<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 . .. . . . . . . June 30, 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 August 13, 1999: 18,992,361
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION..................................................................... 1
Item 1. Financial Statements...................................................................... 1
Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited)
and December 31, 1998..................................................................... 1
Condensed Consolidated Statements of Operations (unaudited) for the
three months and six months ended June 30, 1999 and 1998.................................. 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months and six months ended June 30, 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................................ 13
PART II - OTHER INFORMATION........................................................................ 13
Item 5. Legal Proceedings........................................................................ 13
Item 6. Exhibits and Reports on Form 8-K......................................................... 14
Signatures......................................................................................... 14
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 20,769,617 $ 27,599,967
Investments...................................................................... 14,693,608 20,494,443
Accounts receivable, net......................................................... 28,420,151 18,601,724
Unbilled receivables............................................................. 8,926,243 5,751,405
Income taxes receivable.......................................................... 1,733,378 1,830,868
Deferred income taxes............................................................ 944,483 1,176,686
Prepaid expenses and other current assets........................................ 2,039,271 1,528,580
------------- ------------
Total current assets.......................................................... 77,526,751 76,983,673
Property and equipment, net (accumulated depreciation
1999 $15,538,205; 1998 $13,679,322)............................................. 13,082,827 11,824,787
Intangibles and other assets....................................................... 63,302,288 43,999,890
------------- ------------
TOTAL.............................................................................. $153,911,866 $132,808,350
============= ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES and SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................................................. $ 1,755,703 $ 1,386,440
Accrued payroll and compensation................................................. 798,668 632,691
Other accrued expenses........................................................... 11,398,172 2,455,309
Unearned revenue................................................................. 5,322,667 1,831,406
Deferred compensation............................................................ 1,367,606 1,907,389
Current portion of long-term debt................................................ -- 383,402
------------ ------------
Total current liabilities..................................................... 20,642,816 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 and 18,992,361 issued and outstanding in
1999; 18,685,813 shares issued and outstanding in 1998........................ 189,924 186,858
Additional paid-in capital......................................................... 111,494,243 108,710,195
Retained earnings................................................................. 17,717,891 11,447,668
------------ ------------
Total shareholders' equity.................................................... 129,402,058 120,344,721
------------ ------------
TOTAL.............................................................................. $153,911,866 $132,808,350
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ......................... $ 27,251,026 $ 11,399,713 $ 47,880,209 $ 21,531,676
Software and software services ............... 8,348,754 8,891,894 18,518,107 16,516,942
Other ........................................ 655,448 669,020 1,233,442 1,267,790
------------- ------------- ------------ ------------
Total revenues ............................. 36,255,228 20,960,627 67,631,758 39,316,408
------------- ------------- ------------ ------------
EXPENSES:
Cost of outsourcing services, net............. 18,748,692 5,867,302 31,904,149 11,502,165
Cost of software and software services, net... 5,498,507 4,845,153 10,503,194 8,921,788
Cost of other revenues........................ 343,433 441,055 738,670 865,798
Selling, general and administrative........... 4,156,500 3,807,120 8,606,153 7,050,641
Research and development, net................. 680,356 676,295 1,652,560 1,098,565
Depreciation and amortization................. 2,459,178 1,422,744 4,636,735 2,635,584
Purchased research and development............ -- 500,000 -- 500,000
------------- ------------- ------------ ------------
Total expenses.............................. 31,886,666 17,559,669 58,041,461 32,574,541
------------- ------------- ------------ ------------
OPERATING INCOME ............................... 4,368,562 3,400,958 9,590,297 6,741,867
OTHER INCOME (EXPENSE):
Interest income............................... 415,555 879,398 873,612 1,298,168
Interest expense.............................. (2,881) (20,746) (13,540) (39,784)
------------- ------------- ------------ ------------
Total other income (expense)................ 412,674 858,652 860,072 1,258,384
------------- ------------- ------------ ------------
INCOME BEFORE INCOME TAXES...................... 4,781,236 4,259,610 10,450,369 8,000,251
INCOME TAX EXPENSE.............................. (1,912,492) (1,688,409) (4,180,146) (3,109,853)
------------- ------------- ------------ ------------
NET INCOME...................................... $ 2,868,744 $ 2,571,201 $ 6,270,223 $ 4,890,398
============= ============= ============ ============
NET INCOME PER SHARE (BASIC).................... $ .15 $ .14 $ .33 $ .29
============= ============= ============ ============
NET INCOME PER SHARE (DILUTED).................. $ .14 $ .13 $ .31 $ .26
============= ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC)............................. 18,966,315 18,258,995 18,864,055 16,872,893
============= ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (DILUTED)........................... 20,401,712 20,203,316 20,342,382 18,901,796
============= ============= ============ ============
</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>
Six months ended
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income...................................................................... $ 6,270,223 $ 4,890,398
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................................. 4,636,735 2,635,584
In-process research and development............................................ -- 500,000
Changes in operating assets and liabilities:
Accounts receivable (9,818,427) (1,642,129)
Unbilled receivables........................................................... (3,174,832) (4,076,857)
Prepaid expenses and other current assets...................................... (510,697) 2,630,723
Other assets................................................................... (704,687) 143,741
Accounts payable............................................................... 369,263 (213,938)
Accrued payroll and compensation............................................... 165,959 140,420
Other accrued expenses......................................................... 6,342,881 81,379
Unearned revenue............................................................... 3,491,261 (1,116,846)
Income taxes receivable........................................................ 1,595,441 1,173,354
Deferred compensation.......................................................... 293,280 (256,891)
------------ ------------
Net cash provided by operating activities....................................... 8,956,400 4,888,938
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment............................................ (3,144,257) (2,611,743)
Sale/(purchase) of investments................................................. 5,800,835 (11,335,455)
Capitalized research and development costs..................................... (936,317) (963,553)
Acquisition of subsidiary, net of cash acquired................................ -- (4,237,161)
Outsourcing contract acquisition costs......................................... (15,791,851) --
Capitalized implementation costs............................................... (2,021,249) --
------------ ------------
Net cash used in investing activities .......................................... (16,092,839) (19,147,912)
------------ ------------
FINANCING ACTIVITIES:
Repayment of borrowings........................................................ (383,402) --
Proceeds from exercises under stock plans, net................................. 689,491 238,948
------------ ------------
Net cash provided by financing activities....................................... 306,089 238,948
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (6,830,350) 38,080,464
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 27,599,967 28,039,323
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 20,769,617 $ 66,119,787
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................................. $ 13,540 $ 31,398
============ ============
Income taxes paid ............................................................. $ 2,709,150 $ 1,942,173
============ ============
</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.
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 18,966,315 and 18,258,995 for the
three months ended June 30, 1999 and 1998, respectively and 18,864,055 and
16,872,893 for the six months ended June 30, 1999 and 1998, respectively. The
weighted average number of shares (diluted) was 20,401,712 and 20,203,316 for
the three months ended June 30, 1999 and 1998, respectively and 20,342,382 and
18,901,796 for the six months ended June 30, 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.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133, as amended, is effective for fiscal years beginning
after June 15, 2000. 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.
4
<PAGE> 7
2. RELATED PARTY TRANSACTIONS
The Company provides outsourcing services and software and software
services to The Millers Insurance Company ("Millers Insurance") (formerly The
Millers Mutual Fire Insurance Company), a shareholder of the Company, and The
Millers Casualty Insurance Company ("Millers Casualty"), an indirect 99.5%
subsidiary of Millers Insurance, under the terms of various agreements. For the
six months ended June 30, 1999 and 1998, under such agreements, the Company
earned total fees of approximately $12,702,000 and $11,584,000, respectively.
Effective January 1, 1998, the Company and Millers Insurance entered
into an agreement whereby the Company provides benefits administration services
to Millers Insurance and Millers Casualty for a monthly fee of $15,000. Total
fees earned under this agreement were $90,000 for each of the six month periods
ending June 30, 1999 and 1998.
The Company incurred rental expenses to Millers Insurance for office
space, totaling approximately $158,000 for the six month period ended June 30,
1998. In November 1998, Millers Insurance 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
six month period ended June 30, 1999, INSpire incurred $384,636 of rental
expense under this agreement.
There was a net receivable due from Millers Insurance of approximately
$3,977,000 and $2,424,00 as of June 30, 1999 and 1998, respectively.
3. COMMITMENTS AND CONTINGENCIES
From time to time the Company receives various claims incidental to its
business, including claims alleging breaches of warranty, breach of contract,
deceptive trade practices and similar claims under license agreements and other
agreements with customers of the Company. Such claims include a lawsuit filed by
a former customer of the Company seeking recovery of approximately $696,000
previously paid to the Company, damages in excess of $1,000,000, a judgment that
approximately $1,106,000 invoiced to such customer is not owed and treble
damages and attorney fees. The Company intends to vigorously defend this
lawsuit. Management does not believe the outcome of this lawsuit will have a
material adverse effect on the Company's business, financial condition,
cash flows or results of operations.
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 June
30, 1999, and the related condensed consolidated statements of operations for
the three months ended June 30, 1999 and 1998 and the six months ended June 30,
1999 and 1998, and condensed consolidated statements of cash flows for the six
months ended June 30, 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 consolidated financial statements
from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 21, 1999
6
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
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 "Robert Plan Acquisition") 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 the Robert Plan Acquisition, the Company entered 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.
Pending Acquisition of Certain Assets of Island Insurance Company, Ltd.
("Island Group") The Company entered into an asset and employee transfer
agreement (the "Island Group Acquisition") expected to close December 31, 2000,
with Island Group, pursuant to which the Company agreed to acquire from Island
Group certain assets and employees used in the conduct of its policy and claims
administration. In conjunction with this transaction, the Company also entered
into a transitional services and contingent transfer agreement with Island Group
effective June 1, 1999 through December 31, 2000, and a policy and claims
administration agreement to provide certain policy and claims administration
services to Island Group for a period of ten years beginning June 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 Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ............................. 75.2 % 54.4 % 70.8 % 54.8 %
Software and software services ................... 23.0 42.4 27.4 42.0
Other ............................................ 1.8 3.2 1.8 3.2
----- ----- ----- -----
Total revenues............................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
EXPENSES:
Cost of outsourcing services...................... 51.7 28.0 47.2 29.3
Cost of software and software services............ 15.2 23.1 15.5 22.7
Cost of other revenues............................ 0.9 2.1 1.1 2.2
Selling, general and administrative............... 11.5 18.2 12.7 17.9
Research and development.......................... 1.9 3.2 2.4 2.8
Depreciation and amortization..................... 6.8 6.8 6.9 6.7
Purchased research and development................ -- 2.4 -- 1.3
----- ----- ----- -----
Total expenses............................... 88.0 83.8 85.8 82.9
----- ----- ----- -----
OPERATING INCOME ................................... 12.0 16.2 14.2 17.1
OTHER INCOME ....................................... 1.2 4.1 1.3 3.2
----- ----- ----- -----
INCOME BEFORE INCOME TAX............................ 13.2 20.3 15.5 20.3
INCOME TAX EXPENSE.................................. (5.3) (8.0) (6.2) (7.9)
----- ----- ----- -----
NET INCOME ......................................... 7.9 % 12.3 % 9.3 % 12.4 %
===== ===== ===== =====
</TABLE>
7
<PAGE> 10
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenues were $36.3 million for the three months ended
June 30, 1999 compared to $21.0 million for the three months ended June 30,
1998, an increase of $15.3 million or 73%. Outsourcing services revenues were
$27.3 million for the three months ended June 30, 1999 compared to $11.4 million
for the three months ended June 30, 1998, an increase of $15.9 million or 139%.
The growth in outsourcing services revenues is due primarily to: (i) the Company
performing outsourcing services under a policy and claims administration
agreement with Arrowhead General Insurance Agency, Inc. ("Arrowhead") entered
into effective December 1, 1998, (ii) outsourcing services performed under a
policy and claims administration agreement with The Robert Plan entered into
effective April 1, 1999, (iii) outsourcing services performed under a policy and
claims administration agreement with Island Group entered into effective June 1,
1999, and (iv) outsourcing services performed under seven other outsourcing
contracts entered into after June 30, 1998. Software and software services
revenues were $8.3 million for the three months ended June 30, 1999 compared to
$8.9 million for the three months ended June 30, 1998, a decrease of $600,000 or
7%. The decrease in software and software services revenues is primarily
attributable to fewer in-process installations of the Windows into Property and
Casualty System ("WPC") and other software productivity tools, resulting in
lower license fee revenues.
Cost of Revenues. Cost of revenues, which is comprised mainly of
personnel costs, was $24.6 million for the three months ended June 30, 1999
compared to $11.2 million for the three months ended June 30, 1998, an increase
of $13.4 million or 120%. Cost of outsourcing services was $18.7 million for the
three months ended June 30, 1999 compared to $5.9 million for the three months
ended June 30, 1998, an increase of $12.8 million or 217%. 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 69% for the three
months ended June 30, 1999 from 51% for the three months ended June 30, 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. Cost of
software and software services was $5.5 million for the three months ended June
30, 1999 compared to $4.8 million for the three months ended June 30, 1998, an
increase of $700,000 or 15%. This increase is primarily attributable to the
costs associated with an increase in consulting services, which comprised a
larger proportion of total software revenues during the three months ended June
30, 1999 compared to prior periods. Cost of software and software services as a
percentage of software and software services revenues increased to 66% for the
three months ended June 30, 1999 from 54% for the three months ended June 30,
1998, as a result of the change in the software revenue mix described above as
well as a decrease in the productivity of software personnel.
Selling, General and Administrative. Selling, general and
administrative expenses were $4.2 million for the three months ended June 30,
1999 compared to $3.8 million for the three months ended June 30, 1998, an
increase of $400,000 or 11%. 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. Selling,
general and administrative expenses as a percentage of total revenues decreased
to 11% for the three months ended June 30, 1999 from 18% for the three months
ended June 30, 1998. This decrease is due to the increased revenue base over
which to spread these costs.
Research and Development. Research and development expense remained
stable at $680,000 for the three months ended June 30, 1999 compared to $676,000
for the three months ended June 30, 1998. 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, 1999 and
1998 is net of capitalized software development costs of approximately $440,000
and $486,000, respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $2.5 million for the three months ended June 30, 1999 compared to $1.4
million for the three months ended June 30, 1998, an increase of approximately
$1.1 million or 79%. This increase is primarily attributable to: (i)
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 (the "Arrowhead Acquisition"), (ii) amortization of goodwill
recorded in connection with the Robert Plan Acquisition, and (iii) amortization
of goodwill recorded in connection with the Island Group Acquisition, and (iv)
acquisitions of additional property and equipment since June 30, 1998 as a
result of the expansion in infrastructure to support the Company's growth.
8
<PAGE> 11
Nonrecurring Operating Expenses. In the purchase price allocation of
the acquisition of the outstanding stock of Paragon Interface, Inc. on April 28,
1998 (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.
Other Income. Other income, consisting principally of investment
income, decreased to $413,000 for the three months ended June 30, 1999 from
$859,000 for the three months ended June 30, 1998. The decrease of $446,000, or
52%, is due to a decrease in cash equivalents and investments primarily as a
result of the Arrowhead Acquisition, the Robert Plan Acquisition and the Island
Group Acquisition.
Net Income. Net income was $2.9 million, or $.14 per diluted share
($.15 per basic share), for the three months ended June 30, 1999 compared to net
income of $2.6 million, or $.13 per diluted share ($.14 per basic share), for
the three months ended June 30, 1998. Excluding the impact on net income
resulting from the $500,000 write-off of purchased research and development
associated with the Paragon Acquisition, net income would have been $3.1
million, or $.15 per diluted share ($.17 per basic share), for the three months
ended June 30, 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues. Total revenues were $67.6 million for the six months ended
June 30, 1999 compared to $39.3 million for the six months ended June 30, 1998,
an increase of $28.3 million or 72%. Outsourcing services revenues were $47.9
million for the six months ended June 30, 1999 compared to $21.5 million for the
six months ended June 30, 1998, an increase of $26.4 million or 123%. The growth
in outsourcing services revenues is due primarily to: (i) the Company performing
outsourcing services under a policy and claims administration agreement with
Arrowhead entered into effective December 1, 1998, (ii) outsourcing services
performed under a policy and claims administration agreement with The Robert
Plan entered into effective April 1, 1999, (iii) outsourcing services performed
under a policy and claims administration agreement with Island Group entered
into effective June 1, 1999, and (iv) outsourcing services performed under seven
other outsourcing contracts entered into after June 30, 1998. Software and
software services revenues were $18.5 million for the six months ended June 30,
1999 compared to $16.5 million for the six months ended June 30, 1998, an
increase of $2.0 million or 12%. The increase in software and software services
revenues is primarily attributable to more installations of WPC systems and
other software productivity tools during early 1999, resulting in increased
services and license fee revenues.
Cost of Revenues. Cost of revenues, which is comprised mainly of
personnel costs, was $43.1 million for the six months ended June 30, 1999
compared to $21.3 million for the six months ended June 30, 1998, an increase of
$21.8 million or 102%. Cost of outsourcing services was $31.9 million for the
six months ended June 30, 1999 compared to $11.5 million for the six months
ended June 30, 1998, an increase of $20.4 million or 177%. 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 67% for the six
months ended June 30, 1999 from 53% for the six months ended June 30, 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. Cost of software and
software services was $10.5 million for the six months ended June 30, 1999
compared to $8.9 million for the six months ended June 30, 1998, an increase of
$1.6 million or 18%. This increase is primarily attributable to the costs
associated with an increase in consulting services related to the software
installations described above. Cost of software and software services as a
percentage of software and software services revenues increased to 57% for the
six months ended June 30, 1999 from 54% for the six months ended June 30, 1998,
due to a decrease in the productivity of software personnel.
Selling, General and Administrative. Selling, general and
administrative expenses were $8.6 million for the six months ended June 30, 1999
compared to $7.1 million for the six months ended June 30, 1998, an increase of
$1.5 million or 21%. 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. Selling, general
and administrative expenses as a percentage of total revenues decreased to 13%
for the six months ended June 30, 1999 from 18% for the six months ended June
30, 1998. This decrease is due to the increased revenue base over which to
spread these costs.
9
<PAGE> 12
Research and Development. Research and development expense was $1.7
million for the six months ended June 30, 1999 compared to $1.1 million for the
six months ended June 30, 1998, an increase of $600,000 or 55%. 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 six months ended June 30, 1999 and 1998 is net of capitalized
software development costs of approximately $936,000 and $964,000, respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $4.6 million for the six months ended June 30, 1999 compared to $2.6 million
for the six months ended June 30, 1998, an increase of approximately $2.0
million or 77%. This increase is primarily attributable to: (i) amortization of
goodwill and depreciation on fixed assets recorded in connection with the
Arrowhead Acquisition, (ii) amortization of goodwill recorded in connection with
the Robert Plan Acquisition, (iii) amortization of goodwill recorded in
connection with the Island Group Acquisition, and (iv) acquisitions of
additional property and equipment since June 30, 1998 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.
Other Income. Other income, consisting principally of investment
income, decreased to $860,000 for the six months ended June 30, 1999 from $1.3
million for the six months ended June 30, 1998. The decrease of $400,000, or
31%, is due to a decrease in cash equivalents and investments primarily as a
result of the Arrowhead Acquisition, the Robert Plan Acquisition and the Island
Group Acquisition.
Net Income. Net income was $6.3 million, or $.31 per diluted share
($.33 per basic share), for the six months ended June 30, 1999 compared to net
income of $4.9 million, or $.26 per diluted share ($.29 per basic share), for
the six months ended June 30, 1998. Excluding the impact on net income resulting
from the $500,000 write-off of purchased research and development associated
with the Paragon Acquisition, net income would have been $5.4 million, or $.29
per diluted share ($.32 per basic share), for the six months ended June 30,
1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investments were $35.5 million as of June
30, 1999 compared to $48.1 million as of December 31, 1998, a decrease of $12.6
million. Net cash provided by operating activities was $9.0 million for the six
months ended June 30, 1999 compared to net cash provided by operating activities
of $4.9 million for the six months ended June 30, 1998. For the six months ended
June 30, 1999, cash flow provided by operating activities included depreciation
and amortization expense of $4.6 million and increases in accrued expenses and
unearned revenue of approximately $6.3 million and $3.5 million, respectively,
which were offset by an increase in accounts receivable of $9.8 million and an
increase in unbilled receivables of $3.2 million. Net cash used in investing
activities was $16.1 million for the six months ended June 30, 1999, which is
primarily attributable to costs associated with the Robert Plan Acquisition and
the Island Group Acquisition. Net cash provided by financing activities was
$306,000 for the six months ended June 30, 1999, primarily attributable to
proceeds from exercises under stock plans.
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. 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.
In the normal course of business, INSpire provides software, software
services and outsourcing services in advance of receiving payment for such
products and services. Customers are invoiced in accordance with the terms of
their contracts with the Company. As of June 30, 1999, approximately $4.8
million of the total balance of accounts receivable resulted from invoices
outstanding more than 180 days. These invoices relate primarily to six software
customers. The Company is vigorously pursuing collection of these amounts. There
can be no assurance
10
<PAGE> 13
that the Company will be able to collect all amounts due, and a significant
write-off of uncollectible accounts receivable could have a material adverse
effect on the financial condition and results of operations of the Company.
Management is presently assessing the likelihood that any write-off of
uncollectible accounts receivable will materially exceed the Company's allowance
for doubtful accounts.
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. 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 Year
2000 issues could have a material adverse effect on the financial condition and
results of operations of INSpire.
Current versions of INSpire's software applications have been tested
and verified to be Year 2000 compliant. Prior versions of the Company's software
applications, however, which have been licensed to software customers and used
in providing services to outsourcing customers, may not be Year 2000 compliant.
Software customers have been notified of the availability of Year 2000 compliant
versions of the Company's software applications. Testing and remediation of
INSpire's software applications used in providing outsourcing services is
expected to be completed by December 31, 1999.
The Company has made upgrades to its facilities, communications
equipment, and security systems that, it believes, will make them completely
operational after December 31, 1999. During 1997 and 1998, the Company
implemented financial and human resources systems that are designed to be Year
2000 compliant. A major effort is underway to upgrade the desktop hardware and
client/server hardware and software used throughout the Company's internal
operations. The prioritization of hardware and software replacements or upgrades
is anticipated to be completed before December 31, 1999, and contingency plans
will be developed beginning October 1, 1999 for any hardware or software used in
the Company's internal operations that may not be replaced or upgraded prior to
December 31, 1999.
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. Major
suppliers of products and services have been contacted to determine their Year
2000 status, and most have provided positive responses regarding their Year 2000
compliance. 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 $2.5 and $3.0 million. The Company anticipates financing these costs
with cash generated from operations. The originally scheduled completion date
for the Company's Year 2000 readiness process was June 30, 1999, but INSpire has
not yet fully concluded its Year 2000 assessment and remediation efforts. These
continuing efforts have exposed additional Year 2000 issues, which are being
addressed, but the estimated time to complete assessment, testing and
remediation has been delayed to December 31, 1999. INSpire is developing
contingency plans if 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.
11
<PAGE> 14
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, as amended, is effective for fiscal years beginning
after June 15, 2000. 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 persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
12
<PAGE> 15
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 six months ended June 30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company receives various claims incidental to its
business, including claims alleging breaches of warranty, breach of contract,
deceptive trade practices and similar claims under license agreements and other
agreements with customers of the Company. Such claims include a lawsuit filed by
a former customer of the Company seeking recovery of approximately $696,000
previously paid to the Company, damages in excess of $1,000,000, a judgment that
approximately $1,106,000 invoiced to such customer is not owed and treble
damages and attorney fees. The Company intends to vigorously defend this
lawsuit. Management does not believe the outcome of this lawsuit will have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations.
13
<PAGE> 16
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 June 30, 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: August 16, 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
14
<PAGE> 17
INDEX TO EXHIBIT
<TABLE>
<CAPTION>
EXHIBIT NO. 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 Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic
Average shares outstanding................................................... 18,966 18,259 18,864 16,873
======== ========= ========= =========
Net income .................................................................. $ 2,869 $ 2,571 $ 6,270 $ 4,890
======== ========= ========= =========
Per share amount............................................................. $ .15 $ .14 $ .33 $ .29
======== ========= ========= =========
Diluted
Average shares outstanding................................................... 18,966 18,259 18,864 16,873
Net effect of dilutive stock options based on the
treasury stock method using the average market price....................... 1,436 1,944 1,478 2,029
Total........................................................................ 20,402 20,203 20,342 18,902
======== ========= ========= =========
Net income .................................................................. $ 2,869 $ 2,571 $ 6,270 $ 4,890
======== ========= ========= =========
Per share amount............................................................. $ .14 $ .13 $ .31 $ .26
======== ========= ========= =========
</TABLE>
15
<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 periods ended June 30, 1999 and 1998, as indicated in our report
dated July 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 June 30, 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
August 16, 1999
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,770
<SECURITIES> 14,694
<RECEIVABLES> 28,806
<ALLOWANCES> 386
<INVENTORY> 0
<CURRENT-ASSETS> 77,527
<PP&E> 28,621
<DEPRECIATION> 15,538
<TOTAL-ASSETS> 153,912
<CURRENT-LIABILITIES> 20,643
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 129,212
<TOTAL-LIABILITY-AND-EQUITY> 153,912
<SALES> 0
<TOTAL-REVENUES> 67,632
<CGS> 0
<TOTAL-COSTS> 58,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 10,450
<INCOME-TAX> 4,180
<INCOME-CONTINUING> 6,720
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,270
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.31
</TABLE>
