<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..........................September 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 November 12, 1999: 18,998,270
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION.................................................................... 1
Item 1. Financial Statements..................................................................... 1
Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and December 31, 1998.................................................................... 1
Condensed Consolidated Statements of Operations (unaudited) for the
three months and nine months ended September 30, 1999 and 1998........................... 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the
nine months ended September 30, 1999 and 1998............................................ 3
Notes to Condensed Consolidated Financial Statements (unaudited)......................... 4
Independent Accountants' Report.......................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 15
PART II - OTHER INFORMATION........................................................................ 15
Item 1. Legal Proceedings........................................................................ 15
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signatures......................................................................................... 16
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 12,789,520 $ 27,599,967
Investments ................................................... 16,808,263 20,494,443
Accounts receivable, net ...................................... 20,111,367 18,601,724
Unbilled receivables .......................................... 7,618,908 5,751,405
Income taxes receivable ....................................... 6,652,181 1,830,868
Deferred income taxes ......................................... 5,792,148 1,176,686
Prepaid expenses and other current assets ..................... 2,086,478 1,528,580
------------- -------------
Total current assets ....................................... 71,858,865 76,983,673
Property and equipment, net (accumulated depreciation
1999 $16,518,850; 1998 $13,679,322) .......................... 12,695,837 11,824,787
Intangibles and other assets, net ............................... 50,946,524 43,999,890
------------- -------------
TOTAL ........................................................... $ 135,501,226 $ 132,808,350
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .............................................. $ 1,901,773 $ 1,386,440
Accrued payroll and compensation .............................. 831,157 632,691
Other accrued expenses ........................................ 16,851,320 2,455,309
Unearned revenue .............................................. 4,642,996 1,831,406
Deferred compensation ......................................... 1,321,493 1,907,389
Current portion of long-term debt ............................. 296,813 383,402
------------- -------------
Total current liabilities .................................. 25,845,552 8,596,637
Deferred compensation ........................................... 489,201 260,047
Deferred income taxes ........................................... -- 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 18,998,270 issued and outstanding in
1999; 18,685,813 shares issued and outstanding in 1998 ........ 189,983 186,858
Additional paid-in capital ...................................... 111,612,790 108,710,195
Retained earnings (accumulated deficit) ......................... (2,636,300) 11,447,668
------------- -------------
Total shareholders' equity .................................. 109,166,473 120,344,721
------------- -------------
TOTAL ........................................................... $ 135,501,226 $ 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 Nine months ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ................................ $ 31,452,660 $ 13,314,284 $ 79,332,868 $ 34,846,030
Software and software services ...................... 5,556,786 8,346,946 24,074,893 24,863,884
Other ............................................... 342,652 422,941 1,576,093 1,690,662
------------- ------------- ------------- -------------
Total revenues .................................. 37,352,098 22,084,171 104,983,854 61,400,576
------------- ------------- ------------- -------------
EXPENSES:
Cost of outsourcing services, net ................... 24,653,267 5,704,613 56,557,416 17,206,778
Cost of software and software services, net ......... 5,145,146 5,457,918 15,564,577 14,379,706
Cost of other revenues .............................. 199,508 284,280 938,175 1,150,078
Selling, general and administrative ................. 5,595,380 4,013,921 14,194,456 10,944,537
Research and development, net ....................... 1,109,386 796,921 2,767,987 1,895,486
Depreciation and amortization ....................... 2,399,352 1,634,938 7,036,084 4,270,524
Purchased research and development .................. -- -- -- 500,000
Bad debts ........................................... 10,847,828 30,000 10,932,634 150,000
Litigation .......................................... 1,229,442 -- 1,229,442 --
Intangible assets impairment ........................ 16,756,701 -- 16,756,701 --
Other ............................................... 804,000 -- 804,000 --
------------- ------------- ------------- -------------
Total expenses .................................. 68,740,010 17,922,591 126,781,472 50,497,109
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) ............................... (31,387,912) 4,161,580 (21,797,618) 10,903,467
OTHER INCOME (EXPENSE):
Interest income ..................................... 298,229 829,269 1,171,841 2,127,437
Interest expense .................................... (610) (8,966) (14,150) (48,750)
------------- ------------- ------------- -------------
Total other income .............................. 297,619 820,303 1,157,691 2,078,687
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES ..................... (31,090,293) 4,981,883 (20,639,927) 12,982,154
INCOME TAX BENEFIT (EXPENSE) .......................... 10,736,105 (1,743,656) 6,555,959 (4,853,510)
------------- ------------- ------------- -------------
NET INCOME (LOSS) ..................................... $ (20,354,188) $ 3,238,227 $ (14,083,968) $ 8,128,644
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE (BASIC) ................... $ (1.07) $ .18 $ (.74) $ .47
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE (DILUTED) ................. $ (1.07) $ .16 $ (.74) $ .42
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (BASIC) ................................... 18,992,939 18,358,416 18,907,489 17,370,488
============= ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (DILUTED) ................................. 19,890,862 20,353,515 20,208,797 19,372,827
============= ============= ============= =============
</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>
Nine months ended
September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................ $(14,083,968) $ 8,128,644
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization .......................... 7,036,084 4,270,524
Deferred income tax .................................... (5,532,845) --
Bad debts .............................................. 10,847,828 150,000
Purchased research and development ..................... -- 500,000
Intangible assets impairment ........................... 16,756,701 --
Changes in operating assets and liabilities:
Accounts receivable .................................... (12,357,471) (2,860,796)
Unbilled receivables ................................... (1,867,503) --
Prepaid expenses and other current assets .............. (557,898) (3,407,666)
Other assets ........................................... (575,550) (139,317)
Accounts payable ....................................... 515,333 (192,365)
Accrued payroll and compensation ....................... 198,466 223,541
Other accrued expenses ................................. 11,796,009 381,848
Unearned revenue ....................................... 2,811,590 (3,119,717)
Income taxes receivable ................................ (6,246,315) 2,040,313
Deferred compensation .................................. 476,322 (216,891)
------------ ------------
Net cash provided by operating activities .................. 9,216,783 5,758,118
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net ................. (3,710,578) (6,117,361)
Sale (purchase) of investments ........................... 3,686,180 (15,603,278)
Capitalized research and development costs ............... (1,230,408) (1,510,926)
Acquisition of subsidiary, net of cash acquired .......... -- (4,237,161)
Contract acquisition costs ............................... (18,949,895) --
Capitalized implementation costs ......................... (4,544,038) --
------------ ------------
Net cash used in investing activities ...................... (24,748,739) (27,468,726)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings ................................. 296,813 --
Repayment of borrowings .................................. (383,402) (946,622)
Issuance of common stock, net of issuance costs paid ..... -- 52,877,321
Proceeds from exercises under stock plans, net ........... 808,098 388,173
------------ ------------
Net cash provided by financing activities .................. 721,509 52,318,872
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... (14,810,447) 30,608,264
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 27,599,967 28,039,323
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 12,789,520 $ 58,647,587
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................ $ 14,150 $ 48,750
============ ============
Income taxes paid ........................................ $ 5,050,750 $ 2,642,173
============ ============
</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 (Loss) Per Share - Net income (loss) per share of the
Company is computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted earnings (loss) per share
considers the impact of potential common shares, unless the inclusion of the
potential common shares would have an anti-dilutive effect. The weighted
average number of shares (basic) was 18,992,939 and 18,358,416 for the three
months ended September 30, 1999 and 1998, respectively and 18,907,489 and
17,370,488 for the nine months ended September 30, 1999 and 1998, respectively.
The weighted average number of shares (diluted) was 19,890,862 and 20,353,515
for the three months ended September 30, 1999 and 1998, respectively and
20,208,797 and 19,372,827 for the nine months ended September 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 all derivative instruments to
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
nine months ended September 30, 1999 and 1998, under such agreements, the
Company earned total fees of approximately $19,775,000 and $18,370,000,
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 $135,000 for each of the nine month
periods ending September 30, 1999 and 1998. The Company expects to terminate
this agreement effective November 30, 1999.
The Company incurred rental expenses to Millers Insurance for office
space totaling approximately $236,600 for the nine month period ended September
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 nine month period ended September 30, 1999, INSpire incurred
approximately $577,000 of rental expense under this agreement. Millers
Insurance currently occupies approximately 22% of the building in which
INSpire's headquarters is located. Millers Insurance is expected to vacate the
building effective November 30, 1999, after which time the Company will incur
additional rental expense for the portion of the building previously occupied
by Millers Insurance.
There was a net receivable due from Millers Insurance of approximately
$4.2 million as of September 30, 1999 and $2.0 million as of December 31, 1998.
Effective September 13, 1999, F. George Dunham, III, the Company's
Chief Executive Officer and Chairman of the Board, was elected interim Chief
Executive Officer of both Millers Insurance and Millers Casualty. Mr. Dunham
has served as Chairman of the Board of Directors of Millers Insurance and
Millers Casualty since October 1998, and was Vice Chairman of the Board of both
companies from June 1997 to October 1998. Mr. Dunham previously served as
President and Chief Executive Officer of Millers Insurance and Millers Casualty
from 1994 to 1997.
3. COMMITMENTS AND CONTINGENCIES
From time to time the Company receives various claims incidental to
its business, including claims alleging breach 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 for an amount of at least
approximately $696,000 previously paid to the Company, damages in excess of
$1.0 million, a declaratory judgment that approximately $1.1 million invoiced
to such customer is not owed and treble damages and attorney fees. The Company
intends to vigorously defend this lawsuit, and has filed a counterclaim seeking
recovery of approximately $1.1 million invoiced to such customer and attorney
fees. 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.
In December 1997, the Company entered into a contract with Sul America
Cia Nacional de Seguros ("Sul America") to provide a license for the Windows
into Property and Casualty System and other software products, and software
services for the implementation of such products. In conjunction with this
contract, the Company was required to arrange a surety to provide Sul America
with a performance bond in the amount of $3.7 million, the proceeds of which
could be used in the event that the Company did not fulfill its obligations
under the contract. The contract was segregated into three phases of
deliverables, two of which have been accepted and paid for in the amount of
$2.5 million by Sul America. In August 1999, Sul America terminated its
contract with the Company, and demanded payment under the performance bond.
Under its agreement to indemnify the surety against losses under the
performance bond allegedly caused by INSpire's default, the Company arranged an
irrevocable standby letter of credit in October 1999 with Bank of America, N.A.
in the amount of $3.7 million. The Company intends to pursue collection of its
outstanding receivable balance of $1.2 million from Sul America, and defend
itself against Sul America's claims that the Company failed to comply with the
terms of the contract. The ultimate outcome of this matter cannot presently be
determined.
5
<PAGE> 8
4. INTANGIBLE ASSETS IMPAIRMENT
The Company recognized an impairment charge in September 1999 of $16.8
million for certain intangible assets, including a substantial portion of the
goodwill and software acquired in the purchases of Strategic Data Systems, Inc.
in March 1997 and Paragon Interface, Inc. in April 1998, the software license
associated with the Company's agreement with Cover-All Systems, Inc. entered
into in October 1997, and internally capitalized software development costs.
The Company periodically evaluates the carrying value of intangible assets to
determine if impairment exists based upon estimated undiscounted future cash
flows. The impairment, if any, is measured by the difference between net book
value and estimated discounted future cash flows, and is charged to expense in
the period identified. The impairment charge was necessitated by the Company's
determination, based on recent operating results, that the future expected
sales and cash flows from the Company's software operations would be
significantly lower than previously expected.
6
<PAGE> 9
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
September 30, 1999, and the related condensed consolidated statements of
operations for the three months ended September 30, 1999 and 1998 and the nine
months ended September 30, 1999 and 1998, and condensed consolidated statements
of cash flows for the nine months ended September 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
October 20, 1999
7
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Nine months ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ........................... 84.2% 60.3% 75.6% 56.8%
Software and software services ................. 14.9 37.8 22.9 40.4
Other .......................................... 0.9 1.9 1.5 2.8
---------- ---------- ---------- ----------
Total revenues ............................ 100.0 100.0 100.0 100.0
---------- ---------- ---------- ----------
EXPENSES:
Cost of outsourcing services, net .............. 66.0 25.9 53.9 28.0
Cost of software and software services, net .... 13.8 24.7 14.8 23.4
Cost of other revenues ......................... 0.5 1.3 0.9 1.9
Selling, general and administrative ............ 15.0 18.2 13.5 17.8
Research and development, net .................. 3.0 3.6 2.6 3.1
Depreciation and amortization .................. 6.4 7.4 6.7 7.0
Purchased research and development ............. 0.0 0.0 0.0 0.8
Bad debts ...................................... 29.0 0.1 10.4 0.2
Litigation ..................................... 3.3 0.0 1.2 0.0
Intangible assets impairment ................... 44.9 0.0 16.0 0.0
Other .......................................... 2.1 0.0 0.8 0.0
---------- ---------- ---------- ----------
Total expenses ............................ 184.0 81.2 120.8 82.2
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) .......................... (84.0) 18.8 (20.8) 17.8
OTHER INCOME ..................................... 0.8 3.8 1.1 3.3
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAX .................. (83.2) 22.6 (19.7) 21.1
INCOME TAX BENEFIT (EXPENSE) ..................... 28.7 (7.9) 6.3 (7.9)
---------- ---------- ---------- ----------
NET INCOME (LOSS) ................................ (54.5)% 14.7% (13.4)% 13.2%
========== ========== ========== ==========
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues were $37.4 million for the three months ended
September 30, 1999 compared to $22.1 million for the three months ended
September 30, 1998, an increase of $15.3 million or 69%. Outsourcing services
revenues were $31.5 million for the three months ended September 30, 1999
compared to $13.3 million for the three months ended September 30, 1998, an
increase of $18.2 million or 137%. The growth in outsourcing services revenues
is due primarily to: (i) the Company performing outsourcing services under a
policy administration agreement with Arrowhead General Insurance Agency, Inc.
("Arrowhead") entered into effective December 1, 1998 and the Company's
subsidiary performing outsourcing services under a claims administration
agreement with Arrowhead entered into effective December 1, 1998, (ii) the
Company performing outsourcing services under a policy and claims
administration agreement with The Robert Plan Corporation ("The Robert Plan")
entered into effective April 1, 1999, (iii) the Company performing outsourcing
services under a policy and claims administration agreement with Island
Insurance Company, Ltd. ("Island Group") entered into effective June 1, 1999,
and (iv) the Company performing outsourcing services under five additional
outsourcing contracts entered into after September 30, 1998. Software and
software services revenues were $5.6 million for the three months ended
September 30, 1999 compared to $8.3 million for the three months ended
September 30, 1998, a decrease of $2.7 million or 33%. The decrease in software
and software services revenues is primarily attributable to fewer in-
8
<PAGE> 11
process installations of the Windows into Property and Casualty System ("WPC")
and other software productivity tools, resulting in lower license fees and
software services revenues.
Cost of Revenues. Cost of revenues, which is comprised mainly of
personnel costs, was $30.0 million for the three months ended September 30,
1999 compared to $11.4 million for the three months ended September 30, 1998,
an increase of $18.6 million or 163%. Cost of outsourcing services was $24.7
million for the three months ended September 30, 1999 compared to $5.7 million
for the three months ended September 30, 1998, an increase of $19.0 million or
333%. This increase is primarily attributable to costs associated with the
performance of the outsourcing services under the contracts described above.
Cost of outsourcing services for the three months ended September 30, 1999 was
also impacted by Year 2000 remediation expenses as well as various employee
benefits costs related primarily to the additional employees in the facilities
acquired from Arrowhead. Cost of outsourcing services as a percentage of
outsourcing services revenues increased to 78% for the three months ended
September 30, 1999 from 43% for the three months ended September 30, 1998. This
increase is a result of additional 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 $5.1 million for the three months ended September 30,
1999 compared to $5.5 million for the three months ended September 30, 1998, a
decrease of $400,000 or 7%. This decrease is primarily attributable to the
redeployment of software programmers to the outsourcing division to implement
systems necessary to perform the outsourcing services under the contracts
described above. Cost of software and software services as a percentage of
software and software services revenues increased to 93% for the three months
ended September 30, 1999 from 65% for the three months ended September 30, 1998
as a result of a decrease in software license fee revenues proportionate to
software services revenues, as well as a decrease in the productivity of
software personnel.
Selling, General and Administrative. Selling, general and
administrative expenses were $5.6 million for the three months ended September
30, 1999 compared to $4.0 million for the three months ended September 30,
1998, an increase of $1.6 million or 40%. 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. During the three months ended September 30, 1999, selling, general and
administrative expenses included fees paid to Cochran, Caronia & Co., an
investment banking firm hired by the Company to advise it on exploring
strategic alternatives. Selling, general and administrative expenses for the
three months ended September 30, 1999 also included a year-to-date accrual of
approximately $450,000 for increased property taxes. Selling, general and
administrative expenses as a percentage of total revenues decreased to 15% for
the three months ended September 30, 1999 from 18% for the three months ended
September 30, 1998. This decrease is due to the increased revenue base over
which to spread these costs.
Research and Development. Research and development expense increased
to $1.1 million for the three months ended September 30, 1999 compared to
$800,000 for the three months ended September 30, 1998, an increase of $300,000
or 38%. This increase is due to increased personnel dedicated to the
development of new software products, as well as lower capitalized research and
development costs. This expense is comprised primarily of personnel, equipment
and occupancy costs related to software development. Research and development
expense for the three months ended September 30, 1999 and 1998 is net of
capitalized software development costs of approximately $294,000 and $547,000,
respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $2.4 million for the three months ended September 30, 1999 compared to $1.6
million for the three months ended September 30, 1998, an increase of
approximately $800,000 or 50%. 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 and depreciation on fixed assets recorded in
connection with the acquisition of certain assets from affiliates of The Robert
Plan as of April 1, 1999 (the "Robert Plan Acquisition"), (iii) amortization of
goodwill recorded in connection with the acquisition of certain assets of
Island Group as of June 1, 1999 (the "Island Group Acquisition"), and (iv)
acquisitions of additional property and equipment since September 30, 1998 as a
result of the expansion in infrastructure to support the Company's growth.
Unusual Operating Expenses. During September 1999, the Company
recognized $29.6 million in charges primarily relating to the Company's
assessment of assets associated with its software business. These charges
9
<PAGE> 12
consist of: (i) $10.8 million to increase the allowance for bad debts, (ii)
$1.2 million of litigation expenses, (iii) $16.8 million for the impairment of
intangible assets and (iv) $804,000 in other charges.
In the normal course of business, the Company 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. During the quarter ended September 30,
1999, management took action relative to specific software installation
contracts which had significant past due balances and ceased further work,
pending resolution of the balances due under the terms of the contracts. The
Company recognized $10.8 million of bad debts expense in September 1999. The
Company is vigorously pursuing collection of these accounts. However,
management assessed the likelihood as probable that these amounts would be
uncollectible.
Litigation expenses of $1.2 million include expenses associated with
the collection of accounts receivable, as well as penalties or settlements to
be paid in connection with various pending matters.
The Company recognized an impairment charge of $16.8 million for
certain intangible assets, including a substantial portion of the goodwill and
software acquired in the purchases of Strategic Data Systems, Inc. in March
1997 (the "SDS Acquisition") and Paragon Interface, Inc. in April 1998 (the
"Paragon Acquisition"), the software license associated with the Company's
agreement with Cover-All Systems, Inc. entered into in October 1997 (the
"Cover-All License"), and internally capitalized software development costs.
The Company periodically evaluates the carrying value of intangible assets to
determine if impairment exists based upon estimated undiscounted future cash
flows. The impairment, if any, is measured by the difference between net book
value and estimated discounted future cash flows, and is charged to expense in
the period identified. The impairment charge was necessitated by the Company's
determination, based on recent operating results, that the future expected
sales and cash flows from the Company's software operations would be
significantly lower than previously expected.
Other operating expenses of $804,000 represent the accrual of future
payment obligations under operating leases for fixed assets no longer in use by
the Company.
Other Income. Other income, consisting principally of investment
income, decreased to $298,000 for the three months ended September 30, 1999
from $820,000 for the three months ended September 30, 1998. The decrease of
$522,000, or 64%, is due to a decrease in cash equivalents and investments
primarily as a result of the cash used in the Arrowhead Acquisition, the Robert
Plan Acquisition and the Island Group Acquisition.
Net Income (Loss). Net loss was $20.4 million, or $1.07 per diluted
share ($1.07 per basic share), for the three months ended September 30, 1999
compared to net income of $3.2 million, or $.16 per diluted share ($.18 per
basic share), for the three months ended September 30, 1998. Excluding the
impact on net income resulting from the $29.6 million nonrecurring operating
expenses discussed above, net loss for the three months ended September 30,
1999 would have been $871,000 or $.05 per diluted share ($.05 per basic share).
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Total revenues were $105.0 million for the nine months ended
September 30, 1999 compared to $61.4 million for the nine months ended
September 30, 1998, an increase of $43.6 million or 71%. Outsourcing services
revenues were $79.3 million for the nine months ended September 30, 1999
compared to $34.8 million for the nine months ended September 30, 1998, an
increase of $44.5 million or 128%. The growth in outsourcing services revenues
is due primarily to: (i) the Company performing outsourcing services under a
policy administration agreement with Arrowhead entered into effective December
1, 1998 and the Company's subsidiary performing outsourcing services under a
claims administration agreement with Arrowhead entered into effective December
1, 1998, (ii) the Company performing outsourcing services under a policy and
claims administration agreement with The Robert Plan entered into effective
April 1, 1999, (iii) the Company performing outsourcing services under a policy
and claims administration agreement with Island Group entered into effective
June 1, 1999, and (iv) the Company performing outsourcing services under five
additional outsourcing contracts entered into after September 30, 1998.
Software and software services revenues were $24.1 million for the nine months
ended September 30, 1999 compared to $24.9 million for the nine months ended
September 30, 1998, a decrease of $800,000 or 3%. The decrease in software and
software services revenues is primarily attributable to fewer in-process
installations of WPC and other software productivity tools, resulting in lower
license fee revenues.
10
<PAGE> 13
Cost of Revenues. Cost of revenues, which is comprised mainly of
personnel costs, was $73.1 million for the nine months ended September 30, 1999
compared to $32.7 million for the nine months ended September 30, 1998, an
increase of $40.4 million or 124%. Cost of outsourcing services was $56.6
million for the nine months ended September 30, 1999 compared to $17.2 million
for the nine months ended September 30, 1998, an increase of $39.4 million or
229%. This increase is primarily attributable to costs associated with the
performance of the outsourcing services under the contracts described above.
Cost of outsourcing services as a percentage of outsourcing services revenues
increased to 71% for the nine months ended September 30, 1999 from 49% for the
nine months ended September 30, 1998. This increase is a result of additional
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 $15.6
million for the nine months ended September 30, 1999 compared to $14.4 million
for the nine months ended September 30, 1998, an increase of $1.2 million or
8%. 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 nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998. Cost of software and software
services as a percentage of software and software services revenues increased
to 65% for the nine months ended September 30, 1999 from 58% for the nine
months ended September 30, 1998 as a result of the change in the software
revenue mix described above as well a decrease in the productivity of software
personnel.
Selling, General and Administrative. Selling, general and
administrative expenses were $14.2 million for the nine months ended September
30, 1999 compared to $10.9 million for the nine months ended September 30,
1998, an increase of $3.3 million or 30%. 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 14% for the nine months ended September 30, 1999 from 18%
for the nine months ended September 30, 1998. This decrease is due to the
increased revenue base over which to spread these costs.
Research and Development. Research and development expense was $2.8
million for the nine months ended September 30, 1999 compared to $1.9 million
for the nine months ended September 30, 1998, an increase of $900,000 or 47%.
This increase is primarily due to increased personnel expanding the
functionality of current software products and developing new software
products. This expense is comprised primarily of personnel, equipment and
occupancy costs related to software development. Research and development
expense for the nine months ended September 30, 1999 and 1998 is net of
capitalized software development costs of approximately $1.2 million and $1.5
million, respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $7.0 million for the nine months ended September 30, 1999 compared to $4.3
million for the nine months ended September 30, 1998, an increase of
approximately $2.7 million or 63%. This increase is primarily attributable to
amortization of goodwill and depreciation on fixed assets recorded in
connection with the Arrowhead Acquisition, the Robert Plan Acquisition and the
Island Group Acquisition, and the acquisition of additional property and
equipment since September 30, 1998 to expand infrastructure to support the
Company's growth.
Unusual Operating Expenses. During September 1999, the Company
recognized $29.6 million in charges primarily relating to the Company's
assessment of assets associated with its software business. These charges
consist of: (i) $10.8 million to increase the allowance for bad debts, (ii)
$1.2 million of litigation expenses, (iii) $16.8 million for the impairment of
intangible assets and (iv) $804,000 in other charges.
In the normal course of business, the Company 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. During the quarter ended September 30,
1999, management took action relative to specific software installation
contracts which had significant past due balances and ceased further work,
pending resolution of the balances due under the terms of the contracts. The
Company recognized $10.8 million of bad debts expense in September 1999. The
Company is vigorously pursuing collection of these accounts. However,
management assessed the likelihood as probable that these amounts would be
uncollectible.
Litigation expenses of $1.2 million include expenses associated with
the collection of accounts receivable, as well as penalties or settlements to
be paid in connection with various pending matters.
11
<PAGE> 14
The Company recognized an impairment charge of $16.8 million for
certain intangible assets, including a substantial portion of the goodwill and
software purchased in the SDS Acquisition and the Paragon Acquisition, the
Cover-All License, and internally capitalized software development costs. The
Company periodically evaluates the carrying value of intangible assets to
determine if impairment exists based upon estimated undiscounted future cash
flows. The impairment, if any, is measured by the difference between net book
value and estimated discounted future cash flows, and is charged to expense in
the period identified. The impairment charge was necessitated by the Company's
determination, based on recent operating results, that the future expected
sales and cash flows from the Company's software operations would be
significantly lower than previously expected.
Other operating expenses of $804,000 represent the accrual of future
payment obligations under operating leases for fixed assets no longer in use by
the Company.
In the purchase price allocation of the acquisition 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, consisting principally of investment
income, decreased to $1.2 million for the nine months ended September 30, 1999
from $2.1 million for the nine months ended September 30, 1998. The decrease of
$900,000, or 43%, is due to a decrease in cash equivalents and investments
primarily as a result of cash used in the Arrowhead Acquisition, the Robert
Plan Acquisition and the Island Group Acquisition.
Net Income (Loss). Net loss was $14.1 million, or $.74 per diluted
share ($.74 per basic share), for the nine months ended September 30, 1999
compared to net income of $8.1 million, or $.42 per diluted share ($.47 per
basic share), for the nine months ended September 30, 1998. Excluding the
impact on net income resulting from the $29.6 million nonrecurring operating
expenses discussed above, net income for the nine months ended September 30,
1999 would have been $5.4 million or $.27 per diluted share ($.29 per basic
share).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 for the nine months ended September 30, 1998 would have been $8.6
million, or $.45 per diluted share ($.50 per basic share).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investments were $29.6 million as of
September 30, 1999 compared to $48.1 million as of December 31, 1998, a
decrease of $18.5 million. Net cash provided by operating activities was $9.2
million for the nine months ended September 30, 1999 compared to net cash
provided by operating activities of $5.8 million for the nine months ended
September 30, 1998. For the nine months ended September 30, 1999, increases in
other accrued expenses and unearned revenue of approximately $11.8 million and
$2.8 million, respectively, were offset by an increase in income taxes
receivable of $6.2 million and increases in accounts receivable and unbilled
receivables of $1.5 million and $1.9 million, respectively. Net cash used in
investing activities was $24.7 million for the nine months ended September 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 $722,000 for the nine months ended September 30, 1999, primarily
attributable to proceeds from exercises under stock plans.
In December 1997, the Company entered into a contract with Sul America
Cia Nacional de Seguros ("Sul America") to provide a license for WPC and other
software products, and software services for the implementation of such
products. In conjunction with this contract, the Company was required to
arrange a surety to provide Sul America with a performance bond in the amount
of $3.7 million, the proceeds of which could be used in the event that the
Company did not fulfill its obligations under the contract. The contract was
segregated into three phases of deliverables, two of which have been accepted
and paid for in the amount of $2.5 million by Sul America. In August 1999, Sul
America terminated its contract with the Company, and demanded payment under
the performance bond. Under its agreement to indemnify the surety against
losses under the performance bond allegedly caused by INSpire's default, the
Company arranged an irrevocable standby letter of credit in October 1999 with
Bank of America, N.A. in the amount of $3.7 million. The Company intends to
pursue collection of its outstanding receivable balance of $1.2 million from
Sul America, and defend itself against Sul America's claims that the Company
failed to comply with the terms of the contract. The ultimate outcome of this
matter cannot presently be determined.
12
<PAGE> 15
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.
YEAR 2000 ISSUES
The Company is continuing its review of outstanding Year 2000 issues
and taking steps to prevent these issues from adversely affecting its future
operating results. This readiness process includes, but is not limited to,
preparing an inventory of potential Year 2000 issues, determining functions
affected, performing remediation as necessary, developing testing and recording
results. In its assessment of Year 2000 issues, the Company is specifically
focusing on its software applications and associated software products,
hardware, facilities, communications equipment and security systems. The
Company expects 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 Company's
financial condition, cash flows or results of operations.
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, management 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 completed by November 30, 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 Company's financial condition, cash flows or results of operations.
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 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 12, 1999. INSpire is developing contingency plans for
business continuation and enhanced client support in case Year 2000 issues
arise during late 1999 or early 2000.
13
<PAGE> 16
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 all derivative instruments to 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 and its management 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.
14
<PAGE> 17
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 nine months ended September 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 breach 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 for an amount of at least
approximately $696,000 previously paid to the Company, damages in excess of
$1.0 million, a declaratory judgment that approximately $1.1 million invoiced
to such customer is not owed and treble damages and attorney fees. The Company
intends to vigorously defend this lawsuit, and has filed a counterclaim seeking
recovery of approximately $1.1 million invoiced to such customer and attorney
fees. 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.
In December 1997, the Company entered into a contract with Sul America
to provide a license for WPC and other software products, and software services
for the implementation of such products. In conjunction with this contract, the
Company was required to arrange a surety to provide Sul America with a
performance bond in the amount of $3.7 million, the proceeds of which could be
used in the event that the Company did not fulfill its obligations under the
contract. The contract was segregated into three phases of deliverables, two of
which have been accepted and paid for in the amount of $2.5 million by Sul
America. In August 1999, Sul America terminated its contract with the Company,
and demanded payment under the performance bond. Under its agreement to
indemnify the surety against losses under the performance bond allegedly caused
by INSpire's default, the Company arranged an irrevocable standby letter of
credit in October 1999 with Bank of America, N.A. in the amount of $3.7
million. The Company intends to pursue collection of its outstanding receivable
balance of $1.2 million from Sul America, and defend itself against Sul
America's claims that the Company failed to comply with the terms of the
contract. The ultimate outcome of this matter cannot presently be determined.
15
<PAGE> 18
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
quarter ended September 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: November 15, 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
16
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of the Company and
Articles of Amendment No. 1 thereto (Incorporated by
reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, Registration No. 333-31173).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 of the Company's Registration
Statement on Form S-1, Registration No. 333-31173).
3.3 Form of First Amendment to the Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the Company's
Form 10-Q for the three months ended March 31, 1998 filed on
May 14, 1998).
4.1 Specimen Certificate for shares of Common Stock of the
Company (Incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-1, Registration
No. 333-31173).
4.2 Form of Rights Agreement, by and between the Company and U.S.
Trust Company of Texas, N.A. dated as of July 30, 1997
(Incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-1, Registration No.
333-31173).
4.3 Form of First Amendment to Rights Agreement (Incorporated by
reference to Exhibit 4.3 of the Company's Form 10-Q for the
three months ended March 31, 1998 filed on May 14, 1998).
11.1 Statement regarding Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule (EDGAR version only).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic
Average shares outstanding .............................. 18,993 18,358 18,907 17,370
======== ======== ======== ========
Net income (loss) ....................................... $(20,354) $ 3,238 $(14,084) $ 8,129
======== ======== ======== ========
Per share amount ........................................ $ (1.07) $ .18 $ (.74) $ .47
======== ======== ======== ========
Diluted
Average shares outstanding .............................. 18,993 18,358 18,907 17,370
Net effect of dilutive stock options based on the
treasury stock method using the average market price .. 898 1,996 1,302 2,003
-------- -------- -------- --------
Total ................................................... 19,891 20,354 20,209 19,373
======== ======== ======== ========
Net income (loss) ....................................... $(20,354) $ 3,238 $(14,084) $ 8,129
======== ======== ======== ========
Per share amount ........................................ $ (1.07) $ .16 $ (.74) $ .42
======== ======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15.1
AWARENESS LETTER OF INDEPENDENT ACCOUNTANTS
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
condensed consolidated financial information of INSpire Insurance Solutions,
Inc. for the periods ended September 30, 1999 and 1998, as indicated in our
report dated October 20, 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 September 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
November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET OF INSPIRE INSURANCE
SOLUTIONS, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,790
<SECURITIES> 16,808
<RECEIVABLES> 31,321
<ALLOWANCES> 11,210
<INVENTORY> 0
<CURRENT-ASSETS> 71,859
<PP&E> 29,215
<DEPRECIATION> 16,519
<TOTAL-ASSETS> 135,501
<CURRENT-LIABILITIES> 25,846
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 108,976
<TOTAL-LIABILITY-AND-EQUITY> 135,501
<SALES> 0
<TOTAL-REVENUES> 104,984
<CGS> 0
<TOTAL-COSTS> 126,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (20,640)
<INCOME-TAX> (6,556)
<INCOME-CONTINUING> (14,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,084)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
