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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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)
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TEXAS 75-2595937
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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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 March 31, 2000: 19,138,001
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<PAGE> 2
INDEX
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PAGE
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PART I -- FINANCIAL INFORMATION....................................... 1
Item 1. Financial Statements........................................ 1
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999........................... 1
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended March 31, 2000 and 1999.......... 2
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended March 31, 2000 and 1999.......... 3
Notes to Condensed Consolidated Financial Statements
(unaudited)................................................. 4
Independent Accountants' Report............................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 11
PART II -- OTHER INFORMATION.......................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 12
Signatures............................................................ 13
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<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 11,311,306 $ 899,032
Investments............................................... 10,602,234 16,774,703
Accounts receivable, net.................................. 27,216,899 24,593,172
Unbilled receivables...................................... 700,248 4,814,894
Income taxes receivable................................... 2,379,728 6,861,736
Deferred income taxes..................................... 5,587,370 5,753,743
Prepaid expenses and other current assets................. 1,435,718 1,881,424
------------ ------------
Total current assets.............................. 59,233,503 61,578,704
Property and equipment, net (accumulated depreciation 2000
$18,184,865; 1999 $17,450,341)............................ 13,465,226 14,179,800
Intangibles and other assets................................ 60,507,943 56,269,846
------------ ------------
TOTAL....................................................... $133,206,672 $132,028,350
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,360,766 $ 2,054,937
Accrued payroll and compensation.......................... 1,449,575 970,633
Other accrued expenses.................................... 16,139,105 19,043,135
Unearned revenue.......................................... 3,198,267 1,777,580
Deferred compensation..................................... 776,278 1,325,583
Income taxes payable...................................... 820,075 --
------------ ------------
Total current liabilities......................... 23,744,066 25,171,868
Deferred compensation....................................... 377,762 380,175
Deferred income taxes....................................... 2,005,629 2,005,629
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, 19,138,001 shares issued and outstanding in
2000; 18,998,270 shares issued and outstanding in
1999................................................... 191,380 189,983
Additional paid-in capital................................ 113,740,367 112,523,113
Accumulated deficit....................................... (6,852,532) (8,242,418)
------------ ------------
Total shareholders' equity........................ 107,079,215 104,470,678
------------ ------------
TOTAL....................................................... $133,206,672 $132,028,350
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
----------- -----------
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REVENUES:
Outsourcing services...................................... $32,560,317 $20,629,185
Software and software services............................ 3,731,205 10,169,355
Other..................................................... 307,831 577,991
----------- -----------
Total revenues.................................... 36,599,353 31,376,531
----------- -----------
EXPENSES:
Cost of outsourcing services, net......................... 25,277,849 13,155,457
Cost of software and software services, net............... 2,583,962 5,004,687
Cost of other revenues.................................... 118,526 395,236
Selling, general and administrative....................... 3,440,791 4,449,653
Research and development, net............................. 934,321 972,204
Depreciation and amortization............................. 2,113,010 2,177,558
----------- -----------
Total expenses.................................... 34,468,459 26,154,795
----------- -----------
OPERATING INCOME............................................ 2,130,894 5,221,736
OTHER INCOME (EXPENSE):
Interest income........................................... 185,583 458,058
Interest expense.......................................... -- (10,658)
----------- -----------
Total other income (expense)...................... 185,583 447,400
----------- -----------
INCOME BEFORE INCOME TAX.................................... 2,316,477 5,669,136
INCOME TAX EXPENSE.......................................... 926,591 2,267,654
----------- -----------
NET INCOME.................................................. $ 1,389,886 $ 3,401,482
=========== ===========
NET INCOME PER SHARE (BASIC)................................ $ .07 $ .18
=========== ===========
NET INCOME PER SHARE (DILUTED).............................. $ .07 $ .17
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
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OPERATING ACTIVITIES:
Net income................................................ $ 1,389,886 $ 3,401,482
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,113,010 2,177,558
Change in operating assets and liabilities:
Accounts receivable.................................. (2,623,727) (4,235,557)
Unbilled receivables................................. 4,114,646 (1,669,568)
Prepaid expenses and other current assets............ 261,127 1,606,079
Other assets......................................... 37,111 (681,046)
Accounts payable..................................... (694,172) 974,228
Accrued payroll and compensation..................... 478,942 276,121
Other accrued expenses............................... (117,323) 872,544
Unearned revenue..................................... 1,420,687 4,214,210
Income taxes payable/receivable...................... 5,448,543 702,189
Deferred compensation................................ (113,894) 40,000
----------- -----------
Net cash provided by operating activities................... 11,714,836 7,678,240
----------- -----------
INVESTING ACTIVITIES:
Sales of investments...................................... 6,172,468 2,529,217
Purchases of property and equipment....................... (425,258) (1,836,466)
Capitalized research and development costs................ (128,766) (495,868)
Deferred contract costs................................... (7,042,106) (491,604)
----------- -----------
Net cash used in investing activities....................... (1,423,662) (294,721)
----------- -----------
FINANCING ACTIVITIES:
Repayment of borrowings................................... -- (215,377)
Proceeds from exercises under stock plans, net............ 121,100 648,337
----------- -----------
Net cash provided by/(used in) financing activities......... 121,100 432,960
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 10,412,274 7,816,479
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD................................................. 899,032 27,599,967
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $11,311,306 $35,416,446
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................. $ -- $ 10,695
=========== ===========
Income taxes refunded..................................... $ 4,522,333 $ 125,653
=========== ===========
</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
("IT") outsourcing services to the property and casualty ("P&C") insurance
industry. Until recently, the Company also marketed and licensed computer
software 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 Consolidated Financial Statements -- The accompanying
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
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, 2000. 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, 1999 included in the Company's Form 10-K (File No 000-23005).
Certain information and note disclosures normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the Securities and
Exchange Commission's rules and regulations.
Intangibles and Other Assets -- Costs in excess of net assets acquired are
amortized over periods ranging from five to twenty years using the straight-line
method. Acquired software and other intangibles are amortized over a period of
three to ten years using the straight-line method. Deferred contract costs are
comprised of the incremental fees and direct costs associated with long-term
outsourcing service agreements and are amortized over the related contract
period of up to ten years using the straight-line method. In September 1999, 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 software license
associated with the Company's agreement with Cover-All Systems, Inc. entered
into in October 1997, and internally capitalized software production costs. The
Company periodically evaluates the carrying value of long lived 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.
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.
Diluted net income per share considers the impact of potential common shares,
unless the inclusion of such shares would have an anti-dilutive effect. The
weighted average number of shares (basic) was 19,032,051 and 18,767,930 for the
three months ended March 31, 2000 and 1999, respectively. The weighted average
number of shares (diluted) was 19,588,501 and 20,314,281 for the three months
ended March 31, 2000 and 1999, respectively. For the quarter ended March 31,
2000, 2,873,467 options outstanding were considered to be anti-dilutive and are
excluded from the calculation of net income per share (diluted). The weighted
average number of shares amounts have been adjusted to reflect all stock splits
in the form of stock dividends.
4
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INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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.
2. RELATED PARTY TRANSACTIONS
The Company provides outsourcing services and software and software
services to The Millers Insurance Company, a shareholder of the Company, The
Millers Casualty Insurance Company ("Millers Casualty"), an indirect 99.5%
subsidiary of Millers Insurance, and Millers American Group, Inc. ("Millers
American"), of which Millers Insurance is an indirect wholly-owned subsidiary,
under the terms of various agreements. On December 30, 1999, INSpire and various
Millers American subsidiaries entered into a five-year Master Services Agreement
that superceded existing outsourcing services agreements with Millers Insurance
and Millers Casualty. For the three months ended March 31, 2000 and 1999, under
such agreements, the Company earned total fees of $6,649,660 and $7,537,012,
respectively.
On September 1, 1999, INSpire entered into an Asset and Employee Transfer
Agreement with Millers American (the "Phoenix Acquisition"), pursuant to which
INSpire agreed to acquire from Millers American for a purchase price of
$3,500,000 certain assets and employees used in the conduct of its policy and
claims administration with respect to its policies written by Phoenix Indemnity
Insurance Company ("Phoenix Indemnity"), a wholly-owned subsidiary of Millers
American. In conjunction with this transaction, which is expected to close upon
obtaining all necessary regulatory authority approvals, INSpire entered into a
Service Addendum to the Company's Master Services Agreement with Millers
American to provide certain policy and claims administration services with
respect to the Phoenix Indemnity book of business for a period of ten years
beginning September 1, 1999.
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 $45,000 for each of the three month periods
ending March 31, 2000 and 1999.
There was a net receivable due from Millers American of approximately
$6,619,832 and $3,465,958 as of March 31, 2000 and 1999, respectively.
INSpire's headquarters is located in a building owned by a partnership
which is 100% owned by certain members of the Company's Board of Directors and
the Company's chief executive officer. For the three months period ended March
31, 2000 and 1999, INSpire incurred $258,760 and $192,318, respectively, of
rental expense under this agreement.
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 on
June 23, 1999 in the United States District Court for the Eastern District of
North Carolina by Medical Mutual Insurance Company of North Carolina ("Medical
Mutual"), a former customer of the Company
5
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INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
(Medical Mutual Insurance Company of North Carolina vs. INSpire Insurance
Solutions, Inc. (5-99CV-416-F3)). Medical Mutual seeks 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. On March 31, 2000, United States Magistrate Judge William A. Webb
of the United States District Court for the Eastern District of North Carolina,
Western Division, issued an omnibus order compelling arbitration of the dispute
between Medical Mutual Insurance Company of North Carolina and INSpire Insurance
Solutions, Inc. and staying/abating the proceeding pending arbitration.
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.
Such claims also include a lawsuit filed on November 9, 1999 in the United
States District Court for the Northern District of Illinois by Zurich American
Insurance Company ("Zurich"), a former customer of the Company (Zurich American
Insurance Company vs. INSpire Insurance Solutions, Inc. (99C-7288)). Zurich
seeks recovery for an amount of at least approximately $4.3 million previously
paid to the Company, a declaratory judgment that approximately $2.0 million
invoiced to such customer is not owed and damages to compensate Zurich for
INSpire's alleged breaches of contract. The Company intended to vigorously
defend this lawsuit, and filed a counterclaim seeking recovery of approximately
$2.0 million invoiced to such customer and attorney fees. On April 17, 2000, a
settlement agreement was signed between Zurich and Inspire to resolve amicably
all matters and issues in controversy between them, all without any admission by
or on the part of either party of any liability of any nature, and Zurich paid
to INSpire $375,000. The lawsuit was dismissed on May 3, 2000.
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 INSpire 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. On December 21, 1999, INSpire filed
a lawsuit in the 8th Civil Court of Rio de Janeiro (INSpire Insurance Solutions,
Inc. vs. Sul America Seguros S.A. and INA Seguradora S.A. (99.001.175.210-6))
requesting a preliminary injunction, which was granted in January 2000,
restricting the surety from paying $3.7 million to Sul America until a final
decision is rendered in the ordinary lawsuit to be filed. 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.
On December 3, 1999, a shareholder class action lawsuit was filed in the
United States District Court for the Northern District of Texas on behalf of all
purchasers of the Company's Common Stock during the period between January 28,
1998 and October 14, 1999 (Southland Securities Corporation et. al. v. Inspire
Insurance Solutions, Inc. et. al. (7-99CV-243-R)). The named defendants include
the Company, certain officers and directors of the Company, and Millers
Insurance. The complaint alleges violations under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by
making false and misleading statements and failing to disclose material facts
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. The plaintiff seeks monetary damages
6
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INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
and interest. Two additional shareholder class action lawsuits, nearly identical
to the one described above, have been filed against the Company in the United
States District Court for the Northern District of Texas: Larry Altobell and
Lawrence J. Miller et. al. v. Inspire Insurance Solutions, Inc. et. al.
(7-99CV-248-R) filed on December 16, 1999, and Stacy B. and Rhonda K. Lofton et.
al. v. Inspire Insurance Solutions, Inc. et. al. (7-00CV-001-R) filed on January
3, 2000. The lawsuits were filed in the Wichita Falls Division. They have been
consolidated, lead plaintiffs and counsel have been appointed and the
consolidation action has been transferred to the Fort Worth Division. The
Company intends to defend these suits vigorously in all aspects. The ultimate
outcome of this matter cannot presently be determined.
In February 2000, a complaint was filed against INSpire, in the United
States District Court for the District of New Jersey-Newark No. 00-803. The
Plaintiff, Cover-All Systems, Inc. ("CSI"), is a developer, owner and licensor
of computer software programs. The complaint alleges that INSpire breached a
Software License & Support Services Agreement ("the Agreement"), entered into in
October 1997. CSI seeks damages in excess of $1.5 million. INSpire has filed an
Answer and has alleged a counterclaim against CSI for breach of the Agreement
and its duty of good faith and fair dealing and is seeking recovery for an
amount of $2.5 million that the Company previously paid to CSI. The ultimate
outcome of this matter cannot presently be determined.
On March 2, 2000 the Company filed an arbitration claim against The
Doctor's Company with the American Arbitration Association to collect $1,546,095
as the amount due to the Company under a License Agreement, Implementation
Support Agreement and Accelerated Enhancement Plan Agreement. Fort Worth, Texas
was the requested hearing locale. On March 21, 2000, The Doctor's Company
submitted a claim for breach of contract against the Company with the American
Arbitration Association and requested a hearing locale in Napa, California. The
Doctor's Company claim alleges that as a result of the Company's failure to meet
obligations under its agreements, The Doctor's Company is entitled to the return
of $912,507 previously paid to the Company plus direct costs and consequential
damages. Concurrently, The Doctor's Company filed a petition in the Napa County
Superior Court bearing Case No. 26-09134 to compel arbitration in California.
The American Arbitration Association has since determined that the hearing
locale will be in Fort Worth, Texas. The Company intends to pursue collection of
its outstanding receivable balance and to vigorously defend the claim asserted
by The Doctor's Company. The ultimate outcome of this matter cannot presently be
determined.
A lawsuit was filed on April 18, 2000 in the District Court of Texas,
Tarrant County by Buena Venture Associates, L.P. ("Buena Venture"), a
shareholder of INSpire (Buena Venture Associates, L.P. v. INSpire Insurance
Solutions, Inc. (048-182682-00)). Buena Venture seeks a declaration that a
recent amendment to the Company's bylaws adopted by the Board of Directors is
invalid with respect to the 2000 annual meeting of shareholders and an
injunction prohibiting its enforcement at such meeting. Buena Venture also seeks
reimbursement for attorneys' fees incurred in connection with this matter. On
April 28, 2000, the Board of Directors rescinded and repealed the contested
bylaw, and based on such action, the Company believes that such lawsuit will not
proceed.
7
<PAGE> 10
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solutions, Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
INSpire Insurance Solutions, Inc. and subsidiary (the "Company") as of March 31,
2000, and the related condensed consolidated statements of operations and cash
flows for the three month periods ended March 31, 2000 and 1999. 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 accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
INSpire Insurance Solutions, Inc. and subsidiary as of December 31, 1999, 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, 2000, 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, 1999 is
fairly stated, in all material respects, in relation to the condensed
consolidated financial statements from which it has been derived.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
April 19, 2000
8
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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
MARCH 31,
---------------
2000 1999
------ ------
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REVENUES:
Outsourcing services...................................... 89.0% 65.7%
Software and software services............................ 10.2 32.4
Other..................................................... .8 1.8
------ ------
Total revenues.................................... 100.0 100.0
------ ------
EXPENSES:
Cost of outsourcing services, net......................... 69.0 41.9
Cost of software and software services.................... 7.1 16.0
Cost of other revenues.................................... .3 1.3
Selling, general and administrative....................... 9.4 14.2
Research and development, net............................. 2.6 3.1
Depreciation and amortization............................. 5.8 6.9
------ ------
Total expenses.................................... 94.2 83.4
------ ------
OPERATING INCOME............................................ 5.8 16.6
OTHER INCOME................................................ .5 1.4
------ ------
INCOME BEFORE INCOME TAX.................................... 6.3 18.1
INCOME TAX EXPENSE.......................................... (2.5) (7.2)
------ ------
NET INCOME.................................................. 3.8% 10.8%
====== ======
</TABLE>
RECENT DEVELOPMENTS
On May 3, 2000, F. George Dunham, III resigned as Chairman and Chief
Executive Officer and, subsequently, R. Earl Cox, III was appointed by the
Company's board to serve as Chairman and interim Chief Executive Officer. In
connection therewith, the Company and Mr. Dunham entered into an agreement
providing for separation payments of $1.3 million to Mr. Dunham, and the parties
agreed to covenants and conditions governing his resignation.
The Company entered into an information technology services agreement with
Tokio Marine Management, Inc. to provide services for Tokio Marine's personal
lines business. The services under this agreement will be provided for a period
of five years beginning April 19, 2000.
The Company also entered into a functional outsourcing agreement with
Zephyr Insurance Company. Under this agreement, Zephyr Insurance Company will
outsource all policy administration and claims administration operations to
INSpire. This agreement is for a period of ten years beginning April 19, 2000.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues. Total revenues were $36.6 million for the three months ended
March 31, 2000 compared to $31.4 million for the three months ended March 31,
1999, an increase of $5.2 million or 17%. Outsourcing services revenues were
$32.6 million for the three months ended March 31, 2000 compared to $20.6
million for the three months ended March 31, 1999, an increase of $12 million or
58%. The growth in outsourcing services revenues is due primarily to: (i) the
Company performing outsourcing services under a policy administration agreement
and a claims administration agreement with The Robert Plan entered into
effective April 1, 1999, (ii) the Company performing outsourcing services under
a policy and claims agreement with
9
<PAGE> 12
Island Group entered into effective June 1, 1999, and (iii) the Company
performing outsourcing services under five additional outsourcing contracts
entered into after March 31, 1999. Software and software services revenues were
$3.7 million for the three months ended March 31, 2000 compared to $10.2 million
for the three months ended March 31, 1999, a decrease of $6.5 million or 64%.
The decrease in software and software services revenues is primarily
attributable to the decision the Company made in December 1999 to discontinue
efforts directed toward increasing licensed software packages in order to focus
on its outsourcing business.
Cost of Revenues. Cost of revenues, which is comprised mainly of personnel
costs, was $28 million for the three months ended March 31, 2000 compared to
$18.6 million for the three months ended March 31, 1999, a increase of $9.4
million or 51%. Cost of outsourcing services was $25.3 million for the three
months ended March 31, 2000 compared to $13.2 million for the three months ended
March 31, 1999, an increase of $12.1 million or 92%. 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 78 % for the three
months ended March 31, 2000 from 64% for the three months ended March 31, 1999.
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 $2.6 million for the three months ended March
31, 2000 compared to $5 million for the three months ended March 31, 1999, a
decrease of $2.4 million or 48%. This decrease is primarily attributable to
fewer in-process installations of Windows into Property & Casualty System "WPC"
and other software productivity tools, resulting in lower license fees and
software services revenues. Cost of software and software services as a
percentage of software and software services revenues increased to 69% for the
three months ended March 31, 2000 from 49% for the three months ended March 31,
1999.
Selling, General and Administrative. Selling, general and administrative
expenses were $3.4 million for the three months ended March 31, 2000 compared to
$4.4 million for the three months ended March 31, 1999, a decrease of $1 million
or 23%. This decline is primarily due to a reduction of staff. Selling, general
and administrative expenses as a percentage of total revenues decreased to 9 %
for the three months ended March 31, 2000 from 14% for the three months ended
March 31, 1999. This decrease is due to the increased revenue base over which to
spread these costs.
Research and Development. Research and development expense was $934,000 for
the three months ended March 31, 2000 compared to $972,000 for the three months
ended March 31, 1999, a decrease of $38,000 or 4%. This decline is primarily due
to a decreased utilization of contract and consultant personnel. Research and
development expense for the three months ended March 31, 2000 and 1999 is net of
capitalized software development costs of approximately $129,000 and $496,000,
respectively.
Depreciation and Amortization. Depreciation and amortization expense was
$2.1 million for the three months ended March 31, 2000 compared to $2.2 million
for the three months ended March 31, 1999, a decrease of approximately $100,000
or 5%. This decline is primarily due to the third quarter 1999 write-off of
intangibles.
Other Income. Other income, consisting principally of investment income,
decreased to $186,000 for the three months ended March 31, 2000 from $447,000
for the three months ended March 31, 1999. The decrease of $261,000, or 58%, is
due to a decrease in cash equivalents and investments.
Net Income. Net income was $1.4 million, or $.07 per diluted share ($.07
per basic share), for the three months ended March 31, 2000 compared to net
income of $3.4 million, or $.17 per diluted share ($.18 per basic share), for
the three months ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $11.3 million as of March 31, 2000 compared
to $899,000 as of December 31, 1999, an increase of $10.4 million.
10
<PAGE> 13
Net cash provided by operating activities was $4 million higher for the
quarter ended March 31, 2000, compared to the same period of 1999. The increase
is primarily attributable to $4.5 million in tax refunds and a $1.5 million net
reduction in unbilled receivables and accounts receivable during 2000. These
increases were partially offset by reductions in net income and other working
capital changes.
Net cash used in investing activities was $1.4 million for the quarter
ended March 31, 2000. The $7.0 million of expenditures for deferred contract
costs includes a one-time finder's fee payment of $2.6 million related to the
April 1, 1999 asset purchase agreement with The Robert Plan as well as
capitalized contract implementation costs associated with long-term outsourcing
service agreements. The deferred contract costs are partially offset by the
conversion of $6.2 million in long term investments to cash and cash
equivalents.
Net cash generated by financing activities was $121,000 for the first
quarter 2000 and is 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designed as part of a hedge transaction and, if it is
the type of hedge transaction. The Company does not expect that the adoption of
SFAS 133 will have a material impact on its financial statements because the
Company does not currently hold any derivative instruments.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 10-Q contains or may contain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
made in this report, other than statements of historical fact, including but not
limited to statements made under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that relate to future results and
operations of the Company, and which may be indicated by words such as
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions,
are forward-looking statements. Actual results could differ materially from
those contemplated by the forward-looking statements as a result of certain
factors, including but not limited to difficulties associated with growth, the
Company's dependence on major customers and limited operating history,
technological change, competitive factors and pricing pressures, product
development risks, changes in legal and regulatory requirements, and general
economic conditions. Such statements reflect the current views of the Company
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of the Company. All subsequent written and oral
forward-looking statements attributable to the Company or person acting on its
behalf are expressly qualified in their entirety by this paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no quantitative or qualitative changes with respect to
market risk exposure during the three months ended March 31, 2000.
11
<PAGE> 14
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-Q:
<TABLE>
<C> <S>
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,
1999 filed on May 14, 1999).
3.4 -- Form of Second Amendment to the Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the
Company's Form 8-K filed on March, 27 2000).
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, 1999 filed on May
14, 1999).
10.0 -- Employment agreement dated April 1, 2000.
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>
(b) The Company did file a report on Form 8-K during the three months ended
March 31, 2000. In the Form 8-K filed March 27, 2000, the Company disclosed the
adoption of the Second Amendment to the Company's Amended and Restated Bylaws.
By board action on April 28, 2000, the Second Amendment was repealed.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: May 12, 2000
INSPIRE INSURANCE SOLUTIONS, INC.
/s/ R. EARL COX, III
------------------------------------
R. Earl Cox, III
Interim Chief Executive Officer,
Chairman and Director
/s/ JEFFREY W. ROBINSON
------------------------------------
Jeffrey W. Robinson
President & Chief Operating Officer
/s/ COLLEEN R. DAVIS
------------------------------------
Colleen R. Davis
Vice President & Chief Accounting
Officer
13
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
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,
1999 filed on May 14, 1999).
3.4 -- Form of Second Amendment to the Bylaws of the Company
(Incorporated by reference to Exhibit 3.3 of the
Company's Form 8-K filed on March, 27 2000).
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, 1999 filed on May
14, 1999).
10.0 -- Employment agreement dated April 1, 2000.
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 10.0
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), made and entered into this
1st day of April, 2000, to be effective on July 1, 2000 (the "Effective Date"),
by and between INSpire Insurance Solutions, Inc., a Texas corporation
("Employer"), and Jeffrey W. Robinson, a resident of Texas ("Employee").
W I T N E S S E T H:
WHEREAS, Employer is a corporation engaged in business in the State of
Texas and throughout the United States;
WHEREAS, Employer desires to employ Employee in the capacity of President
and Chief Operating Officer, upon the terms and conditions hereinafter set
forth; and
WHEREAS, Employee is willing to enter into this Agreement with respect to
his employment and services upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, Employer hereby employs Employee and Employee hereby accepts
such employment upon the terms and conditions hereinafter set forth:
1. Term of Agreement. The term of this Agreement shall commence on the
effective date of this Agreement and shall terminate on July 1, 2003. The term
of this Agreement shall automatically be extended for additional one-year
periods commencing on July 1, 2001 and on each July 1 thereafter, unless either
Executive or Employer gives written notice to the other on or before April 1,
2001 or any April 1 thereafter of his or its intention not to extend this
Agreement.
2. Duties of Employee. (a) President and Chief Operating Officer .Employee
agrees that during the term of this Agreement, he will devote his full
professional and business-related time, skills and best efforts to the
businesses of Employer in the capacity of President and Chief Operating Officer,
or such other capacity as Employer and Employee may agree upon. If there are
major significant changes in the duties or responsibilities of Employee from
those listed as Prohibited Activities on Exhibit A attached hereto, that are not
mutually agreed upon, Employee may terminate his employment within sixty (60)
days of any such change. In addition, Employee shall devote all necessary time
and his best efforts in the performance of any other duties as may be assigned
to him from time to time by the Board of Directors of Employer including, but
not limited to, serving on Employer's Board of Directors if elected. Employee
shall devote his full professional and business skills to Employer as his
primary responsibility. Employee may engage in personal, passive investment
activities provided such activities do not interfere with the performance of his
duties hereunder and violate the noncompetition and nondisclosure provisions set
forth herein. Employer shall take such action as may be necessary to cause
Employee to be appointed to the Board of Directors of the Company (and to any
executive or similar committees thereof) and to have Employee nominated for
election to the Board of Directors to serve as a director during each year of
the term of this Agreement.
(b) Other Positions. Nothing herein shall be construed to prohibit Employee
from serving on the boards of non-competitive businesses or non-profit community
organizations or similar entities.
3. Compensation.
(a) Base Salary. Employer shall pay Employee an annual base salary of
three hundred thousand dollars ($300,000) per annum (or fraction for
portions of a year). Such base salary will be adjusted from time to time in
accordance with then current standard salary administration guidelines of
Employer. Employee's salary shall be subject to all appropriate federal and
state withholding taxes and shall be payable in accordance with the normal
payroll procedures of Employer.
<PAGE> 2
(b) Annual Bonus. In addition to the salary set forth in Section 3(a)
hereof, Employee shall be entitled to participate in the Bonus Plan each
year during the term of this Agreement. Employer agrees that the Bonus Plan
shall not be terminated by Employer prior to the termination of this
Agreement.
(c) Stock Options. Employee shall be granted stock options for shares
of common stock of Employer pursuant to the terms of a Stock Option
Agreement granted under the MiliRisk, Inc. 1997 Stock Option Plan, as
amended, a copy of which has been provided to Employee. The number of
shares of common stock, exercise price and date of grant for such options
is set forth on Schedule 3(c) attached hereto.
4. Fringe Benefits. The terms of this Agreement shall not foreclose
Employee from participating with other employees of Employer in such fringe
benefit or incentive compensation plans as may be authorized and adopted from
time to time by Employer; provided, however, that Employee must meet any and all
eligibility provisions required under said fringe benefit or incentive
compensation plans. Employee may be granted such other fringe benefits or
perquisites as Employee and Employer may from time to time agree upon.
5. Vacations. Employee shall be entitled to the number of paid vacation
days in each calendar year as shall be determined by the Board of Directors of
Employer from time to time. In no event, however, shall Employee be entitled to
less than four weeks paid vacation during each calendar year.
6. Reimbursement of Expenses. Employer recognizes that Employee will incur
legitimate business expenses in the course of rendering services to Employer
hereunder. Accordingly, Employer shall reimburse Employee, upon presentation of
receipts or other adequate documentation, for all necessary and reasonable
business expenses incurred by Employee in the course of rendering services to
Employer under this Agreement.
7. Working Facilities. Employee shall be furnished an office, personal
secretary and such other facilities and services suitable to his position and
adequate for the performance of his duties, which shall be consistent with the
policies of Employer.
8. Termination. The employment relationship between Employee and Employer
created hereunder shall terminate before the expiration of the stated term of
this Agreement upon the occurrence of any one of the following events:
(a) Death or Permanent Disability. The death or permanent disability
of Employee. For the purpose of this Agreement, the "permanent disability"
of Employee shall mean Employee's inability, because of his injury,
illness, or other incapacity (physical or mental), to perform the essential
functions of the position contemplated herein, with or without reasonable
accommodation to Employee with respect to such injury, illness or other
incapacity, for a continuous period of 150 days or for 180 days out of a
continuous period of 360 days. Such permanent disability shall be deemed to
have occurred on the 150th consecutive day or on the 180th day within the
specified period, whichever is applicable.
(b) Termination for Cause. The following events, which for purposes of
this Agreement shall constitute "cause" for termination:
(1) The willful breach by Employee of any provision of Sections
2, 11, 12, or 13 hereof (including but not limited to a refusal to
follow lawful directives of the Board of Directors of Employer) after
notice to Employee of the particular details thereof and a period of
10 days thereafter within which to cure such breach and the failure of
Employee to cure such breach within such 10 day period;
(2) Any act of fraud, misappropriation or embezzlement by
Employee with respect to any aspect of Employer's business;
<PAGE> 3
(3) The illegal use of drugs by Employee during the term of this
Agreement that, in the determination of the Board of Directors of
Employer, substantially interferes with Employee's performance of his
duties hereunder;
(4) Substantial failure of performance by Employee that is
repeated or continued after 30 day written notice to Employee of such
failure and that is reasonably determined by the Board of Directors of
Employer to be materially injurious to the business or interests of
Employer and which failure is not cured by Employee within such 30 day
period; or
(5) Conviction of Employee by a court of competent jurisdiction
of a felony or of a crime involving moral turpitude.
Any notice of discharge shall describe with reasonable specificity the
cause or causes for the termination of Employee's employment, as well as
the effective date of the termination (which effective date may be the date
of such notice). If Employer terminates Employee's employment for any of
the reasons set forth above, Employer shall have no further obligations
hereunder from and after the effective date of termination (other than as
set forth below) and shall have all other rights and remedies available
under this or any other agreement and at law or in equity.
(c) Termination by Employee with Notice. Employee may terminate this
Agreement without liability to Employer arising from the resignation of
Employee upon thirty days written notice to Employer. Employer retains the
right after proper notice of Employee's voluntary termination to require
Employee to cease employment immediately; provided, however, in such event,
Employer shall remain obligated to pay Employee his salary during the
thirty days notice period or the remaining term of this Agreement,
whichever is less. During such thirty days notice period, Employee shall
provide such consulting services to Employer as Employer may reasonably
request and shall assist Employer in training his successor and generally
preparing for an orderly transition.
(d) Termination by Employer with Notice. Employer may terminate this
Agreement at any time upon one (1) year written notice to Employee;
provided, however, upon such notice Employee shall not be required to
perform any services for Employer other than during the period of three (3)
months immediately following the receipt of such notice of termination in
which Employee shall assist Employer in training his successor and
generally preparing for an orderly transition. Notice by Employer of its
intention to not extend this Agreement under Section 1 will constitute
termination under this provision.
9. Compensation Upon Termination.
(a) General. Upon the termination of Employee's employment under this
Agreement before the expiration of the stated term hereof for any reason,
Employee shall be entitled to (i) the salary earned by him before the
effective date of termination, as provided in Section 3(a) hereof, prorated
on the basis of the number of full days of service rendered by Employee
during the year to the effective date of termination, (ii) any accrued, but
unpaid, vacation or sick leave benefits, (iii) any authorized but
unreimbursed business expenses, and (iv) any accrued, but unpaid annual
bonus.
(b) Termination For Other Than Cause. If such termination is the
result of the discharge of Employee by Employer for any reason other than
(i) by Employer or Employee with notice pursuant to Section 8(d) or 8(c),
respectively, or (ii) for cause (as defined in Section 8(b) hereof), then
Employee shall be entitled to receive as a severance payment an amount
equal to the salary (excluding bonuses) that Employee would have received
for the remainder of the term of this Agreement in accordance with the
regular payroll periods during the remainder of the term of this Agreement.
If Employee's employment hereunder terminates because of the death of
Employee, all amounts that may be due to him under the terms of this
Agreement shall be paid to his administrators, personal representatives,
heirs and legatees, as may be appropriate.
<PAGE> 4
(c) Termination For Cause. If the employment relationship hereunder is
terminated by Employer for cause (as defined in Section 8(b) hereof),
Employee shall not be entitled to any severance compensation, except as
provided in Section 9(a) above.
(d) Termination by Employer with Notice. If the employment
relationship is terminated by Employer other than for cause, then Employee
shall be entitled to receive as a severance payment and as compensation for
all services performed hereunder pursuant to Section 8(d) hereof an amount
equal to the salary that Employee would have received for the remainder of
the term of this Agreement in accordance with the regular payroll periods
of Employer during the applicable period.
(e) Termination by Employee with Notice. If the employment
relationship is terminated by Employee pursuant to the provisions of
Section 8(c) hereof, Employee shall be entitled to receive as a severance
payment and as compensation for all services performed hereunder pursuant
to Section 8(c) hereof the salary that Employee would have received for the
remainder of the term of this Agreement or one (1) year, whichever is less,
in accordance with the regular payroll period of Employer during the
applicable period.
(f) Survival. The provisions of Sections 9, 11, 12, and 13 hereof
shall survive the termination of the employment relationship hereunder and
this Agreement to the extent necessary or reasonably appropriate to effect
the intent of the parties hereto as expressed in such provisions.
10. Other Agreements. This Agreement shall be separate and apart from, and
shall be deemed to alter the terms of, any executive compensation agreements,
deferred compensation agreements, bonus agreements, general employment benefits
plans, stock option plans and any other plans or agreements entered into between
Employee and Employer pursuant to which Employee has been granted specific
rights, benefits or options.
11. Noncompetition. Employee agrees that, during his employment with
Employer and for a period of three (3) years from the date of termination of his
employment with Employer, he will not directly or indirectly compete with
Employer by engaging in the activities set forth on Exhibit A attached hereto
and incorporated herein by reference (the "Prohibited Activities") within the
geographic area of the United States of America (the "Restricted Area"). For
purposes of this Section 11, Employee recognizes and agrees that Employer
conducts and will conduct business in the entire Restricted Area and that
Employee will perform his duties for Employer within the entire Restricted Area.
Employee shall be deemed to be engaged in and carrying on the Prohibited
Activities if he engages in the Prohibited Activities in any capacity
whatsoever, including, but not limited to, by or through a partnership of which
he is a general or limited partner or an employee engaged in such activities, or
by or through a corporation or association of which he owns five percent (5%) or
more of the stock or of which he is an officer, director, employee, member,
representative, joint venturer, independent contractor, consultant or agent who
is engaged in such activities. Employee agrees that during the three (3) year
period described above, he will notify Employer of the name and address of each
employer with whom he has accepted employment during such period. Such
notification shall be made in writing within five (5) days after Employee
accepts any employment or new employment by certified mail, return receipt
requested.
12. Confidential Data. Employee further agrees that, during his employment
with Employer and thereafter, he will keep confidential and not divulge to
anyone, disseminate nor appropriate for his own benefit or the benefit of
another any confidential information described in Exhibit C attached hereto and
incorporated by reference herein (the "Confidential Data"). Employee hereby
acknowledges and agrees that this prohibition against disclosure of Confidential
Data is in addition to, and not in lieu of, any rights or remedies that Employer
may have available pursuant to the laws of any jurisdiction or at common law to
prevent the disclosure of trade secrets, and the enforcement by Employer of its
rights and remedies pursuant to this Agreement shall not be construed as a
waiver of any other rights or available remedies that it may possess in law or
equity absent this Agreement.
13. Nonsolicitation of Employees. Employee covenants that, during his
employment with Employer and for a period of one (1) year from the date of
termination of his employment with Employer, he will not (i) directly or
indirectly induce or attempt to induce any employee of Employer to terminate his
or her employment or (ii) without prior written consent of Employer, offer
employment either on behalf of himself or on behalf of any other individual or
entity to any employee of Employer or to any terminated employee of Employer.
<PAGE> 5
14. Property of Employer. Employee acknowledges that from time to time in
the course of providing services pursuant to this Agreement he shall have the
opportunity to inspect and use certain property, both tangible and intangible,
of Employer and Employee hereby agrees that such property shall remain the
exclusive property of Employer, and Employee shall have no right or proprietary
interest in such property, whether tangible or intangible, including, without
limitation, Employee's customer and supplier lists, contract forms, books of
account, computer programs and similar property.
15. Equitable Relief. Employee acknowledges that the services to be
rendered by him are of a special, unique, unusual, extraordinary, and
intellectual character, which gives them a peculiar value, and the loss of which
cannot reasonably or adequately be compensated in damages in an action at law,
and that a breach by him of any of the provisions contained in this Agreement
will cause Employer irreparable injury and damage. Employee further acknowledges
that he possesses unique skills, knowledge and ability and that competition by
him in violation of this Agreement or any other breach of the provisions of this
Agreement would be extremely detrimental to Employer. By reason thereof,
Employee agrees that Employer shall be entitled, in addition to any other
remedies it may have under this Agreement or otherwise, to injunctive and other
equitable relief to prevent or curtail any breach of this Agreement by him.
16. "Change of Control". In the event (each such event, a "Change of
Control"): (1) Employer becomes a subsidiary of another corporation or entity or
is merged or consolidated into another corporation or entity or substantially
all of the assets of Employer are sold to another corporation or entity; or (2)
any person, corporation, partnership or other entity, either alone or in
conjunction with its "affiliates," as that term is defined in Rule 405 of the
General Rules and Regulations under the Securities Act of 1933, as amended, or
other group of persons, corporations, partnerships or other entities who are not
"affiliates" but who are acting in concert, becomes the owner of record or
beneficially of securities of Employer that represent thirty-three and one-third
percent (33 1/3%) or more of the combined voting power of Employer's then
outstanding securities entitled to elect Directors; or (3) the Board of
Directors of Employer or a committee thereof makes a determination in its
reasonable judgment that a "Change of Control" of Employer has taken place; or
(4) if the original Board of Directors of Employer that existed on the effective
date of this Agreement or those directors nominated by the original Board of
Directors no longer constitute a majority, then this is deemed to be a "Change
of Control"; the term during which this Agreement shall be effective shall
include the remaining term of this Agreement following the date of the Change of
Control plus two (2) years, and Employee's compensation for such period shall be
based on the following formula, shall be subject to the following conditions,
and shall be in lieu of the compensation provided for under Section 3 of this
Agreement and in lieu of the compensation upon termination provided for under
Section 9 of this Agreement (except for Section 9(a), which shall still apply):
(a) Employee shall be paid an annual salary for the remaining term of
this Agreement plus two (2) years consisting of one hundred percent (100%)
of the average amount of total cash compensation, excluding payments made
under tax benefit bonuses paid upon the lapse of resale restrictions on
common stock for certain officers, of Employee for the two (2) calendar
years prior to the Change of Control.
(b) Employee shall be paid an annual amount for the remaining term of
this Agreement plus two (2) years in consideration of the noncompetition
covenant of Section 11 of this Agreement consisting of fifty percent (50%)
of the average amount of total cash compensation, excluding payments made
under tax benefit bonuses paid upon the lapse or resale restrictions on
common stock for certain officers, of Employee for the two (2) calendar
years prior to the Change of Control. Such annual amounts shall be paid
quarterly in advance.
(c) Notwithstanding any other provision of this Agreement, if (a)
there is a change in the ownership or effective control of Employer or in
the ownership of a substantial portion of the assets of Employer [within
the meaning of Section 280G(b) (2) (A) of the Internal Revenue Code (the
"Code")], and (b) the payments otherwise to be made pursuant to Section 16
and any other payments or benefits otherwise to be paid to Executive in the
nature of compensation to be received by or for the benefit of Employee and
contingent upon such event (the "Termination Payments") would create an
"excess parachute payment" within the meaning of Section 280G of the Code,
then Employer shall make the Termination Payments in substantially equal
installments, the first installment being due within thirty days after the
date of
<PAGE> 6
termination and each subsequent installment being due on July 1 of each
year, such that the aggregate present value of all Termination Payments,
whether pursuant to this Agreement or otherwise, will be as close as
possible to, but not exceed, 299% of the Executive's base amount, within
the meaning of Section 280G.
(d) Employer shall have no obligation to pay the amounts set forth in
paragraphs (a) and (b) of Section 16 as limited by paragraph (c) if there
is reasonable proof that the noncompetition or confidential data provisions
of Sections 11 and 12, respectively, of this Agreement are being violated.
(e) In the event the employment relationship is terminated for cause
(pursuant to Section 8(b) hereof) following a Change of Control, Employer
shall not be obligated to make any further payments of the compensation
amounts provided for in this Agreement, except as provided in Section 9(a)
above. Notwithstanding any other provision of this Agreement, except for
paragraphs (e) and (j) of this Section 16, which shall control in the event
Employee terminates employment as provided in paragraphs (e) and (j), in
the event Employee voluntarily terminates employment following a Change of
Control for other than Good Reason, as defined hereinafter, compensation
amounts set forth in paragraphs (a) and (b) shall be payable only for a one
(1) year period following termination of employment.
"Good Reason" to terminate employment with Employer occurs if: (1)
duties are assigned that are materially inconsistent with previous duties;
(2) duties and responsibilities are substantially reduced; (3) base
compensation is reduced not as part of an across the board reduction for
all senior officers or executives; (4) participation under compensation
plans or arrangements generally made available to persons at Employee's
level of responsibility at Employer is denied; (5) a successor fails to
assume this Agreement; or (6) termination is made without compliance with
prescribed procedures.
(f) In the event Employee is involuntarily terminated by Employer
without cause, Employee voluntarily terminates employment for Good Reason
or the employment relationship is terminated by death or permanent
disability of Employee, Employer's obligation to pay the compensation
amounts provided in this Section 16 shall survive termination of
employment.
(g) In the event of termination of employment during the pendency of a
"Potential Change of Control", as hereinafter defined, paragraphs (g) and
(h) of this Section 16 shall apply as if an actual Change of Control had
taken place. A "Potential Change of Control" shall be deemed to have
occurred if: (1) Employer has entered into an agreement or letter of intent
the consummation of which would result in a Change of Control; (2) any
person publicly announces an intention to take or to consider taking
actions that, if consummated, would constitute a Change of Control; or (3)
the Board of Directors of Employer or a committee thereof in its reasonable
judgment makes a determination that a Potential Change of Control for
purposes of this Agreement has occurred. A Potential Change of Control
remains pending for purposes of receiving payments under this Agreement
until the earlier of the occurrence of a Change of Control or a
determination by the Board of Directors or a committee thereof (at any
time) that a Change of Control is no longer reasonably expected to occur.
(h) Notwithstanding anything contained in this Agreement to the
contrary, Employee and Employer, or the person, corporation, partnership or
other entity acquiring control of Employer pursuant to this Section 16,
with the concurrence of the Chief Executive Officer and Compensation
Committee of the Board of Directors of Employer, may mutually agree that
Employee, with three (3) months' notice, may terminate his employment and
receive a lump sum payment equal to the present value of remaining payments
under this Agreement discounted by the then current Treasury Bill rate for
the remaining term of this Agreement.
17. Successors Bound. This Agreement shall be binding upon Employer and
Employee, their respective heirs, executors, administrators or successors in
interest, including without limitation, any corporation, partnership or other
entity acquiring control of Employer pursuant to Section 16 hereof.
18. Severability and Reformation. The parties hereto intend all provisions
of this Agreement to be enforced to the fullest extent permitted by law. If,
however, any provision of this Agreement is held to be illegal,
<PAGE> 7
invalid, or unenforceable under present or future law, such provision shall be
fully severable, and this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part hereof, and the
remaining provisions shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its
severance.
19. Integrated Agreement. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof, and there
are no agreements, understandings, specific restrictions, warranties or
representations relating to said subject matter between the parties other than
those set forth herein or herein provided for.
20. Attorneys' Fees. If any action at law or in equity, including any
action for declaratory or injunctive relief, is brought to enforce or interpret
the provisions of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees from the nonprevailing party, which fees may
be set by the court in the trial of such action, or may be enforced in a
separate action brought for that purpose, and which fees shall be in addition to
any other relief which may be awarded.
21. Notices. All notices and other communications required or permitted to
be given hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally, mailed by certified mail (return receipt
requested) or sent by overnight delivery service, cable, telegram, facsimile
transmission or telex to the parties at the following addresses or at such other
addresses as shall be specified by the parties by like notice:
(a) If to Employer: INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Attention: F. George Dunham, III
Facsimile No.: (800)826-9865
(b) If to Employee: 4805 Lafayette Avenue
Fort Worth, Texas 76107
Notice so given shall, in the case of notice so given by mail, be deemed to
be given and received on the fourth calendar day after posting, in the case of
notice so given by overnight delivery service, on the date of actual delivery
and, in the case of notice so given by cable, telegram, facsimile transmission,
telex or personal delivery, on the date of actual transmission or, as the case
may be, personal delivery.
22. Further Actions. Whether or not specifically required under the terms
of this Agreement, each party hereto shall execute and deliver such documents
and take such further actions as shall be necessary in order for such party to
perform all of his or its obligations specified herein or reasonably implied
from the terms hereof.
23. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF
TEXAS.
24. Assignment. This Agreement is personal to Employee and may not be
assigned in any way by Employee without the prior written consent of Employer.
This Agreement shall not be assignable or delegable by Employer, other than to
an affiliate of Employer, except if there is a Change of Control as defined in
Section 16, Employer may assign its rights and obligations hereunder to the
person, corporation, partnership or other entity that has gained such control.
25. Counterparts. This Agreement may be executed in counterparts, each of
which will take effect as an original and all of which shall evidence one and
the same Agreement.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
INSpire Insurance Solutions, Inc.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
EMPLOYEE:
-----------------------------------------
Jeffrey W. Robinson
<PAGE> 9
EXHIBIT A
PROHIBITED ACTIVITIES
Acting in any capacity, either individually or with any corporation,
partnership or other entity, directly or indirectly, in providing, or proposing
to provide, data processing software systems, related automation support
services and information services to the insurance industry, including, but not
limited to, application software, processing, consulting and related services,
in the performance of any of the following types of duties in any part of the
insurance industry:
1. The performance of the sales and marketing functions.
2. The responsibility for sales revenue generation.
3. The responsibility for customer satisfaction.
4. The responsibility for research and development of insurance data base
products.
5. The responsibility for the research and development of information
data processing systems and services.
6. The providing of input to pricing of products.
7. The planning and management of data processing services resources.
8. The coordination of the efforts of the various aspects of computer
systems services organizations with other functions.
9. The planning and management of information services resources.
10. The providing and management of an operations staff to support the
above listed activities.
<PAGE> 10
EXHIBIT B
CONFIDENTIAL INFORMATION
1. All software/systems (including all present, planned and future software),
whether licenses or unlicensed, developed by or on behalf of or otherwise
acquired by INSpire Insurance Solutions, Inc. or any of its subsidiaries.
"All software/system" shall mean:
o all code in whatever form
o all data pertaining to the architecture and design of such software
systems
o all documentation in whatever form
o all flowcharts
o any reproduction or recreation in whole or in part of any of the above
in whatever form.
2. All business plans and strategies including:
o strategic plans
o product plans
o marketing plans
o financial plans
o operating plans
o resource plans
o all research and development plans including all data produced by such
efforts.
3. Internal policies, procedures, methods and approaches which are unique to
INSpire Insurance Solutions, Inc. and are not public.
4. Any information relating to the employment, job responsibility,
performance, salary and compensation of any present or future officer or
employee of INSpire Insurance Solutions, Inc.
<PAGE> 1
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------
2000 1999
------- -------
<S> <C> <C>
Basic
Average shares outstanding .................................... 19,032 18,768
======= =======
Net income .................................................... $ 1,390 $ 3,401
======= =======
Per share amount .............................................. $ .07 $ .18
======= =======
Diluted
Average shares outstanding .................................... 19,032 18,768
Net effect of dilutive stock options based on the
treasury stock method using the average market price ........ 557 1,546
------- -------
Total ......................................................... 19,589 20,314
======= =======
Net income .................................................... $ 1,390 $ 3,401
======= =======
Per share amount .............................................. $ .07 $ .17
======= =======
</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 March 31, 2000 and 1999, as indicated in our report
dated April 19, 2000; because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above, which is included in this
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, is
incorporated by reference in Registration Statement No. 333-36271 on Form S-8.
We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, as amended, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and 11
of that Act.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
May 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND BALANCE SHEET OF INSPIRE INSURANCE
SOLUTIONS, INC. AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 11,311
<SECURITIES> 10,602
<RECEIVABLES> 36,170
<ALLOWANCES> 8,953
<INVENTORY> 0
<CURRENT-ASSETS> 59,234
<PP&E> 31,650
<DEPRECIATION> 18,185
<TOTAL-ASSETS> 133,207
<CURRENT-LIABILITIES> 23,744
<BONDS> 0
0
0
<COMMON> 191
<OTHER-SE> 106,887
<TOTAL-LIABILITY-AND-EQUITY> 133,207
<SALES> 0
<TOTAL-REVENUES> 36,599
<CGS> 0
<TOTAL-COSTS> 34,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,316
<INCOME-TAX> 927
<INCOME-CONTINUING> 1,390
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,390
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
