<PAGE> 1
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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 JUNE 30, 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)
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 July 31, 2000: 19,138,001
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION............................................................................ 1
Item 1. Financial Statements............................................................................. 1
Condensed Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999................................................................................ 1
Condensed Consolidated Statements of Operations (unaudited) for the three
months and six months ended June 30, 2000 and 1999............................................... 2
Condensed Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2000 and 1999..................................................................... 3
Notes to Condensed Consolidated Financial Statements (unaudited)................................. 4
Independent Accountants' Report.................................................................. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 14
PART II - OTHER INFORMATION............................................................................... 15
Item 1. Legal Proceedings................................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 16
Item 5. Other Information................................................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................................. 17
Signatures ............................................................................................... 18
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 4,689,010 $ 899,032
Investments ..................................................... 11,749,851 16,774,703
Accounts receivable, net ........................................ 28,755,732 24,593,172
Unbilled receivables ............................................ 294,065 4,814,894
Income taxes receivable ......................................... 1,130,850 6,861,736
Deferred income taxes ........................................... 5,587,370 5,753,743
Prepaid expenses and other current assets ....................... 1,637,601 1,881,424
------------- -------------
Total current assets .......................................... 53,844,479 61,578,704
Property and equipment, net (accumulated depreciation 2000
$19,252,911; 1999 $17,450,341) .................................... 12,946,531 14,179,800
Intangibles and other assets ......................................... 63,658,101 56,269,846
------------- -------------
TOTAL ................................................................ $ 130,449,111 $ 132,028,350
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................ $ 481,186 $ 2,054,937
Accrued payroll and compensation ................................ 1,631,422 970,633
Other accrued expenses .......................................... 15,211,414 19,043,135
Unearned revenue ................................................ 2,227,819 1,777,580
Deferred compensation ........................................... 791,467 1,325,583
------------- -------------
Total current liabilities ..................................... 20,343,308 25,171,868
Deferred compensation ................................................ 375,301 380,175
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 ........................................ 113,740,368 112,523,113
Accumulated deficit ............................................... (6,206,875) (8,242,418)
------------- -------------
Total shareholders' equity .................................. 107,724,873 104,470,678
------------- -------------
TOTAL ................................................................ $ 130,449,111 $ 132,028,350
============= =============
</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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ........................... $ 32,271,957 $ 27,251,026 $ 64,832,274 $ 47,880,209
Software and software services ................. 2,162,792 8,348,754 5,893,997 18,518,107
Other .......................................... 359,750 655,448 667,581 1,233,442
------------ ------------ ------------ ------------
Total revenues ............................. 34,794,499 36,255,228 71,393,852 67,631,758
------------ ------------ ------------ ------------
EXPENSES:
Cost of outsourcing services, net .............. 25,094,573 18,682,448 50,333,089 31,837,905
Cost of software and software
services, net ................................ 1,543,806 5,493,853 4,116,308 10,498,540
Cost of other revenues ......................... 135,606 343,433 254,132 738,670
Selling, general and administrative ............ 2,981,800 4,151,496 6,409,563 8,601,149
Research and development, net .................. 585,025 680,356 1,504,472 1,652,560
Severance expense .............................. 1,350,595 75,902 1,429,290 75,902
Depreciation and amortization .................. 2,207,765 2,459,178 4,320,775 4,636,735
------------ ------------ ------------ ------------
Total expenses ............................. 33,899,170 31,886,666 68,367,629 58,041,461
------------ ------------ ------------ ------------
OPERATING INCOME ................................. 895,329 4,368,562 3,026,223 9,590,297
OTHER INCOME (EXPENSE):
Interest income ................................ 180,768 415,555 366,351 873,612
Interest expense ............................... -- (2,881) -- (13,540)
------------ ------------ ------------ ------------
Total other income (expense) ............... 180,768 412,674 366,351 860,072
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX ......................... 1,076,097 4,781,236 3,392,574 10,450,369
INCOME TAX EXPENSE ............................... 430,440 1,912,492 1,357,031 4,180,146
------------ ------------ ------------ ------------
NET INCOME ....................................... $ 645,657 $ 2,868,744 $ 2,035,543 $ 6,270,223
============ ============ ============ ============
NET INCOME PER SHARE (BASIC) ..................... $ .03 $ .15 $ .11 $ .33
============ ============ ============ ============
NET INCOME PER SHARE (DILUTED) ................... $ .03 $ .14 $ .10 $ .31
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
INSPIRE INSURANCE SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 2,035,543 $ 6,270,223
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 4,320,775 4,636,735
Change in operating assets and liabilities:
Accounts receivable ........................................... (4,162,559) (9,818,427)
Unbilled receivables .......................................... 4,520,828 (3,174,832)
Prepaid expenses and other
current assets .............................................. 59,242 (510,697)
Other assets .................................................. 138,761 (704,687)
Accounts payable .............................................. (1,573,752) 369,263
Accrued payroll and compensation .............................. 669,466 165,959
Other accrued expenses ........................................ (3,653,688) 6,342,881
Unearned revenue .............................................. 450,239 3,491,261
Income taxes payable/receivable ............................... 5,877,346 1,595,441
Deferred compensation ......................................... (101,167) 293,280
------------ ------------
Net cash provided by operating activities ......................... 8,581,034 8,956,400
------------ ------------
INVESTING ACTIVITIES:
Sale of investments ............................................. 5,024,852 5,800,835
Purchases of property and equipment ............................. (1,029,785) (3,144,257)
Capitalized research and development costs ...................... (401,732) (936,317)
Deferred contract costs ......................................... (8,505,491) (17,813,100)
------------ ------------
Net cash used in investing activities ............................. (4,912,156) (16,092,839)
------------ ------------
FINANCING ACTIVITIES:
Repayment of borrowings ......................................... -- (383,402)
Proceeds from exercises under stock
plans, net .................................................... 121,100 689,491
------------ ------------
Net cash provided by financing activities ......................... 121,100 306,089
------------ ------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS .................................................. 3,789,978 (6,830,350)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD ............................................ 899,032 27,599,967
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD .................................................. $ 4,689,010 $ 20,769,617
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ..................................................... $ -- $ 13,540
============ ============
Income taxes paid/(refunded), net ................................. $ (4,520,696) $ 2,739,722
============ ============
</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 December 31, 1999, 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. 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 undiscounted future cash flows, and is charged to expense in the
period identified.
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 19,138,001 and 18,966,315 for the
three months ended June 30, 2000 and 1999, respectively, and 19,085,026 and
18,864,055 for the six months ended June 30, 2000 and 1999, respectively. The
weighted average number of shares (diluted) was 19,605,506 and 20,401,712 for
the three months ended June 30, 2000 and 1999, respectively, and 19,598,148 and
20,342,382 for the six months ended June 30, 2000 and 1999, respectively. For
the quarter ended June 30, 2000, 2,460,641 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.
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
4
<PAGE> 7
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
will have a material impact on its financial statements because the Company does
not currently hold any derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 is effective for the Company's financial statements no later than
the fourth quarter of fiscal year 2000 and requires the Company to recognize
revenue only when it is realized or realizable and earned. Management has not
completed evaluating the impact of the adoption of SAB 101 on the Company's
financial position, results of operations or cash flows.
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 six months ended June 30, 2000 and 1999, under
such agreements, the Company earned total fees of $6,201,305 and $12,702,000,
respectively. Millers American has recently requested that the Company enter
into various modifications to the Master Services Agreement, but to date the
Company has not consented to any changes.
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 $90,000 for each of the six month periods
ending June 30, 2000 and 1999.
There was a receivable due from Millers American of approximately
$10,352,904 and $3,977,000 as of June 30, 2000 and 1999, respectively. The
receivable of $10,352,904 due from Millers American represented 36% of the
Company's accounts receivable at June 30, 2000. Of such receivable, 73% was over
60 days past due and 68% was over 90 days past due. The Company believes Millers
American's ability to make payment of $7,110,291 of the $10,352,904 receivable
due from Millers American is contingent upon receipt by Millers American of
necessary regulatory approvals from the Arizona Department of Insurance that
remain pending in connection with the Phoenix Acquisition; however, any such
payment so received by the Company from Millers American would be
correspondingly reduced by the $3.5 million purchase price payable by the
Company to Millers American in connection with the Phoenix Acquisition. The
Company is unable to ascertain with any degree of certainty whether the Company
will experience continued difficulties associated with the collection of such
receivable from Millers American, and the inability to collect the receivable
would have a material adverse effect on the Company's results of operations,
financial condition and cash flows.
INSpire's headquarters is located in a building owned by a partnership
which is 50% owned by certain members of the Company's Board of Directors and
the Company's interim chief executive officer. For the three months period ended
June 30, 2000 and 1999, INSpire incurred $258,760 and $384,636, respectively, of
rental
5
<PAGE> 8
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
expense under this agreement. For the six month period ended June 30, 2000 and
1999, INSpire incurred $517,520 and $576,954, respectively, of rental expense
under this agreement.
3. COMMITMENTS AND CONTINGENCIES
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
of the amount due to the Company under a License Agreement, Implementation
Support Agreement and Accelerated Enhancement Plan Agreement. The requested
hearing locale was Fort Worth, Texas. 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.
On June 30, 2000, a lawsuit was filed in the Superior Court of the
State of California for the County of San Diego by Western Family Insurance
Company, Inc. ("Western Family") (Western Family Insurance Company, Inc. vs.
Arrowhead General Insurance Agency, Inc., et. al. (GIC749525)). Western Family
is seeking approximately $3.6 million in damages for alleged breach of contract,
negligence, breach of fiduciary duty and express indemnity. The allegations of
this lawsuit are based on an agency agreement by and between Arrowhead General
Insurance Agency and Western Family and a claims management agreement by and
between Arrow Claims Management and Western Family, each entered into in
September 1996. INSpire purchased the assets of Arrowhead General Insurance
Agency and the stock of Arrow Claims Management in December 1998. Although the
outcome of this matter cannot presently be determined, INSpire believes that it
would be entitled to indemnification for this matter from Arrowhead General
Insurance Agency based on a Guaranty Agreement, Outsourcing Agreement and Stock
Purchase Agreement between the parties and believes that the outcome of this
lawsuit will not have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations.
On July 18, 2000, a lawsuit was filed in the Superior Court of the
State of California for the County of San Diego by Juan M. Alvarado and Irene
Alvarado ("Alvarado") (Alvarado, et al. vs. Clarendon National Insurance
Company, et al. (GIC750651)). Alvarado is seeking $3 million in damages plus
punitive damages in this bad faith lawsuit involving an alleged denial of a
claim by Arrow Claims Management and the subsequent handling of the claim.
Although the outcome of this matter cannot presently be determined, INSpire
believes that it would be entitled to indemnification for this matter from
Arrowhead General Insurance Agency based on a Guaranty Agreement, Outsourcing
Agreement and Stock Purchase Agreement between the parties and believes that the
outcome of this lawsuit will not have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations.
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 the Company (Buena Venture Associates, L.P. v. INSpire Insurance
Solutions, Inc. (048-182682)). Buena Venture sought a declaration that an
amendment to the Company's Bylaws adopted by the Board of Directors was invalid
with respect to the 2000 annual meeting of shareholders and
6
<PAGE> 9
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
requested an injunction prohibiting its enforcement at the meeting. Buena
Venture also sought reimbursement for attorneys' fees incurred in connection
with the matter. On April 28, 2000, the Board of Directors rescinded and
repealed the contested bylaw. Buena Venture dismissed this lawsuit on May 10,
2000.
On June 23, 1999 a lawsuit was filed 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
(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 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. On August 7, 2000, the Company and Medical
Mutual entered into a settlement agreement, which will not 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 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
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.
7
<PAGE> 10
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
From time to time the Company is involved in other lawsuits that it
considers to be in the ordinary course of business. The Company is not aware of
any other legal proceedings that it expects would have a material adverse effect
on the Company's business, financial condition, cash flows or results of
operations.
8
<PAGE> 11
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solutions, Inc.
Fort Worth, Texas
We have reviewed the accompanying condensed consolidated balance sheet
of INSpire Insurance Solutions, Inc. and subsidiary (the "Company") as of June
30, 2000, and the related condensed consolidated statements of operations and
cash flows for the three-month and six-month periods ended June 30, 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 auditing standards generally accepted in the United States of
America, 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
July 19, 2000
9
<PAGE> 12
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services ................... 92.8% 75.2% 90.8% 70.8%
Software and software services ......... 6.2 23.0 8.3 27.4
Other .................................. 1.0 1.8 .9 1.8
------ ------ ------ ------
Total revenues ..................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
EXPENSES:
Cost of outsourcing services, net ...... 72.1 51.5 70.5 47.1
Cost of software and
software services .................. 4.4 15.2 5.8 15.5
Cost of other revenues ................. .4 0.9 .4 1.1
Selling, general and administrative .... 8.6 11.5 8.9 12.7
Research and development, net .......... 1.7 1.9 2.1 2.4
Severance expense ...................... 3.9 0.2 2.0 0.1
Depreciation and amortization .......... 6.3 6.8 6.0 6.9
------ ------ ------ ------
Total expenses ..................... 97.4 88.0 95.7 85.8
------ ------ ------ ------
OPERATING INCOME ............................ 2.6 12.0 4.3 14.2
OTHER INCOME ................................ .5 1.2 0.5 1.3
------ ------ ------ ------
INCOME BEFORE INCOME TAX .................... 3.1 13.2 4.8 15.5
INCOME TAX EXPENSE .......................... (1.2) (5.3) (2.5) (6.2)
------ ------ ------ ------
NET INCOME .................................. 1.9% 7.9% 2.9% 9.3%
====== ====== ====== ======
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Total revenues were $34.8 million for the three months ended
June 30, 2000 compared to $36.3 million for the three months ended June 30,
1999, a decrease of $1.5 million or 4%. Outsourcing services revenues were $32.3
million for the three months ended June 30, 2000 compared to $27.3 million for
the three months ended June 30, 1999, an increase of $5 million or 18%. The
growth in outsourcing services revenues is due primarily to the Company
performing outsourcing services under a policy and claims agreement with Island
Group entered into effective June 1, 1999. Based on ongoing current discussions
with Island Group, the Company and Island Group may endeavor to restructure the
nature of the existing outsourcing relationship under the Island Group policy
and claims agreement. If the relationship is restructured along the lines
presently being discussed, this would have a material adverse effect on future
outsourcing service revenues in subsequent quarters. Software and software
services revenues were $2.2 million for the three months ended June 30, 2000
compared to $8.3 million for the three months ended June 30, 1999, a decrease of
$6.1 million or 74%. 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 $26.8 million for the three months ended June 30, 2000
compared to $24.6 million for the three months ended June 30, 1999, an increase
of $2.2 million or 9%. Cost of outsourcing services was $25.1 million for the
three months ended June 30, 2000 compared to $18.7 million for the three months
ended June 30, 1999, an increase of $6.4 million or 34%. 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 June 30, 2000 from 69% for the three months ended June 30, 1999.
This increase is a result
10
<PAGE> 13
of increased staffing and equipment to support the growth of the outsourcing
division. Cost of software and software services was $1.5 million for the three
months ended June 30, 2000 compared to $5.5 million for the three months ended
June 30, 1999, a decrease of $4 million or 73%. 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
71% for the three months ended June 30, 2000 from 66% for the three months ended
June 30, 1999.
Selling, General and Administrative. Selling, general and
administrative expenses were $3 million for the three months ended June 30, 2000
compared to $4.2 million for the three months ended June 30, 1999, a decrease of
$1.2 million or 29%. This decline is primarily due to a reduction of staff
partially offset by a pre-tax charge of $1.3 million, which relates to the
separation payments and related expenses of former CEO, F. George Dunham III.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 9% for the three months ended June 30, 2000 from 11% for the three
months ended June 30, 1999. This decrease is due to the increased revenue base
over which to spread these costs.
Research and Development. Research and development expense was $585,000
for the three months ended June 30, 2000 compared to $680,000 for the three
months ended June 30, 1999, a decrease of $95,000 or 14%. This decline is
primarily due to a decreased utilization of contract and consultant personnel.
Research and development expense for the three months ended June 30, 2000 and
1999 is net of capitalized software development costs of approximately $254,000
and $440,000, respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $2.2 million for the three months ended June 30, 2000 compared to $2.5
million for the three months ended June 30, 1999, a decrease of approximately
$300,000 or 12%.
Other Income. Other income, consisting principally of investment
income, decreased to $181,000 for the three months ended June 30, 2000 from
$416,000 for the three months ended June 30, 1999. The decrease of $235,000, or
56%, is due to a decrease in cash equivalents and investments.
Net Income. Net income was $646,000, or $.03 per diluted share ($.03
per basic share), for the three months ended June 30, 2000 compared to net
income of $2.9 million, or $.14 per diluted share ($.15 per basic share), for
the three months ended June 30, 1999. These results include the pre-tax charge
of $1.3 million, which relates to the separation payments and related expenses
of former CEO, F. George Dunham III. Excluding these charges, net earnings for
the quarter ended June 30, 2000 would have been $1.4 million or $.07 per diluted
share ($.08 per basic share).
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenues. Total revenues were $71.4 million for the six months ended
June 30, 2000 compared to $67.6 million for the six months ended June 30, 1999,
an increase of $3.8 million or 6%. Outsourcing services revenues were $64.8
million for the six months ended June 30, 2000 compared to $47.9 million for the
six months ended June 30, 1999, an increase of $16.9 million or 35%. The growth
in outsourcing services revenues is due primarily to the Company performing
outsourcing services under a policy and claims agreement with Island Group
entered into effective June 1, 1999. Based on ongoing current discussions with
Island Group, the Company and Island Group may endeavor to restructure the
nature of the existing outsourcing relationship under the Island Group policy
and claims agreement. If the relationship is restructured along the lines
presently being discussed, this would have a material adverse effect on future
outsourcing service revenues in subsequent quarters. Software and software
services revenues were $5.9 million for the six months ended June 30, 2000
compared to $18.5 million for the six months ended June 30, 1999, a decrease of
$12.6 million or 68%. 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 $54.7 million for the six months ended June 30, 2000
compared to $43.1 million for the six months ended June 30, 1999, an increase
11
<PAGE> 14
of $11.6 million or 27%. Cost of outsourcing services was $50.3 million for the
six months ended June 30, 2000 compared to $31.9 million for the six months
ended June 30, 1999, an increase of $18.4 million or 58%. 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 78% for
the six months ended June 30, 2000 from 67% for the six months ended June 30,
1999. 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 $4.1 million for the six months ended June
30, 2000 compared to $10.5 million for the six months ended June 30, 1999, a
decrease of $6.4 million or 61%. 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 70% for the
six months ended June 30, 2000 from 57% for the six months ended June 30, 1999
as a result of the change in the software revenue mix described above.
Selling, General and Administrative. Selling, general and
administrative expenses were $6.4 million for the six months ended June 30, 2000
compared to $8.6 million for the six months ended June 30, 1999, a decrease of
$2.2 million or 26%. This decrease is primarily due to a reduction of staff
partially offset by a pre-tax charge of $1.3 million, which relates to the
separation payments and related expenses of former CEO, F. George Dunham III.
Selling, general and administrative expenses as a percentage of total revenues
decreased to 9% for the six months ended June 30, 2000 from 13% for the six
months ended June 30, 1999. This decrease is due to the increased revenue base
over which to spread these costs.
Research and Development. Research and development expense was $1.5
million for the six months ended June 30, 2000 compared to $1.7 million for the
six-months ended June 30, 1999, a decrease of $200,000 or 12%. This decline is
primarily due to a decreased utilization of contract and consultant personnel.
Research and development expense for the six months ended June 30, 2000 and 1999
is net of capitalized software development costs of approximately $381,000 and
$964,000, respectively.
Depreciation and Amortization. Depreciation and amortization expense
was $4.3 million for the six months ended June 30, 2000 compared to $4.6 million
for the six months ended June 30, 1999, a decrease of approximately $300,000 or
7%. This decrease is primarily due to the third quarter 1999 write-off of
intangibles.
Other Income. Other income, consisting principally of investment
income, decreased to $366,000 for the six months ended June 30, 2000 from
$860,000 for the six months ended June 30, 1999. The decrease of $494,000, or
57%, is due to a decrease in cash equivalents and investments.
Net Income. Net income was $2 million, or $.10 per diluted share ($.11
per basic share), for the six months ended June 30, 2000 compared to net income
of $6.3 million, or $.31 per diluted share ($.33 per basic share), for the six
months ended June 30, 1999. These results include a pre-tax charge of $1.3
million, which relates to the separation payments and related expenses of former
CEO, F. George Dunham III. Excluding these charges, net earnings for the quarter
ended June 30, 2000 would have been $1.4 million or $.07 per diluted share ($.08
per basic share).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $4.7 million as of June 30, 2000
compared to $899,000 as of December 31, 1999, an increase of $3.8 million.
Net cash provided by operating activities was $400,000 lower for the
six months ended June 30, 2000, compared to the same period of 1999. The
decrease is primarily attributable to lower net income partially offset by $4.5
million in tax refunds.
Net cash used in investing activities was $4.9 million for the six
months ended June 30, 2000. The $8.5 million of expenditures for deferred
contract costs includes a 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
12
<PAGE> 15
associated with long-term outsourcing service agreements. The deferred contract
costs are partially offset by the conversion of $5.0 million in long term
investments to cash and cash equivalents.
The deferred contract costs represent expenditures on three major
implementation projects, West Coast Processing Center, East Coast Processing
Center and Pacific Processing Center. As of June 30, 2000, total investments in
each of these centers is $7.4 million, $3.5 million and $4.8 million,
respectively, exclusive of goodwill and finder's fees. The implementation of the
Pacific Processing Center is currently on hold. The continuation of this project
is dependent upon the results of a business evaluation currently being performed
by the Company and the customer.
Net cash generated by financing activities was $121,000 for the first
six months of 2000 and is attributable to proceeds from exercises under stock
plans.
The Company believes that cash generated from operations and cash
available from short-term investments will satisfy the Company's anticipated
working capital requirements for at least one year. This belief is based on the
assumption that the Company will collect the Millers American receivable of
approximately $10.4 million as discussed above in Note 2-Related Party
Transactions. However, if the Company experiences continued difficulties in
collection of the Millers American receivable of $10.4 million, the inability to
collect the receivable would have a material adverse effect on the Company's
liquidity and it is unlikely that the Company's existing sources of liquidity
would be sufficient to satisfy the Company's anticipated short-term liquidity
requirements during the ensuing year. In such event, the Company would have to
significantly alter its existing business or seek additional sources of debt or
equity financing to continue its operations, and there can be no assurance that
the Company could successfully manage such a transition or obtain any such
additional financing.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 is effective for the Company's financial statements no later than
the fourth quarter of fiscal year 2000 and requires the Company to recognize
revenue only when it is realized or realizable and earned. Management has not
completed evaluating the impact of the adoption of SAB 101 on the Company's
financial position, results of operations or cash flows.
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.
13
<PAGE> 16
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 June 30, 2000.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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
of the amount due to the Company under a License Agreement, Implementation
Support Agreement and Accelerated Enhancement Plan Agreement. The requested
hearing locale was Fort Worth, Texas. 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.
On June 30, 2000, a lawsuit was filed in the Superior Court of the
State of California for the County of San Diego by Western Family Insurance
Company, Inc. ("Western Family") (Western Family Insurance Company, Inc. vs.
Arrowhead General Insurance Agency, Inc., et. al. (GIC749525)). Western Family
is seeking approximately $3.6 million in damages for alleged breach of contract,
negligence, breach of fiduciary duty and express indemnity. The allegations of
this lawsuit are based on an agency agreement by and between Arrowhead General
Insurance Agency and Western Family and a claims management agreement by and
between Arrow Claims Management and Western Family, each entered into in
September 1996. INSpire purchased the assets of Arrowhead General Insurance
Agency and the stock of Arrow Claims Management in December 1998. Although the
outcome of this matter cannot presently be determined, INSpire believes that it
would be entitled to indemnification for this matter from Arrowhead General
Insurance Agency based on a Guaranty Agreement, Outsourcing Agreement and Stock
Purchase Agreement between the parties and believes that the outcome of this
lawsuit will not have a material adverse effect on the Company's business,
financial condition, cash flows or results of operations.
On July 18, 2000, a lawsuit was filed in the Superior Court of the
State of California for the County of San Diego by Juan M. Alvarado and Irene
Alvarado ("Alvarado") (Alvarado, et al. vs. Clarendon National Insurance
Company, et al. (GIC750651)). Alvarado is seeking $3 million in damages plus
punitive damages in this bad faith lawsuit involving an alleged denial of a
claim by Arrow Claims Management and the subsequent handling of the claim.
Although the outcome of this matter cannot presently be determined, INSpire
believes that it would be entitled to indemnification for this matter from
Arrowhead General Insurance Agency based on a Guaranty Agreement, Outsourcing
Agreement and Stock Purchase Agreement between the parties and believes that the
outcome of this lawsuit will not have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations.
The Company previously disclosed a lawsuit brought against it by Buena
Venture Associates, L.P. ("Buena Venture") in its Annual Report on Form 10-K/A
filed with the Securities and Exchange Commission (the "SEC") on April 28, 2000.
On
15
<PAGE> 18
April 28, 2000, the Board of Directors rescinded and repealed the contested
bylaw. Buena Venture dismissed this lawsuit on May 10, 2000.
The Company previously disclosed a lawsuit brought against it by
Medical Mutual Insurance Company of North Carolina ("Medical Mutual") in its
Annual Report on Form 10-K/A filed with the SEC on April 28, 2000. On August 7,
2000, the Company and Medical Mutual entered into a settlement agreement, which
will not have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations.
The Company previously disclosed a lawsuit brought against it by Zurich
American Insurance Company ("Zurich") in its Annual Report on Form 10-K/A filed
with the SEC on April 28, 2000. 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 addition, the Company previously disclosed in its Annual Report on
Form 10-K/A filed with the SEC on April 28, 2000, litigation brought against it
by Sul America Cia Nacional de Seguros and shareholder lawsuits with Southland
Securities Corporation, Larry Altobell and Lawrence J. Miller, et. al., and
Stacy B. and Rhonda K. Loften, et. al. None of these cases have had any material
developments since the prior disclosure.
From time to time the Company is involved in other lawsuits that it
considers to be in the ordinary course of business. The Company is not aware of
any other legal proceedings that it expects would have a material adverse effect
on the Company's business, financial condition, cash flows or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of Shareholders of the Company was held on
June 23, 2000.
(b) Information regarding the Company's directors is contained in
the Company's Definitive Proxy Statement, which is attached
hereto as Exhibit 22.
(c) Harry E. Bartel was elected to serve as a director for a term
of three years according to the following vote:
For: 18,378,724 Against: 229,829 Abstain: N/A
John F. Pergande was elected to serve as a director for a term
of three years according to the following vote:
For: 18,388,999 Against: 219,562 Abstain: N/A
Greg B. Kent was elected to serve as a director for a term of
three years according to the following vote:
For: 18,394,880 Against: 213,673 Abstain: N/A
The selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending December 31,
2000 was ratified by the shareholders according to the
following vote:
For: 18,582,249 Against: 12,719 Abstain: 13,585
ITEM 5. OTHER INFORMATION.
On July 1, 2000, Mr. Gordon Gaar was named Executive Vice President and
Chief Technology Officer of INSpire, to replace Mr. John Aldredge who resigned
from his position on July 16, 2000. The Company will pay Mr. Aldredge through
the end of his employment agreement, which expires August 31, 2001. Mr. Gaar
most recently served as Director of Advanced Application Development of INSpire
and was responsible for research and development, including the development of
the E-commerce platform, E-INSpire. Prior to joining INSpire in August 1999, Mr.
Gaar served in various management positions with IBM Global Services from
January 1994 to August 1999.
16
<PAGE> 19
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, 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).
10.1 Employment Agreement dated April 1, 2000 by and between the
Company and Jeffrey W. Robinson (Incorporated by reference to
Exhibit 10 of the Company's Form 10-Q for the three months
ended March 31, 2000 filed on May 12, 2000).
10.2 Employment Agreement dated July 1, 2000 by and between the
Company and Gordon L. Gaar.
10.3 Separation Agreement dated May 7, 2000 by and between the
Company and F. George Dunham, III.
11.1 Statement regarding Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
22 Definitive Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (filed with the Commission on
May 12, 2000 and incorporated herein by reference).
27.1 Financial Data Schedule (EDGAR version only).
(b) The Company filed a Current Report on Form 8-K during the quarter
ended June 30, 2000. The Form 8-K filed on May 4, 2000 disclosed that on April
28, 2000, the Company's Board of Directors rescinded the Second Amendment to the
Company's Amended and Restated Bylaws.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Date: August 11, 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
18
<PAGE> 21
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, 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).
10.1 Employment Agreement dated April 1, 2000 by and between the
Company and Jeffrey W. Robinson (Incorporated by reference to
Exhibit 10 of the Company's Form 10-Q for the three months
ended March 31, 2000 filed on May 12, 2000).
10.2 Employment Agreement dated July 1, 2000 by and between the
Company and Gordon L. Gaar.
10.3 Separation Agreement dated May 7, 2000 by and between the
Company and F. George Dunham, III.
11.1 Statement regarding Computation of Per Share Earnings.
15.1 Letter Re: Unaudited Interim Financial Information.
22 Definitive Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (filed with the Commission on
May 12, 2000 and incorporated herein by reference).
27.1 Financial Data Schedule (EDGAR version only).
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