying notes to condensed financial statements.
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- INSpire Insurance Solutions, Inc. ("INSpire" or the
"Company") 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. Prior to the initial public
offering of common stock on August 22, 1997, the Company was a wholly-owned
subsidiary of The Millers Mutual Fire Insurance Company ("Millers Mutual").
Paragon Interface, Inc. Acquisition -- On April 20, 1998, the Company
acquired all of the outstanding shares of common stock of Paragon
Interface, Inc. ("Paragon") for an aggregate cash purchase price of
$4,250,000 and costs and expenses of approximately $100,000. This
acquisition was funded with cash generated from operating activities.
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
values. As of the acquisition date, assets acquired and liabilities assumed
were as follows:
Purchase price. . . . . . . . . . . . . $ 4,350,000
Fair values of net assets acquired:
Software. . . . . . . . . . . . . . . . 900,000
In-process research and development . . 500,000
Other intangible assets . . . . . . . . 410,000
Tangible assets . . . . . . . . . . . . 603,861
Liabilities assumed . . . . . . . . . . (1,487,122)
-----------
926,739
-----------
Goodwill. . . . . . . . . . . . . . . . $ 3,423,261
===========
The amount assigned to in-process research and development was charged
against operating results at the time of acquisition. Paragon was merged
with and into the Company on May 1, 1998.
Unaudited Interim Condensed Financial Statements -- The accompanying
unaudited condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation
S-X. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods presented
have been included. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for any subsequent
quarter or the year ending December 31, 1998. The independent accountants'
review report of Deloitte & Touche LLP is included in Part I, Item 1 of
this report.
The information included in this Form 10-Q should be read in
conjunction with the financial statements and notes thereto for the year
ended December 31, 1997 included in the Company's Form 10-K (File No.000-
23005).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
Securities and Exchange Commission's rules and regulations.
Reclassifications - Certain prior year amounts have been reclassified
to conform to current year presentation.
Net income (loss) per share - Net income (loss) per share (basic) of
the Company is computed by dividing net income or loss by the weighted
average number of shares outstanding. The weighted average number of shares
(basic) was 12,172,663 and 7,000,000 for the three months ended June 30,
1998 and 1997, respectively, and 11,248,595 and 7,000,000 for the six
months ended June 30, 1998 and 1997, respectively. The weighted average
number of shares (diluted) was 13,468,877 and 7,749,221 for the three
months ended June 30, 1998 and 1997, respectively, and 12,601,197 and
7,000,000 for the six months ended June 30, 1998 and 1997, respectively.
2. RELATED PARTY TRANSACTIONS
The Company provides outsourcing services and software and software
services to 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 six months ended June 30, 1998 and 1997, under such agreements, the
Company earned total fees of approximately $11,584,000 and $6,320,000,
respectively.
Prior to January 1, 1998, pursuant to various agreements, Millers
Mutual provided management and administration services to the Company. For
the six months ended June 30, 1997, total fees paid by the Company to
Millers Mutual were approximately $1,200,000. Effective January 1, 1998,
the Company and Millers Mutual entered into a new agreement whereby the
Company provides benefits administration services to Millers Mutual and
Millers Casualty for a monthly fee of $15,000. As of June 30, 1998, total
fees earned under this agreement were $90,000.
During each of the six month periods ended June 30, 1998 and 1997,
the Company incurred rental expense of approximately $158,000 under a month-
to-month lease agreement with Millers Mutual.
There was a net receivable due from Millers Mutual of approximately
$2,424,000 at June 30, 1998 and $1,301,000 at December 31, 1997.
3. COMMITMENTS AND CONTINGENCIES
In February 1997, the Philadelphia Contributionship for the Insurance
of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action No. 97-
CV-1262) against Strategic Data Systems, Inc. ("SDS"), which was acquired
by the Company in March 1997 and merged into the Company in July 1998, in
the United States District Court for the Eastern District of Pennsylvania.
This suit alleged that certain systems that SDS sold to PCIHLF in 1995 did
not meet PCIHLF's specifications. PCIHLF claimed damages in excess of
$1,300,000. During the three months ended June 30, 1998, the Company and
PCIHLF settled this suit under terms having no material adverse effect on
the Company.
The Company is not a party to any other legal proceedings that the
Company believes could have a material adverse effect on the Company's
business, financial condition or operating results.
4. RESTATEMENT
Subsequent to the issuance of INSpire's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998, the Company's management
revised the amount of the purchase price which was allocated to in-process
research and development in accounting for the acquisition of Paragon in
April 1998. The revised allocation is based upon methods prescribed in a letter
from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants in September 1998. The letter sets
forth the SEC's views regarding the valuation methodology to be used in
allocating a portion of the purchase price to acquired in-process research and
development at the date of acquisition.
The revised valuation is based on management's estimates of the net
cash flows associated with expected operations of Paragon and gives
explicit consideration to the SEC's views on acquired in-process research
and development as set forth in its September 1998 letter to the American
Institute of Certified Public Accountants.
As a result of the revised allocation, the Company's condensed financial
statements as of and for the three and six month periods ended June 30, 1998,
have been restated from amounts previously reported to reduce the amounts of
the acquired in-process research and development expensed by $1.5 million and
to increase intangible assets by $1.5 million. The change had no impact on the
net cash flows provided by operations.
A summary of the significant effects of the restatement is as follows:
As of June 30, 1998
---------------------------
As
previously
reported As restated
------------ -------------
Balance Sheet Data:
Intangibles and other assets. . . . . . . . $19,927,154 $21,427,154
Retained earnings. . . . . . . . . . . . . 3,329,300 4,829,300
Three months ended Six months ended
June 30, 1998 June 30, 1998
----------------------- ----------------------
As As
previously As previously As
reported restated reported restated
----------- ----------- ----------- ----------
Statements of
Operations Data:
In-process research
and development. . . .$ 2,000,000 $ 500,000 $ 2,000,000 $ 500,000
----------- ----------- ----------- -----------
Total expenses . . . . .$19,059,669 $17,559,669 $34,074,541 $32,574,541
----------- ----------- ----------- -----------
Net income . . . . . . .$ 1,071,201 $2,571,201 $ 3,390,398 $ 4,890,398
=========== =========== =========== ===========
Net income per common
share-Basic. . . . . . $0.09 $0.14 $0.30 $0.43
===== ===== ===== =====
Net income per common
share-Diluted. . . . . $0.08 $0.13 $0.27 $0.39
===== ===== ===== =====
5. SUBSEQUENT EVENT
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. 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 $.14 and
$.06 for the three months ended June 30, 1998 and 1997, respectively, and
$.29 and ($.27) for the six months ended June 30, 1998 and 1997,
respectively. Proforma net income (loss) per share (diluted), giving
retroactive effect to this stock dividend, would have been $.13 and $.05
for the three months ended June 30, 1998 and 1997, respectively, and $.26
and ($.27) for the six months ended June 30, 1998 and 1997, respectively.
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solutions, Inc
Fort Worth, Texas
We have reviewed the accompanying condensed balance sheet of INSpire
Insurance Solutions, Inc. (the "Company") as of June 30, 1998, and the
related condensed statements of operations for the three months ended June
30, 1998 and 1997 and the six months ended June 30, 1998 and condensed
statement of cash flows for the six months ended June 30, 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 financial statements for them to be
in conformity with generally accepted accounting principles.
As discussed in Note 4, the accompanying condensed financial
statements as of June 30, 1998 and for the three and six months then
ended have been restated.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of INSpire Insurance Solutions,
Inc.as of December 31, 1997 and June 30, 1997 (not presented herein), and
the related statements of operations, shareholders' equity and cash flows
for the year ended December 31, 1997 (not presented herein) and the six
months ended June 30, 1997; and in our reports dated January 19, 1998 and
July 18, 1997, respectively, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1997 and the
accompanying condensed statements of operations and cash flows for the six
months ended June 30, 1997 is fairly stated, in all material respects, in
relation to the financial statements from which they have been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 20, 1998
(February 25, 1999 as to Note 4)
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.
Subsequent to the issuance of INSpire's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 1998, the Company's management
revised the amount of the purchase price which was allocated to in-process
research and development in accounting for the acquisition of Paragon
Interface, Inc. ("Paragon") in April 1998. The revised allocation is based
upon methods prescribed in a letter from the Securities and Exchange Commission
("SEC") sent to the American Institute of Certified Public Accountants in
September 1998. The letter sets forth the SEC's views regarding the valuation
methodology to be used in allocating a portion of the purchase price to
acquired in-process research and development at the date of acquisition. The
significant effects of the restatement have been reflected herein.
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 $.14 and $.06 for the three
months ended June 30, 1998 and 1997, respectively, and $.29 and ($.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 $.13 and $.05 for the three months ended June 30,
1998 and 1997, respectively, and $.26 and ($.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
In-process research and
development. . . . . . . . . . 2.4 -- 1.3 12.9
Deferred compensation. . . . . . -- 5.9 -- 17.0
Management fees to shareholder . -- 3.8 -- 5.2
----- ----- ----- -----
Total expenses. . . . . . . . 83.8 94.5 82.9 119.0
----- ----- ----- -----
OPERATING INCOME (LOSS). . . . . . 16.2 5.5 17.1 (19.0)
OTHER INCOME (EXPENSE) . . . . . . 4.1 (0.7) 3.2 (0.7)
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAX. . 20.3 4.8 20.3 (19.7)
INCOME TAX BENEFIT (EXPENSE) . . . (8.1) (0.5) (7.9) 7.4
----- ----- ----- -----
NET INCOME (LOSS). . . . . . . . . 12.2% 4.3% 12.4% (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, $500,000 was assigned to in-process 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) increase 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 $2.6 million, or $.19 per diluted share
($.21 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 three months ended June 30, 1997. Excluding the impact on
net income resulting from the $500,000 write-off of in-process research and
development associated with the Paragon Acquisition, restated 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 in-process 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, $500,000 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 $4.9 million, or $.39 per diluted share
($.43 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 $500,000 write-off of in-process research and
development associated with the Paragon Acquisition, restated 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 in-process 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 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: March 24, 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
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Form of Stock Purchase Agreement, dated April 20, 1998,
by and among the Company, Paragon Interface, Inc. and the
shareholders of Paragon Interface, Inc. (Incorporated by
reference to Exhibit 2.1 of the Company's Form 10-Q for the
three months ended March 31, 1998 filed on May 14, 1998).
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).
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
1998(1) 1997 1998(1) 1997
------- ---- ------- ----
Basic
Average shares outstanding . . 12,173 7,000 11,249 7,000
======= ======= ======= =======
Net income (loss). . . . . . . $ 2,571 $ 639 $ 4,890 $(2,856)
======= ======= ======= =======
Per share amount . . . . . . . $ .14 $ .09 $ .43 $ (.41)
======= ======= ======= =======
Diluted
Average shares outstanding . . 12,173 7,000 11,249 7,000
Net effect of dilutive stock
options based on the
treasury stock method
using the average market
price . . . . . . . . . . . . 1,296 749 1,352 --
------- ------- ------- -------
Total . . . . . . . . . . . . . 13,469 7,749 12,601 7,000
======= ======= ======= =======
Net income (loss) . . . . . . . $ 2,571 $ 639 $ 4,890 $(2,856)
======= ======= ======= =======
Per share amount . . . . . . . $ .13 $ .08 $ .39 $ (.41)
======= ======= ======= =======
(1) As restated, see Note 4 in the Notes to Condensed Financial Statements
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
March 26, 1999
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
interim financial information of INSpire Insurance Solutions, Inc. for the
periods ended June 30, 1997 and 1998, as indicated in our report dated July
20, 1998 (February 25, 1999 as to Note 4); 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 June 30, 1998, 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, 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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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THIS SCHEDULE CONTAINS AMENDED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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SOLUTIONS, INC.AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
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<CASH> 66,120
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<RECEIVABLES> 13,187
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