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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23005
INSPIRE INSURANCE SOLUTIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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TEXAS 75-2595937
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
300 BURNETT STREET 76102
FORT WORTH, TEXAS (Zip Code)
(Address of Principal Executive Offices)
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Registrant's telephone number, including area code: (817) 348-3900
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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None N/A
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
SERIES A JUNIOR PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 2000, the aggregate market value of voting stock held by
non-affiliates was $54,641,763.
As of March 1, 2000, there were 18,998,270 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 2000 Annual Meeting is incorporated into Part
III of this Form 10-K by reference.
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INDEX TO ANNUAL REPORT ON FORM 10-K
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FORWARD-LOOKING STATEMENTS............................................... 1
PART I................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 14
ITEM 3. LEGAL PROCEEDINGS........................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 15
PART II.................................................................. 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 27
PART III................................................................. 28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 28
ITEM 11. EXECUTIVE COMPENSATION...................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 28
PART IV.................................................................. 29
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 29
SIGNATURES............................................................... 30
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FORWARD-LOOKING STATEMENTS
This Form 10-K (including the annual report to shareholders (the "Annual
Report") accompanying this Form 10-K) contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended. When used in this Report (including the Annual Report
accompanying this Form 10-K), words such as "anticipate," "believe," "estimate,"
"expect," "intend" and similar expressions, as they relate to INSpire Insurance
Solutions, Inc. ("INSpire" or the "Company") or its management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to INSpire's management. 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, INSpire'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, general
economic conditions and other factors described in "Item 1 -- Business" and
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations." Such statements reflect the current views of INSpire's
management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to the operations, results of
operations, growth strategy and liquidity of INSpire. All subsequent written and
oral forward-looking statements attributable to INSpire or persons acting on its
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
INSpire is a leading provider of policy and claims administration
outsourcing solutions to the property and casualty ("P&C") insurance industry.
INSpire's outsourcing services, which generally are provided on a percentage of
premiums written or claims paid basis, include application of underwriting and
rating criteria defined by the insurer, policy issuance, policyholder mailings,
customer service, billing and collections, claims adjusting and processing, and
information technology ("IT") services. INSpire also provides software and
software services to the P&C insurance industry. These products include policy
and claims administration systems, as well as systems that increase the
productivity of insurers by automating certain functions, such as workflow
management, underwriting rules and guidelines, document production and rating
algorithms. The Company recently decided to discontinue efforts directed toward
increasing licensed software packages in order to focus on its outsourcing
business. The Company will continue to utilize these systems, which run on a
variety of platforms including IBM AS/400, IBM RS/6000, Windows 3.1, Windows 95
and Windows NT, to provide its outsourcing solutions and will continue to
support existing software customers as needed.
OVERVIEW OF THE PROPERTY AND CASUALTY INSURANCE INDUSTRY
The P&C insurance industry provides financial protection for individuals,
businesses and others against losses of property or losses by third parties for
which the insured is liable. P&C insurers underwrite policies that cover various
types of risk, which can generally be divided into (i) personal lines of
insurance covering individuals and (ii) commercial lines of insurance covering
businesses. Personal lines generally include automobile insurance (physical
damage and liability insurance) and homeowners' insurance. Commercial lines
generally include workers' compensation, business, directors and officers
liability, theft and medical malpractice insurance as well as insurance covering
other commercial risks.
The P&C insurance industry is highly competitive. Insurance companies
compete primarily on the basis of price, consumer satisfaction and claims paying
ability. According to A.M. Best Company ("A.M. Best"), as of December 31, 1998,
there were approximately 3,000 P&C insurance companies in the United States
generating approximately $280 billion in annual premium revenues, of which
approximately 59% were written by the top 20 insurers. Based on statistics
released by A.M. Best, premium revenues for the P&C insurance industry over the
past several years have been increasing approximately 3% annually.
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According to a study published by A.M. Best, the 10 largest insured
catastrophes have occurred since 1989, including Hurricane Andrew in 1992, the
Northridge, California earthquake in 1994 and Hurricane Hugo in 1989. INSpire
believes that these catastrophes have caused insurers to decrease their exposure
in areas prone to natural disasters. Much of the excess demand created by
insurers leaving markets is being met by reinsurers and new market entrants that
have not made significant infrastructure investments and do not desire to do so.
INSpire believes that its ability to deliver services priced as a percentage of
premiums written or claims paid should be attractive to these new entrants
because it will enable them to enter new markets without incurring substantial
fixed infrastructure costs.
NEED FOR INFORMATION MANAGEMENT AND WORK PROCESS AUTOMATION
Technology is a critical element in an insurance company's ability to
compete. Insurance companies use technology and information systems as
management tools to compete more effectively by improving efficiency, managing
costs and increasing customer satisfaction. A highly technical industry has
evolved to meet the unique needs of P&C insurers to manage and process large
amounts of policyholder data. Insurers are shifting their focus away from
finding more efficient means of storing information toward more efficient ways
of processing information.
INSpire provides both policy and claims administration outsourcing services
to enable customers to operate as "virtual insurance companies" allowing these
customers to eliminate infrastructures necessary for such purposes. The Company
believes there are significant opportunities to market its services for the
following reasons:
- Economies of Technology. The investment in information systems necessary
for P&C insurers to remain competitive is often cost prohibitive,
particularly for smaller companies, because of the specialized technical
knowledge required to develop, install, operate and maintain
sophisticated systems. INSpire's services allow insurance companies to
take advantage of economies of technology by leveraging INSpire's
investment in software systems and productivity tools.
- Trend Toward Direct Sales. Many insurers of personal lines are able to
reduce costs and premiums by selling policies directly to policyholders
rather than through independent agents. This trend has created
opportunities for INSpire to market its services to both insurers that
sell directly to policyholders and those that continue to sell through
independent agents. Outsourcing of the policy and claims administration
functions allows insurers selling directly to customers to efficiently
provide services that were traditionally performed by agents. Outsourcing
also enables insurers that sell through agents to reduce administration
costs to compete more effectively with insurers that sell directly to
policyholders.
- Year 2000 Issue. The Year 2000 issue manifests itself in the policy and
claims administration area. The Year 2000 issue arose because, until
recently, most software systems were not programmed to correctly
recognize dates beyond December 31, 1999. INSpire believes that many
insurance companies deferred decisions to invest in technology or
consider outsourcing solutions due to concerns over the Year 2000 issue
and may accelerate decisions in 2000 to outsource their policy and claims
needs rather than incurring the cost of updating their old systems.
- Customer Service. As policyholders demand faster, broader and better
service, P&C insurers that provide superior customer service enjoy a
competitive advantage. Policyholders frequently cite dissatisfaction with
policy or claims handling processes as a cause of policy nonrenewal. By
providing good customer service, insurance companies can retain existing
policyholders, which is more cost effective than attracting new
policyholders away from a competitor. Outsourcing can allow insurance
companies to improve customer service while lowering fixed costs.
TREND TOWARD OUTSOURCING
Since the late 1980s, many P&C insurers have sought to use third parties to
provide certain functions or services that the insurers historically performed
in-house. These companies seek to focus on their core competencies, reduce costs
and avoid the significant investment associated with developing, installing,
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operating and maintaining information management and automation systems. INSpire
believes that insurance companies increasingly will conclude that policy and
claims administration and regulatory compliance are too complicated, costly and
administratively burdensome to be performed in-house. Other factors contributing
to the outsourcing trend include the following:
- Need for Flexibility. Many P&C insurers lack the ability to respond
rapidly to changing market conditions. Outsourcing enables insurance
companies to enter new markets quickly and cost-effectively to take
advantage of favorable market conditions without incurring substantial
fixed infrastructure costs.
- Need to Diversify Risk. Many P&C insurers are overexposed to risks from
natural catastrophes in certain markets. Because many states restrict the
ability of insurers to cancel policies or exit particular lines of
business, these insurers often cease writing new policies and outsource
the administration of their remaining policies and claims ("stranded
policies"). Alternatively, insurers may reduce their risk by reinsuring
policies with other insurers that do not have a similar geographic
concentration or by allowing other insurers to renew the stranded
policies. As insurers leave markets, they create demand for outsourcing
the policy and claims administration of the stranded policies.
- Desire to Maximize Statutory Surplus. As most state regulations require
insurance companies to maintain certain ratios of surplus to premiums,
insurance companies that maximize surplus are able to write greater total
premiums. Insurance companies cannot capitalize, for statutory-basis
financial statement reporting purposes, most of the hardware and software
they purchase or develop for policy and claims administration. As a
result, an insurance company with a large investment in its policy and
claims administration infrastructure generally will experience a lower
statutory surplus than it would if it were to outsource its policy and
claims administration.
- Virtual Insurance Companies. Regulatory changes have permitted new
companies that are not traditional insurance companies to enter the P&C
insurance industry. Banks, credit unions and other financial services
companies are beginning to underwrite P&C insurance. These new entrants
often do not have policy and claims administration infrastructure or
expertise in place and are natural candidates for outsourcing. INSpire
facilitates the creation of these "virtual insurance companies" by
providing policy and claims administration and related back office
administration to new entrants that desire to focus their resources on
core marketing, underwriting and financial aspects of the P&C insurance
business.
THE INSPIRE STRATEGY
INSpire's objective is to become the leading provider of policy and claims
administration outsourcing solutions to the P&C insurance industry. INSpire's
strategy to achieve this objective involves the following elements:
- Focused Sales Efforts. INSpire's outsourcing marketing group concentrates
on marketing INSpire's claims administration, policy administration and
IT services to established P&C insurance companies as well as new
entrants in the P&C industry, such as banks, credit unions and other
financial services companies.
- Generate Recurring Revenues. INSpire's services generate revenues based
on events that occur in the normal course of a customer's business.
Policy administration services generate recurring revenues because
INSpire earns a percentage of each premium written by the insurance
company. Claims administration services generate recurring revenues
because INSpire earns a percentage of either each claim paid or each
premium earned by the insurance company.
- Displacement Sales. INSpire intends to continue seeking opportunities to
acquire existing policy and claims administration facilities and to enter
into long term contracts to provide outsourcing services to the seller of
such facilities or affiliates thereof. By converting these facilities
onto its systems, INSpire can more efficiently administer policies and
claims for such customer, thereby increasing its capacity for new
business growth. INSpire utilized this strategy in 1999 when it purchased
the back office assets
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of The Robert Plan Corporation ("The Robert Plan") and Island Insurance
Company, Ltd. ("Island Group").
- Enhance Service Capabilities. Maintaining technological leadership is
critical to remaining competitive in INSpire's industry. INSpire plans to
continuously enhance its systems and to develop new outsourcing services
to respond to constantly changing customer requirements. In addition to
developing and enhancing proprietary technologies, INSpire may enter into
strategic alliances with other firms to utilize systems that complement
INSpire's business. INSpire pursued this strategy in December 1999 when
it entered into a strategic alliance with RTW, Inc. and Tropics Software
Technologies, Inc. to provide an integrated outsourcing solution,
including policy administration and case and claims management, for the
workers' compensation market.
- Pursue Strategic Acquisitions. INSpire intends to consider potential
acquisition candidates that offer opportunities to increase market share
and expand INSpire's line of outsourcing services.
OUTSOURCING SERVICES
INSpire offers a range of services that are capable of providing a complete
turnkey outsourcing solution to all of a P&C insurer's policy and claims
administration needs. INSpire's outsourcing services include application of
underwriting and rating criteria defined by the insurer, policy issuance,
policyholder mailings, customer service, billing and collections, claims
adjusting and processing, and IT services. The customer determines the extent to
which it uses INSpire's services. A team of INSpire and customer personnel works
closely together to ensure the seamless integration of the customer's outsourced
and in-house activities. INSpire's outsourcing services include the following:
- Policy Administration. INSpire offers a suite of services to customers
that are considering outsourcing their policy administration. The
customer retains all of the financial risk and works with INSpire to
provide underwriting and rating guidelines. The customer typically pays
INSpire a percentage of premiums written for policy administration
services, which include the following:
- Direct, agency and internet marketing support
- Policy issuance and acceptance
- Application of underwriting and rating criteria defined by the insurer
- Customer service phone center for policyholders and agents
- Accounting, billing and collections
- Commission calculation and disbursement
- Statutory reporting and regulatory compliance
- Comprehensive management and service bureau reporting
- Claims Administration. Claims administration describes the management of
appraising, qualifying and settling P&C insurance claims. INSpire
maintains a staff of claims adjusters and examiners and also uses
independent claims adjusters. INSpire reviews insurance coverage,
performs a claim analysis and prepares a check for payment of the claim,
if warranted. The customer typically pays INSpire on either a percentage
of premiums earned or claims paid basis.
- IT Outsourcing. INSpire offers services to assist customers in operating,
maintaining and enhancing information systems. INSpire migrates the
customer's current system platform to INSpire's processing platform,
including the installation of all necessary hardware components,
depending on the customer's needs. After such migration, the customer
administers its policies and claims internally by utilizing INSpire's
systems and other software productivity tools. The customer typically
pays INSpire on a percentage of premiums written basis, subject to a
minimum fee.
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INFORMATION PROCESSING SYSTEMS AND PRODUCTIVITY TOOLS
INSpire utilizes proprietary information processing systems and software
productivity tools that automate policy and claims administration. The
information processing systems are designed to run on a variety of platforms,
including IBM AS/400, IBM RS/6000, Windows 3.1, Windows 95 and Windows NT.
INSpire's software productivity tools add functionality and flexibility to base
systems.
- Information Processing Systems
- Policy and Claims Administration System. The Policy and Claims
Administration System ("PCA") is an integrated system that offers policy
and claims administration, billing and collections, financial
administration, and management and statistical bureau reporting. PCA
runs on the IBM AS/400 and IBM RS/6000 platforms.
- Windows into Property and Casualty System. Functionally comparable to
PCA, Windows into Property and Casualty System ("WPC") is an integrated
system that performs functions from submission tracking to policy and
claims administration to management and bureau reporting. WPC runs on a
PC platform in a client/server environment and on most major PC network
operating systems, including Novell Netware and Microsoft Windows NT.
- Software Productivity Tools
- EmPower. EmPower is an automated workflow management system designed for
the personal lines policy administration needs of P&C insurers. EmPower
interfaces with PCA to provide imaging and workflow management
technology. EmPower automatically processes the flow of information in a
paperless environment, substantially reducing manual activities through
the integration of voice, data, image and text into one system. EmPower
operates in a client/server environment using Microsoft Windows.
- Underwriting Expert System. The Underwriting Expert System ("UES")
automates underwriting rules and guidelines to mirror a client's
underwriting process. UES enhances consistency of review and streamlines
customer service and operations departments by reducing the need for
manual underwriting review. UES uses a relational database to store and
report statistics concerning underwriting efficiency and results of the
review process. UES operates in a client/server environment and
interfaces with PCA and WPC.
- Policy Set Production. Policy Set Production ("PSP") allows for laser
quality printing of policy declarations, booklets, forms, endorsements,
billing notices and letters. PSP manages the logistics of producing the
appropriate documents necessary for each policyholder. PSP operates in a
client/server environment and interfaces with PCA and WPC.
- Visual Rater. Visual Rater is a productivity tool using object-oriented
programming technology that allows nontechnical users to create, build,
test and maintain the rating components of insurance processing. With
Visual Rater's "point and click" rating construction and maintenance
interface, reusable rating components become simple icons that are used
as building blocks to create rating algorithms.
- Transfluent(R). Transfluent(R) is a data translation software product
that enables insurance companies to map data from external agencies to
internal systems. INSpire uses it to automatically translate data from
the dissimilar systems or diverse platforms of customer insurance
companies into a format readable by INSpire's information processing
systems.
SOFTWARE SERVICES
Until recently, INSpire also licensed its information processing systems
and productivity tools to P&C insurers. In December 1999, the Company decided to
discontinue efforts directed toward increasing licensed software packages in
order to focus on its outsourcing business. INSpire will continue to provide
customization and maintenance services to existing software customers on a
time-and-materials basis.
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PRODUCT DEVELOPMENT
The market for INSpire's services is characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. INSpire's future success depends in part on its
ability to enhance its existing services and develop new services to meet
changing customer requirements. INSpire's development efforts focus on
enhancement of information processing systems, expansion of operating system
compatibility and development of new services for emerging insurance markets. In
addition, INSpire has acquired new services and products through the acquisition
of complementary businesses and may continue to do so in the future. Currently,
major areas of development emphasis are (i) the expansion of EmPower to include
claims administration and commercial lines policy administration, (ii)
interfacing EmPower with WPC client/server based policy and claims
administration systems, (iii) adding extensive internet functionality and (iv)
the expansion of information processing systems to address additional P&C
insurance markets.
INSpire has made substantial investments in the enhancement and development
of its outsourcing services and proprietary software utilized to provide those
services. The Company incurred research and development costs of approximately
$6.8 million in 1999, $5.0 million in 1998 and $2.0 million in 1997. INSpire
currently has approximately 26 employees that perform product development and
quality assurance. The Company cannot assure that it will be successful in
developing and marketing new or enhanced services.
CUSTOMER SUPPORT AND OPERATIONS
INSpire provides both policy and claims administration outsourcing and
technology services at its service centers in Fort Worth, Texas; San Diego,
California; Edison, New Jersey; and Honolulu, Hawaii. The Company maintains a
customer service phone center for policyholders and agents five days a week.
INSpire employs approximately 689 people in these service centers. INSpire also
utilizes approximately 440 additional people in these service centers under the
terms of various employee lease agreements. These leased personnel are expected
to become INSpire employees at various times during 2000.
INSpire provides claims administration outsourcing services at its service
centers in Sacramento, California; Portland, Oregon; Phoenix, Arizona; Troy,
Michigan and Tampa, Florida. INSpire employs approximately 157 people in these
service centers.
INSpire provides software services and outsourcing operations technical
support at its facilities in Sheboygan, Wisconsin; Columbia, South Carolina; and
Roswell, Georgia. INSpire employs approximately 268 people who provide software
services and outsourcing operations technical support.
SALES AND MARKETING
INSpire has built a seven person sales team dedicated solely to outsourcing
sales. This sales team conducts strategic marketing to a target base of
customers identified on the basis of detailed customer criteria developed by
INSpire's marketing personnel. INSpire believes that this targeted marketing
approach should increase its customer success rate and generate additional
outsourcing services revenues. INSpire conducts marketing programs that include
direct mail, trade shows, public relations, advertising and ongoing customer
communication programs. INSpire also markets its outsourcing services through
insurance brokers, industry consultants, managing general agents and reinsurers.
When an opportunity is identified and a request for proposal is received,
INSpire prepares and submits a comprehensive proposal directly to the
prospective customer. The prospective customer is then invited to Fort Worth to
tour INSpire's service center and discuss the customer's requirements in detail.
In early 1999, the Company developed an on-site customer training room at its
service center in Fort Worth that enables INSpire personnel to work with and
train both prospective and current customers on INSpire's services and products.
If INSpire is selected to be the outsourcing service provider, a multi-year
contract is negotiated and executed. While the outsourcing sales cycle varies
from customer to customer, it typically ranges from three to twelve months.
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COMPETITION
The markets for policy and claims administration and IT services are highly
competitive. The policy administration and IT services outsourcing markets are
dominated by a few large companies, including Policy Management Systems
Corporation ("PMSC"). INSpire competes for these outsourcing customers on the
basis of customer service, performance, product features and price. The claims
administration outsourcing market is highly fragmented, with competition from a
large number of claims administration companies of varying size as well as
independent contractors. Competition in the claims administration market is
principally price driven. Two of the larger competitors in this market are
Lindsey Morden Claim Services Inc. and Crawford & Company, Inc.
INSpire believes, however, that its most significant competition for
outsourcing services comes from policy and claims administration and information
systems development performed in-house by insurance companies. Insurers that
fulfill some or all of their policy and claims administration needs in-house
typically have made a significant investment in their information processing
systems and may be less likely to utilize INSpire's services. In addition,
insurance company personnel have a vested interest in maintaining these
responsibilities in-house.
Many of INSpire's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
INSpire, including name recognition with current and potential customers. As a
result, these competitors may devote more resources to the development,
promotion and sale of their services or products than INSpire and respond more
quickly to emerging technologies and changes in customer requirements. In
addition, current and potential competitors may establish cooperative
relationships among themselves or with third parties to increase the ability of
their services and products to address customer needs. Accordingly, new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. INSpire cannot assure that it will be able to compete
successfully against current and future competitors, or that competitive
pressure faced by the Company will not have a material adverse effect on its
business, financial condition, cash flows or results of operations.
CUSTOMERS
INSpire currently provides outsourcing services to insurance companies,
reinsurers and managing general agents, including The Millers Insurance Company
("Millers Insurance") (formerly The Millers Mutual Fire Insurance Company), an
indirect wholly-owned subsidiary of Millers American Group, Inc. ("Millers
American") that owned approximately 24% of the outstanding common stock, par
value $0.01 per share (the "Common Stock"), of INSpire as of December 31, 1999,
and other subsidiaries of Millers American (collectively, the "Millers Group")
under the terms of various agreements. Effective December 1, 1998, INSpire
entered into a ten-year agreement to provide policy administration services, and
INSpire Claims Management, Inc., a wholly-owned subsidiary of INSpire ("ICM"),
entered into a ten-year agreement to provide claims administration services, to
Arrowhead General Insurance Agency, Inc. ("Arrowhead"), a managing general
agent. INSpire also performs outsourcing services under a ten-year policy and
claims administration agreement with The Robert Plan entered into effective
April 1, 1999 and a ten-year policy and claims administration agreement with
Island Group entered into effective June 1, 1999. INSpire believes it can
continue to successfully obtain new customers with existing books of business
under long term contracts by purchasing such customers' processing facilities
and employees. INSpire also provides outsourcing services to Clarendon National
Insurance Company ("Clarendon") through contracts with various subsidiaries of
E.W. Blanch Holdings Company, Inc. ("Blanch"), and approximately 12 other
customers.
INSpire currently has approximately 50 software and software services
customers. The Company intends to continue to provide services to these
customers as needed but has discontinued efforts to license systems to new
customers.
The Millers Group and Clarendon accounted for approximately 20% and 7%,
respectively, of INSpire's total revenues in 1999 and approximately 30% and 13%,
respectively, of INSpire's total revenues in 1998. Arrowhead accounted for
approximately 22% and 3% of INSpire's total revenues in 1999 and 1998,
respectively. The Robert Plan and Island Group accounted for approximately 14%
and 6%, respectively, of
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INSpire's total revenues in 1999, despite the fact that the Company provided
outsourcing services to The Robert Plan and Island Group for less than a full
year in 1999. Any loss of or material decrease in the business from any of these
customers could have a material adverse effect on INSpire's business, financial
condition, cash flows and results of operations.
EMPLOYEES
As of January 1, 2000, INSpire had 1,215 full-time employees, of whom seven
were employed in sales and marketing functions, 68 in finance and
administration, 26 in research and development, 1,058 in outsourcing operations
and 56 in software services functions. INSpire also utilizes approximately 440
additional people in outsourcing operations under the terms of various employee
lease agreements. These leased personnel are expected to become INSpire
employees at various times during 2000. The Company's employees are not
represented by any collective bargaining organization and none of its employees
are covered by a collective bargaining agreement. INSpire believes that it has a
good relationship with its employees.
INTELLECTUAL PROPERTY
INSpire relies on contract rights and copyright and other intellectual
property laws to protect its products, including software source code, as trade
secrets and confidential proprietary information. INSpire's agreements with its
current and prospective customers prohibit disclosure of INSpire's trade secrets
and proprietary information to third parties without the consent of the Company
and generally restrict the use of INSpire's products to the customers'
operations. INSpire also informs its employees of the proprietary nature of its
products and typically obtains from them agreements not to disclose trade
secrets and proprietary information. Notwithstanding these restrictions, INSpire
cannot assure that its competitors could not obtain unauthorized access to
INSpire's software source code and other trade secrets and proprietary
information. INSpire owns and uses common law trademarks, copyrights and service
marks in connection with its business, most of which are not registered.
INSpire is not engaged in any material disputes with other parties with
respect to the ownership or use of INSpire's proprietary technology. The Company
cannot assure however, that third parties will not assert technology
infringement claims against INSpire in the future. The litigation of such claims
may involve significant expense and management time. In addition, if any such
claim were successful, INSpire could be required to pay monetary damages,
refrain from distributing or using the alleged infringing product, or obtain a
license from the party asserting the claim, which could be unavailable on
commercially reasonable terms. The absence of federal or state registrations for
its intellectual property could be detrimental to INSpire in any infringement
litigation or other disputes regarding intellectual property.
RECENT DEVELOPMENTS
Acquisition of Certain Assets of Freedom General Agency, Inc., Material
Damage Adjustment Corporation of California, Material Damage Adjustment
Corporation of Florida, The Robert Plan of California Corporation, The Robert
Plan of Florida Corporation, The Robert Plan of New Jersey Corporation, Jersey
Central Insurance Agency, Inc., and The Robert Plan of New York
Corporation -- INSpire entered into an asset purchase agreement (the "Robert
Plan Acquisition") effective April 1, 1999, with The Robert Plan, pursuant to
which INSpire agreed to acquire from The Robert Plan certain assets and
employees used in the conduct of its policy and claims administration. Upon the
consummation of the Robert Plan Acquisition, INSpire entered into a policy and
claims administration agreement with The Robert Plan to provide certain policy
and claims administration services for the so-called "voluntary" lines of
automobile, homeowners and commercial automobile insurance for a period of ten
years beginning April 1, 1999.
Pending Acquisition of Certain Assets of Island Insurance Company,
Ltd. -- INSpire entered into an asset and employee transfer agreement (the
"Island Acquisition") expected to close December 31, 2000, with Island Group,
pursuant to which INSpire agreed to acquire from Island Group certain assets and
employees used in the conduct of its policy and claims administration. In
conjunction with this transaction, INSpire also entered into a transitional
services and contingent transfer agreement with Island Group effective June 1,
1999
8
<PAGE> 11
through December 31, 2000, and a policy and claims administration agreement to
provide certain policy and claims administration services to Island Group for a
period of ten years beginning June 1, 1999.
Repositioning of INSpire's Core Business -- In December 1999, INSpire
decided to discontinue efforts directed toward increasing licensed software
packages in order to focus on its outsourcing business. Based on expected
business needs resulting from this repositioning, the Company implemented
management changes and reduced its workforce by approximately 100 employees
effective December 31, 1999.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
INSpire's business, financial condition, cash flows and results of
operations may be impacted by a number of factors, including, but not limited
to, the following, any of which could cause actual results to vary materially
from current and historical results or INSpire's anticipated future results.
Limited operating history and net losses. INSpire commenced operations in
1995 and has a limited operating history in the P&C insurance outsourcing
business. The Company cannot assure that it will be successful in implementing
its long-term operating strategy. The Company's operations generated net losses
for three of the past five years. Net losses were approximately $19.7 million
for the year ended December 31, 1999, $515,000 for the year ended December 31,
1996, and $1.3 million for the period from inception through December 31, 1995.
INSpire cannot assure that it will be able to maintain revenue growth or that
the Company will not sustain net losses in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Pending Legal Proceedings. From time to time INSpire receives various
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 lawsuits filed in June 1999 by
Medical Mutual Insurance Company of North Carolina and November 1999 by Zurich
American Insurance Company, both former customers of INSpire. In August 1999,
Sul America Cia Nacional de Seguros, a former customer of the Company, demanded
payment under a performance bond due to INSpire's alleged contract default, for
which INSpire is potentially liable pursuant to an indemnification agreement
with the surety. Since late 1999, multiple shareholder class action lawsuits
have been filed against the Company, certain officers and directors of the
Company, and Millers Insurance, alleging 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. An adverse
determination in any of these or any future legal proceedings could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations. See "Legal Proceedings."
Fluctuations in quarterly operating results; volatility of trading
price. INSpire has experienced in the past and will experience in the future
quarterly variations in net revenues and net income. Thus, operating results for
any particular quarter are not necessarily indicative of results for any future
period. Factors that have affected quarterly operating results include: (i) the
introduction of new or enhanced services and products by INSpire or its
competitors, (ii) customer acceptance or rejection of new services and products,
(iii) product development expenses, (iv) the timing of new contract signings,
(v) the timing of large scale catastrophes, (vi) the volume of usage of
INSpire's services, (vii) acquisitions, (viii) competitive conditions in its
industry, (ix) general economic conditions and (x) the level of selling and
administrative expenses. Many of these factors are beyond INSpire's control.
The sales cycles for INSpire's services are generally between three and
twelve months and subject to a number of factors beyond the Company's control.
Customer decisions to enter into outsourcing services agreements may be
significantly affected by their decisions to replace current systems. In
addition, demand for INSpire's claims administration services fluctuates greatly
depending on the concentration of large scale catastrophes, such as hurricanes.
For these and other reasons, the revenues of the Company are difficult to
forecast, and INSpire believes that period-to-period comparisons of results of
operations are not necessarily meaningful or indicative of the results that
INSpire may achieve for any subsequent quarter or fiscal year. Therefore, past
operating results should not be considered a reliable indicator of future
performance.
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<PAGE> 12
The trading price of the Common Stock has fluctuated widely in response to
variations in INSpire's quarterly operating results, changes in earnings
estimates by securities analysts, changes in the Company's business and changes
in general market and economic conditions. In addition, in recent years the
stock market has experienced extreme price and volume fluctuations. These
fluctuations have significantly affected the trading prices of the securities of
many emerging growth companies without regard to their specific operating
performance. Such market fluctuations could have a material adverse effect on
the trading price of the Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Dependence on major customers. INSpire derives a substantial portion of its
revenues from outsourcing services provided to a few large customers, including
Millers Group, Arrowhead, The Robert Plan, Island Group and Clarendon. In the
aggregate these customers accounted for approximately 70% of the Company's total
revenues in 1999 and 45% of the Company's total revenues in 1998. The Millers
Group and Clarendon accounted for approximately 20% and 7%, respectively, of
INSpire's total revenues in 1999 and approximately 30% and 13%, respectively, of
INSpire's total revenues in 1998. Arrowhead accounted for approximately 22% and
3% of INSpire's total revenues in 1999 and 1998, respectively. The Robert Plan
and Island Group accounted for approximately 14% and 6%, respectively, of
INSpire's total revenues in 1999, despite the fact that the Company provided
outsourcing services to The Robert Plan and Island Group for less than a full
year in 1999. Any loss of or material decrease in the business from any of these
customers could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations. See
"Business -- Customers."
Ability to grow and expand services. INSpire has grown rapidly since its
formation. The Company's growth strategy depends on its ability to increase its
share of the policy and claims administration market through the enhancement of
existing services, development of new services and the marketing of its
services. There can be no assurance that INSpire will have the financial,
managerial, administrative, marketing or other resources necessary to achieve
these objectives. The success of INSpire depends in large part on its ability to
attract and retain highly skilled managerial, sales and marketing personnel. In
addition, INSpire believes it may need to hire additional technical personnel to
enhance and develop its services. Competition for such personnel is intense, and
should INSpire be unable to hire the necessary personnel, the development and
sale of new or enhanced services would likely be delayed or prevented. INSpire
cannot assure that it will be able to attract, integrate and retain skilled
personnel, manage its infrastructure or overcome other difficulties associated
with growth. If INSpire were to encounter difficulties in implementing the
expansion or development of its services, or in attracting, integrating and
retaining its personnel, such difficulties could have a material adverse effect
on the Company's business, financial condition, cash flows and results of
operations. See "Business -- The INSpire Strategy."
Technological change and new product development risks. The market for
INSpire's services is characterized by rapidly changing technology, evolving
industry standards and frequent introductions of new products and enhancements.
INSpire's future success depends in part on its ability to enhance its existing
services and develop new services to meet changing customer requirements. The
introduction of competing services or products incorporating new technologies
could render some or all of INSpire's services obsolete or unmarketable. As a
result, INSpire has expended substantial resources for the enhancement of its
services and for product development and intends to continue to do so. The
development of new or enhanced services or products results in expenditures and
capital costs that may not be recovered if the service or product is
unsuccessful. Development projects can be lengthy and subject to changing market
requirements and unforeseen costs and delays. The failure of INSpire to develop
and introduce new or enhanced services or products in a timely and
cost-effective manner could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations. See
"Business -- Product Development."
Competition. The markets for policy and claims administration and IT
services are highly competitive. Many of INSpire's competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than INSpire, including name recognition with current and
potential customers. As a result, these competitors may devote more resources to
the development, promotion and sale of their services or products than INSpire
and respond more quickly to emerging technologies and changes in
10
<PAGE> 13
customer requirements. In addition, current and potential competitors may
establish cooperative relationships among themselves or with third parties to
increase the ability of their services and products to address customer needs.
Accordingly, new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. INSpire cannot assure that it will be
able to compete successfully against current and future competitors. Any
competitive pressure faced by the Company could have a material adverse effect
on its business, financial condition, cash flows and results of operations. See
"Business -- Competition."
Control by existing shareholder; conflicts of interest. Millers Insurance
owns approximately 24% of the outstanding shares of Common Stock of the Company.
As INSpire's largest shareholder, Millers Insurance is likely to be able to
maintain effective control of the Company, including the ability to elect a
majority of the Board of Directors. The ownership by Millers Insurance of shares
of Common Stock may discourage or prevent unsolicited mergers, acquisitions,
tender offers, proxy contests or changes of incumbent management, even when
shareholders other than Millers Insurance consider such a transaction or event
to be in their best interest. Accordingly, holders of Common Stock may be
deprived of an opportunity to sell their shares at a premium over the trading
price of the shares.
Until recently, F. George Dunham, III, INSpire's Chief Executive Officer
and Chairman of the Board, also served as Chairman of the Board and Chief
Executive Officer of each of Millers Insurance and Millers Casualty. In January
2000, Mr. Dunham resigned from those positions with Millers Insurance and
Millers Casualty. However, INSpire will continue to have a variety of
contractual relationships with Millers Insurance and Millers Casualty. See the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders (the "2000
Proxy Statement") under the caption "Certain Transactions."
Dependence on key personnel. INSpire's future success will depend largely
on the efforts and abilities of its executive officers, including F. George
Dunham, III, INSpire's Chief Executive Officer, Jeffrey W. Robinson, INSpire's
President and Chief Operating Officer, and certain key technical, managerial and
sales employees. The loss of Messrs. Dunham's or Robinson's services, or the
services of any of INSpire's other key employees, could have a material adverse
effect on the Company's business, financial condition, cash flows and results of
operations. INSpire has employment agreements with Messrs. Dunham and Robinson
that terminate in 2000. INSpire cannot assure that it will be successful in
retaining its key personnel. See the 2000 Proxy Statement under the caption
"Management."
Risks of software defects. The sale and support of software by INSpire
entails the risks of product liability and warranty claims, which could be
substantial. Software products may contain errors or defects, especially when
first introduced or when new versions or enhancements are released. Any such
defects in INSpire's software products could result in product liability or
warranty claims, which could have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations. INSpire's
license agreements with its customers typically contain provisions designed to
limit INSpire's exposure to product liability or warranty claims. These
limitation of liability provisions, however, may be ineffective because of
existing or future federal, state or local laws or unfavorable judicial
decisions. From time to time INSpire receives various 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, and
several such claims are currently pending. See "Legal Proceedings."
Acquisition risks. INSpire intends to consider acquisition candidates that
offer opportunities to increase market share and expand INSpire's line of
outsourcing services. There can be no assurance, however, that INSpire will be
able to consummate or successfully integrate future acquisitions. Acquisitions
involve significant risks, including: (i) the diversion of management's time and
attention to the negotiation of the acquisition and to the assimilation of the
businesses acquired, (ii) the need to modify financial and other systems and add
management resources, (iii) the potential liabilities of the acquired business,
(iv) unforeseen difficulties in the acquired operations, (v) the possible
adverse short-term effects on INSpire's results of operations and (vi) the
financial reporting effects of the amortization of goodwill and other intangible
assets. Furthermore, INSpire cannot assure that any business acquired will
achieve acceptable levels of revenue and profitability or otherwise perform as
expected. Currently, INSpire has no arrangements or understandings with
11
<PAGE> 14
any party with respect to any future acquisition. The Company, however,
continues to monitor potential acquisition opportunities. See "Business -- The
INSpire Strategy."
Reliance on information processing systems. INSpire's outsourcing services
depend on its ability to store, retrieve, process and manage significant
databases, and expand and upgrade periodically its information processing
capabilities. INSpire's principal computer equipment and software systems are
maintained at INSpire's facilities in Fort Worth, Texas; San Diego, California;
Edison, New Jersey; and Honolulu, Hawaii. Interruption or loss of INSpire's
information processing capabilities through loss of stored data, breakdown or
malfunctioning of computer equipment and software systems, telecommunications
failure or damage caused by fire, tornadoes, lightning, electrical power outage
or other disruption could have a material adverse effect on INSpire's business,
financial condition, cash flows and results of operations. Although INSpire
maintains business interruption insurance with an aggregate limit of $12.5
million per occurrence, and has entered into an agreement with International
Business Machines, Inc. to provide disaster recovery services, if needed,
INSpire cannot assure that such insurance or services will continue to be
available at reasonable prices, cover all such losses or compensate the Company
for the possible loss of customers occurring during any period that INSpire is
unable to provide services. See "Business -- Customer Support and Operations."
Dependence on proprietary rights and risks of infringement. INSpire relies
on contract rights and copyright and other intellectual property laws to protect
its products, including software source code, as trade secrets and confidential
proprietary information. The Company's agreements with its current and
prospective customers prohibit disclosure of INSpire's trade secrets and
proprietary information to third parties without the consent of the Company and
generally restrict the use of INSpire's products to the customers' operations.
INSpire also informs its employees of the proprietary nature of its products and
typically obtains from them agreements not to disclose trade secrets and
proprietary information. Notwithstanding these restrictions, INSpire cannot
assure that its competitors could not obtain unauthorized access to INSpire's
software source code and other trade secrets and proprietary information.
INSpire owns and uses common law trademarks, copyrights and service marks in
connection with its business, most of which are not registered.
INSpire is not engaged in any material disputes with other parties with
respect to the ownership or use of INSpire's proprietary technology. The Company
cannot assure however, that third parties will not assert technology
infringement claims against the Company in the future. The litigation of such
claims may involve significant expense and management time. In addition, if any
such claim were successful, INSpire could be required to pay monetary damages,
refrain from distributing or using the alleged infringing product, or obtain a
license from the party asserting the claim, which could be unavailable on
commercially reasonable terms. The absence of federal or state registrations for
its intellectual property could be detrimental to INSpire in any infringement
litigation or other disputes regarding intellectual property. See
"Business -- Intellectual Property."
Government regulation. The P&C insurance industry is subject to extensive
regulation by state governments. Certain aspects of INSpire's business are
affected by such regulations, requiring the Company to periodically update its
software to reflect changes in regulations. In addition, changes in regulations
that adversely affect INSpire's existing and potential customers could have a
material adverse effect on the Company's business, financial condition, cash
flows and results of operations. Although INSpire's services and products are
not directly subject to insurance regulations in the states where INSpire
currently provides them, the Company's outsourcing services may be subject to
insurance regulations in states where INSpire may do business in the future.
Such regulations could require INSpire to obtain a license as a managing general
agent or third party administrator. INSpire cannot give any assurance with
respect to the extent to which it may become subject to regulation in the
future, the ability of the Company to comply with any such regulation or the
cost of compliance. See "Business."
Shares eligible for future sale. Sales of a substantial number of shares of
Common Stock in the open market could adversely affect the trading price of the
Common Stock. Millers Insurance currently holds 4,606,875 shares, representing
approximately 24% of the outstanding shares of Common Stock. A decision by
Millers Insurance to sell shares of Common Stock could adversely affect the
trading price of the Common Stock. INSpire has an aggregate of 26,485,186 shares
of Common Stock authorized but unissued and not
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<PAGE> 15
reserved for specific purposes. All of such shares may be issued without any
action or approval by INSpire's shareholders. Any shares issued would dilute the
percentage ownership of the Company held by the current investors. INSpire has
18,998,270 shares of Common Stock outstanding, all of which are freely
transferable. In addition, (i) 3,488,585 shares of Common Stock are reserved for
issuance under the Stock Option Plan, 3,138,280 of which will be issuable upon
exercise of outstanding options, including currently exercisable options to
purchase 1,668,248 shares, and (ii) 75,000 shares of Common Stock are reserved
for issuance under the Director Plan, 27,500 of which will be issuable upon
exercise of options that are currently outstanding. A total of 404,466 shares
are issuable upon exercise of options granted in conjunction with the Arrowhead
Acquisition and the Island Acquisition. An additional 548,493 shares are
reserved for issuance to employees of the Company upon their purchase pursuant
to the Stock Purchase Plan. INSpire has registered on Form S-8 under the
Securities Act the offering and sale of Common Stock issuable under the Stock
Option Plan, the Director Plan and the Stock Purchase Plan. See the 2000 Proxy
Statement under the captions "Management -- Stock Option Plan," "-- Director
Stock Option Plan," and "-- Employee Stock Purchase Plan."
Anti-takeover considerations. Certain provisions of INSpire's Restated
Articles of Incorporation (the "Restated Articles"), INSpire's Bylaws (the
"Bylaws") and the Texas Business Corporation Act ("TBCA") may have the effect of
discouraging unsolicited proposals for acquisition of the Company. The Restated
Articles and the Bylaws divide the Board of Directors into three classes serving
staggered three-year terms. Pursuant to the Restated Articles, shares of
preferred stock may be issued by INSpire in the future without shareholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
any such preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions, could have the effect of discouraging a third
party's acquisition of a majority of the Common Stock. INSpire has no present
plans to issue any shares of preferred stock. In addition, INSpire has adopted a
shareholder rights plan that could further discourage attempts to acquire
control of the Company. Finally, the TBCA restricts certain business
combinations with any "affiliated shareholder," as defined therein and provides
that directors serving on staggered boards of directors may be removed only for
cause unless the articles of incorporation otherwise provide. INSpire's Restated
Articles do not otherwise so provide.
Limitations on personal liability of directors. The Restated Articles and
Bylaws contain provisions that reduce the potential personal liability of
directors for certain monetary damages and provide for indemnity of directors
and other persons. INSpire also maintains officers and directors liability
insurance and has entered into indemnification agreements with certain of its
officers and directors. The indemnification agreements provide for reimbursement
for all direct and indirect costs of any type or nature whatsoever (including
attorneys' fees and related disbursements) reasonably incurred in connection
with either the investigation, defense or appeal of a covered legal proceeding,
including amounts paid in settlement by or on behalf of an indemnitee
thereunder. Certain directors and officers of the Company, as well as INSpire
and Millers Insurance, are named defendants in several currently pending
shareholder class action lawsuits. See "Legal Proceedings."
No dividends. INSpire has never paid cash dividends on its stock and has no
plans to do so in the foreseeable future. INSpire intends to retain earnings, if
any, to fund growth. See "Market for Registrant's Common Equity and Related
Stockholder Matters -- Dividend Policy."
AVAILABLE INFORMATION
INSpire files annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any document INSpire files at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. INSpire's
SEC filings are also available to the public at INSpire's web site at
http://www.nspr.com or at the SEC's web site at http://www.sec.gov.
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<PAGE> 16
ITEM 2. PROPERTIES.
The following table sets forth certain information with respect to the
principal facilities used in INSpire's operations:
<TABLE>
<CAPTION>
CURRENT APPROXIMATE
MONTHLY SQUARE LEASE
LOCATION FUNCTION RENT FOOTAGE EXPIRATION DATE
- -------- -------- ------- ----------- ---------------
<S> <C> <C> <C> <C>
Fort Worth, Texas........ Corporate headquarters
and outsourcing services $86,300 129,400 November 2008
San Diego, California.... Outsourcing services 92,300 93,000 March 2007
Edison, New Jersey....... Outsourcing services 43,500 30,500 Not applicable(1)
Honolulu, Hawaii......... Outsourcing services 65,000 34,400 Not applicable(2)
Columbia, South Product development,
Carolina............... software services and
technical support 40,200 29,400 August 2002
Sheboygan, Wisconsin..... Product development,
software services and
technical support 20,700 28,100 February 2007
</TABLE>
- ---------------
(1) In conjunction with the Robert Plan Acquisition, The Robert Plan agreed to
allocate approximately 30,500 square feet in its Edison office to INSpire
through April 1, 2001, at which time INSpire intends to relocate to another
facility. INSpire reimburses The Robert Plan rental expense for this
allocated office space, as well as for space allocated to INSpire in The
Robert Plan's satellite facilities, on a monthly basis.
(2) In conjunction with the Island Acquisition, Island Group agreed to allocate
approximately 34,400 square feet in its Honolulu office to INSpire through
December 31, 2000. INSpire reimburses Island Group rental expense for this
allocated space on a monthly basis. Effective January 1, 2001, INSpire
intends to sublease approximately 25,800 square feet from Island Group in
the Honolulu office for monthly rental expense of approximately $48,800.
The aggregate monthly rental expense for the properties listed above is
$348,000. INSpire also leases satellite facilities with an aggregate monthly
lease rate of $102,000.
INSpire believes that its existing facilities are adequate to meet its
requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
From time to time INSpire 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 (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. INSpire intends to vigorously defend this
lawsuit, and has filed a counterclaim seeking recovery of approximately $1.1
million invoiced to such customer and attorney fees. Management does not believe
the outcome of this lawsuit will have a material adverse effect on the Company's
business, financial condition, cash flows or results of operations.
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<PAGE> 17
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. INSpire intends to vigorously defend
this lawsuit, and has filed a counterclaim seeking recovery of approximately
$2.0 million invoiced to such customer and attorney fees. Management does not
believe the outcome of this lawsuit will have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
In December 1997, INSpire 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, INSpire 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. INSpire 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. vs. 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. vs. Inspire Insurance Solutions, Inc. et.
al.(7-99CV-248-R) filed on December 16, 1999, and Stacy B. and Rhonda K. Lofton
et. al. vs. Inspire Insurance Solutions, Inc. et. al. (7-00CV-001-R) filed on
January 3, 2000. INSpire intends to defend these suits vigorously in all
aspects. However, the ultimate outcome of this matter cannot presently be
determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On July 21, 1998, the Board of Directors approved a three-for-two stock
split. The stock split was effected in the form of a stock dividend (the "Stock
Dividend"), which was paid on August 17, 1998 to shareholders of record as of
the close of business on July 31, 1998. Amounts and prices related to shares of
Common Stock in this Part II have been adjusted to give effect to the Stock
Dividend.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the trading
symbol NSPR. The following table sets forth the high and low closing sales
prices as reported by the Nasdaq National Market for the Common Stock for the
periods indicated.
<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter............................................. $22.83 $13.17
Second Quarter............................................ $23.83 $18.92
Third Quarter............................................. $27.75 $18.38
Fourth Quarter............................................ $35.25 $15.50
</TABLE>
<TABLE>
<CAPTION>
1999 HIGH LOW
- ---- ------ ------
<S> <C> <C>
First Quarter............................................. $19.00 $13.13
Second Quarter............................................ $21.88 $11.69
Third Quarter............................................. $13.50 $ 6.88
Fourth Quarter............................................ $ 7.25 $ 3.66
</TABLE>
As of February 24, 2000, there were approximately 44 record holders and
3,750 beneficial holders of the Common Stock.
DIVIDEND POLICY
INSpire has never declared or paid any cash dividends on the Common Stock.
INSpire intends to retain any future earnings to fund growth and does not
anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1999, INSpire issued and sold the following unregistered
securities:
(1) On June 1, 1999, in connection with the Island Acquisition,
INSpire issued to Island Group an option to purchase 105,000 shares of
Common Stock. The exercise price of this option is $11.69 per share of
Common Stock. This option vests according to the terms of an option
agreement dated June 17, 1999, between INSpire and Island Group. This
issuance was exempt from registration under Section 4(2) of the Securities
Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of INSpire presented below as of December 31,
1999, 1998, 1997, 1996 and 1995, and for the years ended December 31, 1999,
1998, 1997 and 1996 and the period April 28, 1995 through December 31, 1995 have
been derived from the audited financial statements of INSpire. The selected
financial data should be read in conjunction with "Item 7 -- Management's
Discussion and Analysis of
16
<PAGE> 19
Financial Condition and Results of Operations" and INSpire's Financial
Statements. The results of operations presented below are not necessarily
indicative of the results of operations that may be achieved in the future.
<TABLE>
<CAPTION>
PERIOD
APRIL 28, 1998
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------------------- DECEMBER 31,
1999(1) 1998(2) 1997(3) 1996 1995(4)
----------- ----------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Outsourcing services....... $ 111,700 $ 50,901 $ 32,458 $ 13,653 $ 3,907
Software and software
services................ 26,940 33,988 21,101 -- --
Other...................... 1,918 2,290 3,010 -- --
----------- ----------- ----------- ----------- -----------
Total revenues..... 140,558 87,179 56,569 13,653 3,907
----------- ----------- ----------- ----------- -----------
Expenses:
Cost of outsourcing
services................ 81,458 26,303 20,798 10,543 4,885
Cost of software and
software services....... 19,184 19,120 10,681 -- --
Cost of other revenues..... 1,154 1,606 2,413 -- --
Selling, general and
administrative.......... 18,308 14,581 8,643 -- --
Research and development,
net..................... 5,195 2,983 1,190 -- --
Depreciation and
amortization............ 9,186 6,210 4,001 787 33
Purchased research and
development............. -- 500 3,000 -- --
Deferred compensation...... -- -- 3,949 -- --
Provision for severance
costs................... 1,721 -- -- -- --
Provision for bad debts.... 10,991 275 71 -- --
Litigation................. 1,229 -- -- -- --
Intangible assets
impairment.............. 16,757 -- -- -- --
Management fees to
shareholder............. -- -- 1,290 3,100 600
Gain on sale of
subsidiary.............. -- -- (1,634) -- --
Other...................... 804 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total expenses..... 165,987 71,578 54,402 14,430 5,518
----------- ----------- ----------- ----------- -----------
Operating income (loss)...... (25,429) 15,601 2,167 (777) (1,611)
Other income (expense)....... 1,396 2,675 350 (2) --
----------- ----------- ----------- ----------- -----------
Income (loss) before income
tax........................ (24,033) 18,276 2,517 (779) (1,611)
Income tax benefit
(expense).................. 4,343 (6,706) (801) 264 349
----------- ----------- ----------- ----------- -----------
Net income (loss)............ $ (19,690) $ 11,570 $ 1,716 $ (515) $ (1,262)
=========== =========== =========== =========== ===========
Net income (loss) per share
(basic).................... $ (1.04) $ 0.65 $ 0.14 $ (0.05) $ (0.12)
=========== =========== =========== =========== ===========
Net income (loss) per share
(diluted).................. $ (1.04) $ 0.58 $ 0.13 $ (0.05) $ (0.12)
=========== =========== =========== =========== ===========
Weighted average shares
(basic).................... 18,930,371 17,854,390 12,206,055 10,500,000 10,500,000
Weighted average shares
(diluted).................. 18,930,371 19,838,583 13,173,746 10,500,000 10,500,000
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments..... $ 17,674 $ 48,094 $28,039 $ 363 $ 22
Working capital............................ 36,407 68,387 30,375 (2,550) (1,072)
Total assets............................... 132,028 132,808 67,897 5,232 2,817
Current portion of long-term debt.......... -- 383 610 2,500 --
Due to shareholder......................... -- -- -- 996 1,569
Long-term debt, excluding current
portion.................................. -- -- 373 -- --
Shareholders' equity....................... 104,471 120,345 48,766 606 1,121
</TABLE>
- ---------------
(1) Includes $31.5 million in charges primarily relating to the Company's
assessment of the recoverability of assets associated with its software
business, including $11.0 million to increase the allowance for bad debts,
$1.2 million of litigation expenses, $16.8 million for the impairment of
intangible assets, $1.7 million for severance costs and approximately
$800,000 of other charges. Excluding the effect of such charges, and the tax
effects thereof, operating expenses, operating income and net income would
have been $134.5 million, $6.1 million and $4.0 million, respectively, and
net income per share (basic) would have been $0.21 and net income per share
(diluted) would have been $0.20.
(2) Includes $500,000 of purchased research and development expenses relating to
the acquisition of Paragon Interface, Inc. on April 20, 1998 (the "Paragon
Acquisition"). Excluding the effect of this charge, operating expenses,
operating income and net income would have been $71.1 million, $16.1 million
and $12.1 million, respectively, and net income per share (basic) would have
been $0.68 and net income per share (diluted) would have been $0.61.
(3) Includes $3.0 million of purchased research and development expenses
relating to the acquisition of Strategic Data Systems, Inc. on March 17,
1997 (the "SDS Acquisition"), $3.9 million of deferred compensation expense
relating to the grant of stock options to executive officers and a $1.6
million gain on the sale of Applied Quoting Systems, Inc. ("AQS"), a
wholly-owned subsidiary of INSpire that was sold by INSpire on September 15,
1997. Excluding the effect of such items, operating expenses, operating
income and net income would have been $49.1 million, $7.5 million and $5.1
million, respectively, and net income per share (basic) would have been
$0.42 and net income per share (diluted) would have been $0.39.
(4) INSpire was incorporated April 28, 1995 and commenced operations July 1,
1995.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
INSpire's revenues historically are derived principally from (i)
outsourcing services and (ii) software and software services. Revenues from
outsourcing services are derived from policy administration services, claims
administration services and IT services. Revenues from software and software
services are derived from contracts that grant customers a license to use
INSpire's software products and contracts that provide for installation,
customization, enhancement, conversion and maintenance services. Other revenues
principally represent hardware sold in connection with software installations.
In December 1999, INSpire decided to discontinue efforts toward licensing
software systems and to focus its efforts on providing outsourcing services. The
Company will continue, however, to satisfy all contractual obligations to
existing software installations as well as provide technical support to existing
software customers as needed on a time-and-materials basis.
Revenues from outsourcing services are recognized as services are rendered.
INSpire is typically paid a percentage of premiums written for policy
administration services, a percentage of premiums earned or claims paid for
claims administration services and a percentage of premiums written subject to a
minimum fee for IT services. Outsourcing services contracts generally are for
terms of two to ten years. Due to the ongoing nature of these outsourcing
services and the length of the terms of the service contracts, outsourcing
services generate recurring revenues. Initial installations of software systems
generally include a one-time license fee and a
18
<PAGE> 21
contract for the installation and customization of the system to meet the
customer's specifications, which INSpire bills at an hourly rate. Amounts
charged for the initial license and the installation and customization of
systems are recognized as revenue during the installation period in proportion
to the hours expended for installation compared to the total hours projected for
installation. In other instances, revenues are recognized based on performance
milestones specified in the contract. INSpire recognizes the annual fee charged
for maintenance of the customer's system over the maintenance contract period.
Revenues from computer hardware and equipment sales, included in other revenues,
are recognized when INSpire receives notification that the equipment has been
shipped by the manufacturer and title has passed to the customer. Changes in
estimates of percentage of completion or losses, if any, associated with
outsourcing or software services are recognized in the period in which they are
determined. Unearned revenues consist of billings to customers in advance of
revenues recognized on such services. Unbilled receivables consist of revenues
recognized in advance of billings due to timing differences related to billing
schedules specified in contracts.
INSpire incurs research and development costs that relate primarily to the
development of new services and products and major enhancements to existing
services and products. Research and development costs are comprised primarily of
salaries. INSpire expenses or capitalizes, as appropriate, these research and
development costs in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed." All research and development costs incurred
prior to the time management believes a project has reached "technological
feasibility" are expensed. Software production costs incurred subsequent to
reaching technological feasibility are capitalized, if material, and reported at
the lower of unamortized cost or net realizable value. Capitalized costs are
amortized over the expected service life of the related software, generally
three to seven years, using the straight-line method. The cost and related
accumulated amortization of projects are written off as they become fully
amortized.
INSpire also capitalizes certain incremental fees and direct costs
associated with long-term outsourcing service agreements, including contract
acquisition and system implementation costs. These deferred costs are amortized
over the related contract period of up to ten years using the straight-line
method.
The Company periodically assesses the recoverability of capitalized
software production costs and deferred contract costs by determining whether the
carrying amount of these long lived assets can be recovered through undiscounted
future operating cash flows and, if warranted, an impairment is recognized. 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.
19
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth, with respect to INSpire and for the periods
indicated, the percentage of total revenues represented by certain revenue,
expense and income items:
<TABLE>
<CAPTION>
PERIOD
APRIL 28,
1995
YEAR ENDED DECEMBER 31, THROUGH
-------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
----- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services......................... 79.5% 58.4% 57.4% 100.0% 100.0%
Software and software services............... 19.2 39.0 37.3 0.0 0.0
Other........................................ 1.3 2.6 5.3 0.0 0.0
----- ----- ----- ----- -----
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Cost of outsourcing services................. 58.0 30.2 36.8 77.2 125.0
Cost of software and software services....... 13.7 21.9 18.9 0.0 0.0
Cost of other revenues....................... 0.8 1.8 4.3 0.0 0.0
Selling, general and administrative.......... 13.0 16.8 15.3 0.0 0.0
Research and development, net................ 3.7 3.4 2.1 0.0 0.0
Depreciation and amortization................ 6.5 7.1 7.0 5.8 0.8
Purchased research and development........... 0.0 0.6 5.3 0.0 0.0
Deferred compensation........................ 0.0 0.0 7.0 0.0 0.0
Provision for severance costs................ 1.2 0.0 0.0 0.0 0.0
Provision for bad debts...................... 7.8 0.3 0.1 0.0 0.0
Litigation................................... 0.9 0.0 0.0 0.0 0.0
Intangible assets impairment................. 11.9 0.0 0.0 0.0 0.0
Management fees to shareholder............... 0.0 0.0 2.3 22.7 15.4
Gain on sale of subsidiary................... 0.0 0.0 (2.9) 0.0 0.0
Other........................................ 0.6 0.0 0.0 0.0 0.0
----- ----- ----- ----- -----
Total expenses....................... 118.1 82.1 96.2 105.7 141.2
----- ----- ----- ----- -----
Operating income (loss)........................ (17.9) 17.9 3.8 (5.7) (41.2)
Other income (expense)......................... 1.0 3.1 0.6 0.0 0.0
----- ----- ----- ----- -----
Income (loss) before income tax................ (17.1) 21.0 4.4 (5.7) (41.2)
Income tax benefit (expense)................... 3.1 (7.7) (1.4) 1.9 8.9
----- ----- ----- ----- -----
Net income (loss).............................. (14.0)% 13.3% 3.0% (3.8)% (32.3)%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Total revenues were $140.6 million for the year ended December
31, 1999 compared to $87.2 million for the year ended December 31, 1998, an
increase of $53.4 million or 61%. Outsourcing services revenues were $111.7
million for the year ended December 31, 1999 compared to $50.9 million for the
year ended December 31, 1998, an increase of $60.8 million or 119%. The growth
in outsourcing services revenues is due primarily to: (i) the Company performing
outsourcing services under a policy administration agreement with Arrowhead
entered into effective December 1, 1998 and the Company's subsidiary performing
outsourcing services under a claims administration agreement with Arrowhead
entered into effective December 1, 1998, (ii) the Company performing outsourcing
services under a policy and claims administration agreement with The Robert Plan
entered into effective April 1, 1999, (iii) the Company performing outsourcing
services under a policy and claims administration agreement with Island Group
entered into effective June 1, 1999, and (iv) the Company performing outsourcing
services under five additional outsourcing contracts entered into during 1999.
Software and software services revenues were $26.9 million for the year ended
December 31, 1999 compared to $34.0 million for the year ended December 31,
1998, a
20
<PAGE> 23
decrease of $7.1 million or 21%. The decrease in software and software services
revenues is primarily attributable to fewer in-process installations of WPC and
other software productivity tools, resulting in lower license fees and software
services revenues.
Cost of revenues. Cost of revenues, which is comprised mainly of personnel
costs, was $101.8 million for the year ended December 31, 1999 compared to $47.0
million for the year ended December 31, 1998, an increase of $54.8 million or
117%. Cost of outsourcing services was $81.5 million for the year ended December
31, 1999 compared to $26.3 million for the year ended December 31, 1998, an
increase of $55.2 million or 210%. This increase is primarily attributable to
costs associated with the performance of outsourcing services under the
contracts described above. Cost of outsourcing services as a percentage of
outsourcing services revenues increased to 73% for the year ended December 31,
1999 from 52% for the year ended December 31, 1998. This increase is a result of
additional staffing and equipment to support the growth of the outsourcing
division, and lower operating margins during the initial phases of the new
outsourcing contracts described above. Cost of software and software services
remained relatively constant at $19.2 million for the year ended December 31,
1999 compared to $19.1 million for the year ended December 31, 1998. Cost of
software and software services as a percentage of software and software services
revenues increased to 71% for the year ended December 31, 1999 from 56% for the
year ended December 31, 1998, primarily as a result of the costs associated with
providing consulting services, which comprised a larger proportion of total
software revenues during the year ended December 31, 1999 compared to the year
ended December 31, 1998, as well as a decrease in the productivity of software
personnel.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $18.3 million for the year ended December 31, 1999
compared to $14.6 million for the year ended December 31, 1998, an increase of
$3.7 million or 25%. This increase is primarily due to additional executive
management, staffing, office space and computer equipment and software required
to expand the infrastructure to support the Company's growth. Selling, general
and administrative expenses as a percentage of total revenues decreased to 13%
for the year ended December 31, 1999 from 17% for the year ended December 31,
1998. This decrease is due to the increased revenue base over which to spread
these costs.
Research and development. Research and development expense was $5.2 million
for the year ended December 31, 1999 compared to $3.0 million for the year ended
December 31, 1998, an increase of $2.2 million or 73%. This increase is
primarily due to increased efforts to expand the functionality of current
software products and the development of new software products to be utilized in
INSpire's outsourcing operations. This expense is comprised primarily of
personnel, equipment and occupancy costs related to software development.
Research and development expense for the year ended December 31, 1999 and 1998
is net of capitalized software production costs of approximately $1.6 million
and $2.0 million, respectively.
Depreciation and amortization. Depreciation and amortization expense was
$9.2 million for the year ended December 31, 1999 compared to $6.2 million for
the year ended December 31, 1998, an increase of approximately $3.0 million or
48%. This increase is primarily attributable to amortization of goodwill and
depreciation on fixed assets recorded in connection with the Arrowhead
Acquisition, the Robert Plan Acquisition and the Island Acquisition, and the
acquisition of additional property and equipment to expand the infrastructure to
support the Company's growth.
Unusual operating expenses. Unusual operating expenses totaled $31.5
million for the year ended December 31, 1999 compared to $500,000 for the year
ended December 31, 1998.
During 1999, the Company recognized $31.5 million in charges primarily
relating to the Company's assessment of the recoverability of assets associated
with its software business. These charges consist of: (i) $11.0 million to
increase the allowance for bad debts, (ii) $1.2 million of litigation expenses,
(iii) $16.8 million for the impairment of intangible assets, (iv) $1.7 million
for severance costs and (v) approximately $800,000 in other charges.
In the normal course of business, INSpire provides software, software
services and outsourcing services in advance of receiving payment for such
products and services. Customers are invoiced in accordance with the terms of
their contracts with the Company. During the quarter ended September 30, 1999,
management took
21
<PAGE> 24
action relative to specific software installation contracts that had significant
past due balances and ceased further work, pending resolution of the balances
due under the terms of the contracts. The Company recognized $11.0 million of
bad debts expense during 1999. INSpire is vigorously pursuing collection of
these accounts.
Litigation expenses of $1.2 million include expenses associated with the
collection of accounts receivable, as well as penalties or settlements to be
paid in connection with various pending matters.
The Company recognized an impairment charge of $16.8 million for certain
intangible assets, including a substantial portion of the goodwill and software
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.
Severance costs of $1.7 million incurred during 1999 represent expenses
associated with staff reductions and executive resignations, primarily as a
result of the Company's decision in December 1999 to discontinue efforts toward
licensing new software systems.
Other operating expenses of approximately $800,000 represent the accrual of
future payment obligations under operating leases for fixed assets no longer in
use by the Company.
In April 1998, $500,000 was assigned to in-process research and development
in the purchase price allocation of the acquisition of the Paragon Acquisition.
This amount was charged to operations.
Other income. Other income, consisting principally of investment income,
decreased to $1.4 million for the year ended December 31, 1999 from $2.7 million
for the year ended December 31, 1998. The decrease of $1.3 million, or 48%, is
due to a decrease in cash equivalents and investments primarily as a result of
cash used in the Arrowhead Acquisition, the Robert Plan Acquisition and the
Island Acquisition.
Net income (loss). Net loss was $19.7 million, or $1.04 per diluted share
($1.04 per basic share), for the year ended December 31, 1999 compared to net
income of $11.6 million, or $.58 per diluted share ($.65 per basic share), for
the year ended December 31, 1998. Excluding the impact on net income resulting
from the $31.5 million nonrecurring operating expenses discussed above, and the
tax effects thereof, net income for the year ended December 31, 1999 would have
been $4.0 million or $.20 per diluted share ($.21 per basic share). Excluding
the impact on net income resulting from the $500,000 write-off of purchased
research and development associated with the Paragon Acquisition, net income for
the year ended December 31, 1998 would have been $12.1 million, or $.61 per
diluted share ($.68 per basic share).
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. INSpire's total revenues were $87.2 million for the year ended
December 31, 1998 compared to $56.6 million for the year ended December 31,
1997, an increase of $30.6 million or 54%. Outsourcing revenues were $50.9
million for 1998 compared to $32.5 million for 1997, an increase of $18.4
million or 57%. This increase is attributable primarily to revenues from 13 new
outsourcing contracts entered into during 1998, including the agreement with
Arrowhead effective as of December 1, 1998. Software and software services
revenues were $34.0 million for 1998 compared to $21.1 million for 1997, an
increase of $12.9 million or 61%. This increase is attributable primarily to
increased license fees from software systems and increased installations,
customization and other software services performed for customers.
Cost of revenues. Total cost of revenues was $47.0 million for the year
ended December 31, 1998 compared to $33.9 million for the year ended December
31, 1997, an increase of $13.1 million or 39%. Cost of outsourcing services was
$26.3 million for the year ended December 31, 1998 compared to $20.8 million for
22
<PAGE> 25
the year ended December 31, 1997, an increase of $5.5 million or 26%. This
increase primarily was a result of the costs associated with the performance of
services under the outsourcing contracts described above. Cost of outsourcing
services as a percentage of outsourcing services revenues decreased to 52% in
1998 from 64% in 1997. This decrease was primarily a result of economies of
scale associated with spreading certain fixed costs over a larger revenue base.
Cost of software and software services was $19.1 million for the year ended
December 31, 1998 compared to $10.7 million for the year ended December 31,
1997, an increase of $8.4 million or 79%. This increase primarily was a result
of increased personnel costs of the software division to support increased
implementation and consulting services. Cost of software and software services
as a percentage of software and software services revenues increased to 56% in
1998 from 51% in 1997. This increase resulted primarily from increased personnel
costs and a lower utilization rate for such personnel during 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses, including management fees paid to shareholder, were
$14.6 million for the year ended December 31, 1998 compared to $9.9 million for
the year ended December 31, 1997, an increase of $4.7 million or 47%. This
increase was primarily due to additional executive management, staffing, office
space and computer equipment and software required to expand the infrastructure
to support INSpire's growth.
Research and development. Research and development expense was $3.0
million, net of capitalized software production costs of $2.0 million, for the
year ended December 31, 1998, compared to $1.2 million, net of capitalized
software production costs of $800,000, for the year ended December 31, 1997, an
increase of 150%. This expense was comprised primarily of personnel, equipment
and occupancy costs related to software development. The increase in this
expense was due to the further development of such existing products as WPC and
EmPower into new platforms and integration within product lines.
Depreciation and amortization. Depreciation and amortization expense was
$6.2 million for the year ended December 31, 1998 compared to $4.0 million for
the year ended December 31, 1997, an increase of $2.2 million or 55%. This
increase was primarily attributable to (i) amortization of goodwill and
capitalized software recorded in connection with the Paragon Acquisition, (ii)
amortization of goodwill recorded in connection with the Arrowhead Acquisition,
and (iii) acquisitions of property and equipment as a result of the expansion in
infrastructure to support INSpire's growth.
Unusual operating expenses. In connection with the Paragon Acquisition,
$500,000 was assigned to in-process research and development and was charged to
operations in April 1998. In the purchase price allocation of the SDS
Acquisition, $3.0 million was assigned to in-process research and development.
This amount was charged to operations in March 1997. In addition, $3.9 million
was charged to operations as deferred compensation associated with stock options
granted to executive officers during 1997.
Other income. Other income for the year ended December 31, 1998 increased
to $2.7 million from $350,000 for the year ended December 31, 1997, an increase
of $1.8 million or 619%. Other income for the year ended December 31, 1998 is
primarily attributable to interest income on funds received as a result of the
Company's initial public offering ("IPO") in August 1997 and follow-on public
offering in March 1998.
Net income (loss). Net income was $11.6 million, or $.58 per diluted share
($.65 per basic share), for the year ended December 31, 1998 compared to a net
income of $1.7 million, or $.13 per diluted share ($.14 per basic share), for
the year ended December 31, 1997. Excluding the impact on net income resulting
from the $500,000 write-off of purchased research and development associated
with the Paragon Acquisition, net income would have been $12.1 million, or $.61
per diluted share ($.68 per basic share), for the year ended December 31, 1998.
In 1997, excluding the impact on net income resulting from the charge to
operations of $3.9 million of deferred compensation associated with stock
options granted to executive officers, the write-off of purchased research and
development of $3.0 million recorded in connection with the SDS Acquisition, and
the gain on the sale of AQS of $1.6 million, and the tax effects thereof, net
income would have been $5.1 million, or $.39 per diluted share ($.42 per basic
share).
23
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and investments were $17.7 million as of December
31, 1999 compared to $48.1 million as of December 31, 1998, a decrease of $30.4
million. Net cash provided by operating activities was $114,000 for the year
ended December 31, 1999. The net loss of $19.7 million for the year ended
December 31, 1999 included noncash charges of $9.2 million for depreciation and
amortization, $11.0 million for bad debts and $16.8 million for intangible
assets impairment, offset by a deferred tax benefit of $6.2 million. Increases
in accounts receivable of $17.0 million and income taxes receivable of $3.6
million were partially offset by an increase in accrued expenses of $7.5
million. Net cash used in investing activities was $27.3 million for the year
ended December 31, 1999, which is primarily attributable to costs associated
with the Robert Plan Acquisition and the Island Acquisition, capitalized
contract implementation costs associated with the outsourcing services
agreements with Arrowhead, The Robert Plan and Island Group, and purchases of
property and equipment necessary to expand the infrastructure to support
INSpire's growth. Net cash provided by financing activities was $449,000 for the
year ended December 31, 1999, primarily attributable to proceeds from exercises
under stock plans.
In December 1997, INSpire entered into a contract with Sul America to
provide a license for WPC and other software products, and software services for
the implementation of such products. In conjunction with this contract, INSpire
was required to arrange a surety to provide Sul America with a performance bond
in the amount of $3.7 million, the proceeds of which could be used in the event
that the Company did not fulfill its obligations under the contract. The
contract was segregated into three phases of deliverables, two of which have
been accepted and paid for in the amount of $2.5 million by Sul America. In
August 1999, Sul America terminated its contract with the Company, and demanded
payment under the performance bond. Under its agreement to indemnify the surety
against losses under the performance bond allegedly caused by INSpire's default,
the Company arranged an irrevocable standby letter of credit in October 1999
with Bank of America, N.A. in the amount of $3.7 million. 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. INSpire
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.
Prior to its IPO in August 1997 and its follow-on public offering in March
1998, INSpire funded its operations through cash generated from operations, as
well as borrowings and capital contributions from Millers Insurance.
INSpire 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, INSpire evaluates
acquisitions of businesses, products and technologies that complement the
Company's business. INSpire 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 February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for transactions
entered into in fiscal years beginning after December 31, 1998. The adoption of
SOP 98-1 did not have a material effect on the Company's consolidated financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 is effective for the Company's
fiscal year ending December 31, 1999. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. The adoption of
SOP 98-5 did not have a material effect on the Company's consolidated financial
statements.
24
<PAGE> 27
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INSpire maintains a short-term investment portfolio consisting mainly of
government and corporate bonds purchased with an average maturity of less than
one year. These available-for-sale securities include both fixed and floating
rate securities. The fixed rate securities are subject to interest rate risk and
will fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 100 basis points from levels at
December 31, 1999, the fair value of the portfolio would decrease by an
immaterial amount. INSpire generally has the ability to hold its fixed income
investments until maturity. The floating rate securities carry a degree of
interest rate risk and may produce less interest income than expected if
interest rates decrease. INSpire does not expect its financial position, results
of operations or cash flows to be materially affected by the effect of a sudden
change in market interest rates on the portfolio.
Other than these short-term investments, INSpire does not engage in trading
market risk sensitive instruments and does not purchase as investments, as
hedges, or for purposes "other than trading" instruments that are likely to
expose INSpire to market risk, whether it be from interest rate, foreign
currency exchange, commodity price or equity price risk. INSpire has issued no
debt instruments, entered into no forward or futures contracts, purchased no
options and entered into no swaps.
25
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of INSpire appear at pages F-1 to F-21.
QUARTERLY RESULTS OF OPERATIONS ON A HISTORICAL BASIS
The following table sets forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 1999 and
1998. This information is derived from unaudited financial statements that
include, in the opinion of INSpire, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with the financial statements of INSpire and notes thereto included
elsewhere in this Form 10-K. The amounts related to shares of Common Stock have
been adjusted to give effect to the Stock Dividend.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services........... $32,367 $ 31,453 $27,251 $20,629 $16,055 $13,314 $11,400 $10,132
Software and software
services..................... 2,864 5,557 8,349 10,170 9,124 8,347 8,892 7,625
Other.......................... 342 342 655 579 599 423 669 599
------- -------- ------- ------- ------- ------- ------- -------
Total revenues.......... 35,573 37,352 36,255 31,378 25,778 22,084 20,961 18,356
------- -------- ------- ------- ------- ------- ------- -------
Expenses:
Cost of outsourcing services... 24,961 24,653 18,749 13,095 9,096 5,704 5,868 5,635
Cost of software and software
services..................... 3,639 5,145 5,499 4,901 4,740 5,458 4,845 4,077
Cost of other revenues......... 217 200 343 394 456 284 441 425
Selling, general and
administrative............... 4,295 5,560 4,051 4,402 3,637 4,014 3,777 3,153
Research and development,
net.......................... 2,427 1,109 680 979 1,088 797 676 422
Depreciation and
amortization................. 2,150 2,399 2,459 2,178 1,939 1,635 1,423 1,213
Purchased research and
development.................. -- -- -- -- -- -- 500 --
Provision for severance
costs........................ 1,457 36 76 152 -- -- -- --
Provision for bad debts........ 58 10,848 30 55 125 30 30 90
Litigation..................... -- 1,229 -- -- -- -- -- --
Intangible assets impairment... -- 16,757 -- -- -- -- -- --
Other.......................... -- 804 -- -- -- -- -- --
------- -------- ------- ------- ------- ------- ------- -------
Total expenses.......... 39,204 68,740 31,887 26,156 21,081 17,922 17,560 15,015
------- -------- ------- ------- ------- ------- ------- -------
Operating income (loss).......... (3,631) (31,388) 4,368 5,222 4,697 4,162 3,401 3,341
Other income (expense)........... 238 298 413 447 596 820 859 400
------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before income
tax............................ (3,393) (31,090) 4,781 5,669 5,293 4,982 4,260 3,741
Income tax benefit (expense)..... (2,213) 10,736 (1,912) (2,268) (1,851) (1,744) (1,689) (1,422)
------- -------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $(5,606) $(20,354) $ 2,869 $ 3,401 $ 3,442 $ 3,238 $ 2,571 $ 2,319
======= ======== ======= ======= ======= ======= ======= =======
Net income (loss) per share
(basic)........................ $ (0.30) $ (1.07) $ 0.15 $ 0.18 $ 0.19 $ 0.18 $ 0.14 $ 0.15
======= ======== ======= ======= ======= ======= ======= =======
Net income (loss) per share
(diluted)...................... $ (0.30) $ (1.07) $ 0.14 $ 0.17 $ 0.17 $ 0.16 $ 0.13 $ 0.13
======= ======== ======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE> 29
The following table sets forth, with respect to INSpire and for the periods
indicated, the percentage of total revenues represented by certain revenue,
expense and income items:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
DEC. 31, SEP. 30, JUN. 30, MAR. 31, DEC. 31, SEP. 30, JUN. 30, MAR. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services........... 91.0% 84.2% 75.2% 65.8% 62.3% 60.3% 54.4% 55.2%
Software and software
services..................... 8.0 14.9 23.0 32.4 35.4 37.8 42.4 41.5
Other.......................... 1.0 0.9 1.8 1.8 2.3 1.9 3.2 3.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Expenses:
Cost of outsourcing services... 70.2 66.0 51.7 41.8 35.3 25.8 28.0 30.7
Cost of software and software
services..................... 10.2 13.8 15.2 15.6 18.4 24.7 23.1 22.2
Cost of other revenues......... 0.6 0.5 0.9 1.3 1.8 1.3 2.1 2.3
Selling, general and
administrative............... 12.1 14.9 11.2 14.0 14.1 18.2 18.0 17.2
Research and development,
net.......................... 6.8 3.0 1.9 3.1 4.2 3.6 3.2 2.3
Depreciation and
amortization................. 6.1 6.4 6.8 6.9 7.5 7.4 6.8 6.6
Purchased research and
development.................. 0.0 0.0 0.0 0.0 0.0 0.0 2.4 0.0
Provision for severance
costs........................ 4.1 0.1 0.2 0.5 0.0 0.0 0.0 0.0
Provision for bad debts........ 0.2 29.0 0.1 0.2 0.5 0.1 0.1 0.5
Litigation..................... 0.0 3.3 0.0 0.0 0.0 0.0 0.0 0.0
Intangible assets impairment... 0.0 44.9 0.0 0.0 0.0 0.0 0.0 0.0
Other.......................... 0.0 2.2 0.0 0.0 0.0 0.0 0.0 0.0
----- ----- ----- ----- ----- ----- ----- -----
Total expenses.......... 110.3 184.1 88.0 83.4 81.8 81.1 83.7 81.8
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss).......... (10.3) (84.1) 12.0 16.6 18.2 18.9 16.3 18.2
Other income (expense)........... 0.7 0.8 1.1 1.4 2.3 3.7 4.1 2.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
tax............................ (9.6) (83.3) 13.1 18.0 20.5 22.6 20.4 20.4
Income tax benefit (expense)..... (6.2) 28.7 (5.3) (7.2) (7.2) (7.9) (8.1) (7.8)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)................ (15.8)% (54.6)% 7.8% 10.8% 13.3% 14.7% 12.3% 12.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
INSpire has experienced in the past and will experience in the future
quarterly variations in net revenues and net income. Thus, operating results for
any particular quarter are not necessarily indicative of results for any future
period. Factors that have affected quarterly operating results include the
introduction of new or enhanced services and products by INSpire or its
competitors, customer acceptance or rejection of new services and products,
product development expenses, the timing of new contract signings, the timing of
large scale catastrophes, the volume of usage of INSpire's services and
products, acquisitions, competitive conditions in its industry, general economic
conditions and the level of selling and administrative expenses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from the 2000 Proxy Statement under the captions "Proposal 1 -- Election of
Directors -- Nominees," "-- Other Directors," "-- Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the 2000 Proxy Statement under the caption "Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the 2000 Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference
from the 2000 Proxy Statement under the caption "Certain Transactions."
28
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for each of the three years
ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity for each of the three
years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1999,
1998 and 1997
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None
Schedules not listed above have been omitted because they are not
required or are not applicable.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following INSpire's financial statements.
The exhibits listed herein will be furnished upon written request to
the Investor Relations Department of INSpire located at INSpire's
headquarters and payment of a reasonable fee that will be limited to
INSpire's reasonable expense in furnishing such exhibits.
(b) The following report was filed on Form 8-K during the three months
ended December 31, 1999, including the date and description of such
report.
<TABLE>
<CAPTION>
DATE OF REPORT DESCRIPTION
- -------------- -----------
<S> <C>
December 3, 1999 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
Registrant'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
Registrant, certain officers and directors of Registrant,
and Millers Mutual Fire Insurance Company. 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. Registrant intends to
defend the suit vigorously in all aspects.
</TABLE>
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INSPIRE INSURANCE SOLUTIONS, INC.
By: /s/ F. GEORGE DUNHAM, III
----------------------------------
Name: F. George Dunham, III
Title: Chief Executive Officer
and Director
Date March 9, 2000
Each person whose signature appears below hereby constitutes and appoints
F. George Dunham, III his true and lawful attorney-in-fact, for him and in his
name, place and stead, to sign any and all amendments to this report and to
cause the same to be filed with the Securities and Exchange Commission, hereby
granting to said attorney-in-fact full power and authority to do and perform all
and every act and thing whatsoever requisite or desirable to be done in and
about the premises as fully to all intents and purposes as the undersigned might
or could do in person, hereby ratifying and confirming all acts and things that
said attorney-in-fact may do or cause to be done by virtue of these presents.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ F. GEORGE DUNHAM, III Chief Executive Officer (principal March 9, 2000
- ----------------------------------------------------- executive officer) and Director
F. George Dunham, III
/s/ KENNETH J. MEISTER Executive Vice President and Chief March 9, 2000
- ----------------------------------------------------- Financial Officer (principal
Kenneth J. Meister financial officer and principal
accounting officer)
/s/ HARRY E. BARTEL Director March 9, 2000
- -----------------------------------------------------
Harry E. Bartel
/s/ DANIEL E. BERCE Director March 9, 2000
- -----------------------------------------------------
Daniel E. Berce
/s/ R. EARL COX, III Director March 9, 2000
- -----------------------------------------------------
R. Earl Cox, III
/s/ JEFFREY W. ROBINSON Director March 9, 2000
- -----------------------------------------------------
Jeffrey W. Robinson
/s/ MITCH S. WYNNE Director March 9, 2000
- -----------------------------------------------------
Mitch S. Wynne
</TABLE>
30
<PAGE> 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
INSpire Insurance Solutions, Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of INSpire
Insurance Solutions, Inc. and subsidiary (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of INSpire Insurance Solutions,
Inc. and subsidiary at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
February 25, 2000
F-2
<PAGE> 35
INSPIRE INSURANCE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 899,032 $ 27,599,967
Investments............................................... 16,774,703 20,494,443
Accounts receivable, net.................................. 24,593,172 18,601,724
Unbilled receivables...................................... 4,814,894 5,751,405
Income taxes receivable................................... 6,861,736 1,830,868
Deferred income taxes..................................... 5,753,743 1,176,686
Prepaid expenses and other current assets................. 1,881,424 1,528,580
------------ ------------
Total current assets.............................. 61,578,704 76,983,673
Property and equipment, net................................. 14,179,800 11,824,787
Intangibles and other assets, net........................... 56,269,846 43,999,890
------------ ------------
TOTAL............................................. $132,028,350 $132,808,350
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 2,054,937 $ 1,386,440
Accrued payroll and compensation.......................... 970,633 632,691
Other accrued expenses.................................... 19,043,135 2,455,309
Unearned revenue.......................................... 1,777,580 1,831,406
Deferred compensation..................................... 1,325,583 1,907,389
Current portion of long-term debt......................... -- 383,402
------------ ------------
Total current liabilities......................... 25,171,868 8,596,637
Deferred compensation....................................... 380,175 260,047
Deferred income taxes....................................... 2,005,629 3,606,945
Commitments and contingencies (Note 16)
SHAREHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding................ -- --
Common stock, $.01 par value; 50,000,000 shares authorized
and 18,998,270 issued and outstanding in 1999;
18,685,813 issued and outstanding in 1998.............. 189,983 186,858
Additional paid-in capital................................ 112,523,113 108,710,195
Retained earnings (accumulated deficit)................... (8,242,418) 11,447,668
------------ ------------
Total shareholders' equity........................ 104,470,678 120,344,721
------------ ------------
TOTAL............................................. $132,028,350 $132,808,350
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 36
INSPIRE INSURANCE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Outsourcing services............................... $111,700,370 $50,900,998 $32,458,600
Software and software services..................... 26,939,783 33,987,807 21,100,899
Other.............................................. 1,917,424 2,289,797 3,009,960
------------ ----------- -----------
Total revenues............................. 140,557,577 87,178,602 56,569,459
------------ ----------- -----------
EXPENSES:
Cost of outsourcing services....................... 81,458,067 26,302,637 20,797,969
Cost of software and software services............. 19,184,026 19,120,468 10,680,787
Cost of other revenues............................. 1,154,209 1,605,708 2,413,170
Selling, general and administrative................ 18,308,059 14,580,548 8,643,072
Research and development, net...................... 5,195,214 2,983,228 1,190,114
Depreciation and amortization...................... 9,186,295 6,210,231 4,001,260
Purchased research and development................. -- 500,000 3,000,000
Deferred compensation.............................. -- -- 3,949,000
Provision for severance costs...................... 1,720,586 -- --
Provision for bad debts............................ 10,990,519 275,000 71,120
Litigation......................................... 1,229,442 -- --
Intangible assets impairment....................... 16,756,701 -- --
Management fees to shareholder..................... -- -- ........ 1,290,000
Gain on sale of subsidiary......................... -- -- (1,634,291)
Other.............................................. 804,000 -- --
------------ ----------- -----------
Total expenses............................. 165,987,118 71,577,820 54,402,201
------------ ----------- -----------
OPERATING INCOME (LOSS).............................. (25,429,541) 15,600,782 2,167,258
OTHER INCOME (EXPENSE):
Interest income.................................... 1,410,306 2,734,328 680,508
Interest expense................................... (14,150) (58,852) (348,007)
Other.............................................. -- -- 17,539
------------ ----------- -----------
Total other income (expense)............... 1,396,156 2,675,476 350,040
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX...................... (24,033,385) 18,276,258 2,517,298
INCOME TAX BENEFIT (EXPENSE)......................... 4,343,299 (6,706,431) (801,218)
------------ ----------- -----------
NET INCOME (LOSS).................................... $(19,690,086) $11,569,827 $ 1,716,080
============ =========== ===========
NET INCOME (LOSS) PER SHARE (BASIC).................. $ (1.04) $ 0.65 $ 0.14
============ =========== ===========
NET INCOME (LOSS) PER SHARE (DILUTED)................ $ (1.04) $ 0.58 $ 0.13
============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 37
INSPIRE INSURANCE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS
COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) TOTAL
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997................ $ 1 $ 2,383,417 $ (1,777,178) $ 606,240
Shareholder's contribution of fixed
assets............................. -- 1,308,191 -- 1,308,191
Shareholder's contribution of
additional paid-in capital......... -- 10,500,000 -- 10,500,000
Stock dividend to shareholder of
64,900 shares...................... 649 (649) -- --
Stock dividend to shareholder of
6,935,000 shares................... 69,350 (69,350) -- --
Initial public offering of 3,191,250
shares............................. 31,913 34,603,690 -- 34,635,603
Net income............................ -- -- 1,716,080 1,716,080
-------- ------------ ------------ ------------
Balance, December 31, 1997.............. 101,913 48,725,299 (61,098) 48,766,114
Shares issued for exercise of 450,500
options............................ 5,884 3,702,330 -- 3,708,214
Shares purchased for employee stock
purchase plan 17,413 shares, net... -- (218,671) -- (218,671)
Income tax effect related to stock
options............................ -- 3,538,424 -- 3,538,424
Public offering of 1,800,000 shares... 18,000 52,962,813 -- 52,980,813
Effect of 3-for-2 stock split......... 61,061 -- (61,061) --
Net income............................ -- -- 11,569,827 11,569,827
-------- ------------ ------------ ------------
Balance, December 31, 1998.............. 186,858 108,710,195 11,447,668 120,344,721
Shares issued for exercise of 312,457
options............................ 3,125 1,445,272 -- 1,448,397
Shares purchased for employee stock
purchase plan 32,309 shares, net... -- 32,321 -- 32,321
Income tax effect related to stock
options............................ -- 1,384,025 -- 1,384,025
Options issued for contract
acquisition........................ -- 951,300 -- 951,300
Net loss.............................. -- -- (19,690,086) (19,690,086)
-------- ------------ ------------ ------------
Balance, December 31, 1999.............. $189,983 $112,523,113 $ (8,242,418) $104,470,678
======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 38
INSPIRE INSURANCE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(19,690,086) $ 11,569,827 $ 1,716,080
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 9,186,295 6,210,231 4,001,260
Purchased research and development...................... -- 500,000 3,000,000
Bad debts............................................... 10,990,519 275,000 71,120
Intangible assets impairment............................ 16,756,701 -- --
Deferred income taxes................................... (6,178,373) 1,141,259 (2,429,531)
Gain on sale of subsidiary.............................. -- -- (1,634,291)
Changes in operating assets and liabilities (net of
effects of acquisitions):
Accounts receivable................................... (16,981,967) (1,843,321) (5,815,406)
Unbilled receivables.................................. 936,511 (5,751,405) --
Prepaid expenses and other current assets............. (352,844) (3,055,858) (3,570,937)
Other assets.......................................... 466,781 (448,446) (468,530)
Accounts payable...................................... 668,497 539,495 (1,766,791)
Accrued payroll and compensation...................... 337,942 (261,865) (324,320)
Other accrued expenses................................ 7,487,826 612,037 1,222,702
Unearned revenue...................................... (53,826) (3,318,634) 3,736,856
Income taxes receivable............................... (3,646,843) (1,709,602) 2,821,062
Deferred compensation................................. 186,768 (148,619) 3,949,000
------------ ------------ ------------
Net cash provided by operating activities.......... 113,901 4,310,099 4,508,274
------------ ------------ ------------
INVESTING ACTIVITIES:
Proceeds from sale of subsidiary, net of cash
relinquished............................................ -- -- 2,499,262
Purchases of property and equipment, net.................. (6,418,278) (7,809,653) (2,060,125)
Sale (purchase) of investments............................ 3,719,740 (20,494,443) --
Purchase of software licensing agreement.................. -- -- (1,623,750)
Capitalized software development costs.................... (1,611,650) (1,997,837) (819,105)
Capitalized contract implementation costs................. (4,846,833) (432,064) --
Facility acquisition costs................................ (18,106,685) (3,000,000) --
Acquisition of subsidiary, net of cash acquired........... -- (24,237,161) (17,118,849)
------------ ------------ ------------
Net cash used in investing activities.............. (27,263,706) (57,971,158) (19,122,567)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings.................................. -- -- 8,677,503
Repayment of borrowings................................... (383,402) (1,128,434) (10,792,589)
Repayment of borrowings to shareholder.................... -- -- (995,706)
Contribution from shareholder............................. -- -- 10,500,000
Issuance of common stock, net of issuance costs paid...... -- 52,980,813 34,635,603
Proceeds from exercises under stock plans, net............ 832,272 1,369,324 --
Bank overdrafts........................................... -- -- 265,407
------------ ------------ ------------
Net cash provided by investing activities.......... 448,870 53,221,703 42,290,218
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (26,700,935) (439,356) 27,675,925
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 27,599,967 28,039,323 363,398
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 899,032 $ 27,599,967 $ 28,039,323
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................. $ 14,150 $ 56,682 $ 360,083
============ ============ ============
Income taxes paid (refunded).............................. $ 5,481,917 $ 7,463,624 $ (48,686)
============ ============ ============
Noncash investing activities -- contribution of fixed
assets from shareholder................................. $ -- $ -- $ 1,308,191
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 39
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- INSpire Insurance Solutions, Inc. and subsidiary ("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 services
and products directly to the customer. The majority of sales are in North
America. Prior to the initial public offering of common stock on August 22,
1997, the Company was a wholly owned subsidiary of The Millers Insurance Company
("Millers Insurance") (formerly The Millers Mutual Fire Insurance Company).
Basis of Presentation -- The consolidated financial statements include the
financial statements of INSpire and its wholly owned subsidiary, INSpire Claims
Management, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
Property and Equipment -- The Company records property and equipment at
cost, less accumulated depreciation. Depreciation is calculated using the
straight-line method based on the estimated useful lives of assets, which range
from three to ten years. Leasehold improvements are amortized over the lease
term or the estimated useful life, whichever is less. Repairs and maintenance
are charged to operating expenses as incurred.
Revenue Recognition -- Revenues from outsourcing services are recognized as
services are rendered. INSpire is typically paid a percentage of premiums
written for policy administration services, a percentage of premiums earned or
claims paid for claims administration services and a percentage of premiums
written, subject to a minimum fee, for IT services. Outsourcing services
contracts generally are for terms of two to ten years. Due to the ongoing nature
of these outsourcing services and the length of the terms of the service
contracts, outsourcing services generate recurring revenues. Initial
installations of software systems generally include a one-time license fee and a
contract for the installation and customization of the system to meet the
customer's specifications, which INSpire bills at an hourly rate. Amounts
charged for the initial license and the installation and customization of
systems are recognized as revenue during the installation period in proportion
to the hours expended for installation compared to the total hours projected for
installation. In other instances, revenues are recognized based on performance
milestones specified in the contract. INSpire recognizes the annual fee charged
for maintenance of the customer's system over the maintenance contract period.
Revenues from computer hardware and equipment sales, included in other revenues,
are recognized when INSpire receives notification that the equipment has been
shipped by the manufacturer and title has passed to the customer. Changes in
estimates of percentage of completion or losses, if any, associated with
software services are recognized in the period in which they are determined.
Losses, if any, associated with outsourcing services are recognized in the
period in which they are determined. Unearned revenues consist of billings to
customers in advance of revenues recognized on such services. Unbilled
receivables consist of revenues recognized in advance of billings due to timing
differences related to billing schedules specified in contracts.
Income Taxes -- Prior to the initial public offering on August 22, 1997,
Millers Insurance and its subsidiaries, including the Company, filed a
consolidated federal income tax return. In accordance with federal income tax
regulations, all corporations included in a consolidated tax return were jointly
and severally liable for all tax liabilities. A tax sharing agreement among
Millers Insurance, the Company and the other subsidiaries of Millers Insurance
(the "Tax Allocation Agreement") provided that taxes on income were charged to
profitable subsidiaries as if they were filing their own separate returns.
Subsidiaries with losses were given credit for tax benefits of their losses to
the extent utilized to reduce the consolidated tax liability or to the extent
the benefits are funded currently. Subsidiaries received the benefit of all tax
credits. Intercompany tax balances were settled annually. Effective August 23,
1997, the Tax Allocation Agreement was terminated as it related to the Company.
The agreement to terminate the Tax Allocation Agreement provides that the
Company will indemnify the other members of the Millers Insurance consolidated
tax group for any of the
F-7
<PAGE> 40
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
group's income taxes and related expenses attributable to the Company and
Millers Mutual will indemnify the Company for any income taxes and related
expenses attributable to any members of the tax group other than the Company's.
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the year in deferred tax assets and
liabilities.
Industry Concentration -- The Company's revenues and accounts receivable
are derived primarily from the United States P&C insurance industry.
Research and Development -- INSpire incurs research and development costs
that relate primarily to the development of new services and products and major
enhancements to existing services and products. Research and development costs
are comprised primarily of salaries. INSpire expenses or capitalizes, as
appropriate, these research and development costs in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." All research and
development costs incurred prior to the time management believes a project has
reached "technological feasibility" are expensed. Software production costs
incurred subsequent to reaching technological feasibility are capitalized, if
material, and reported at the lower of unamortized cost or net realizable value.
Capitalized costs are amortized over the expected service life of the related
software, generally three to seven years, using the straight-line method. The
cost and related accumulated amortization of projects are written off as they
become fully amortized.
The Company assesses the recoverability of these costs by determining
whether the carrying amount of the capitalized costs can be recovered through
undiscounted future operating cash flows.
Cash and Cash Equivalents -- For the purposes of reporting cash flows, cash
and cash equivalents include investments readily convertible to cash with
remaining maturities at date of purchase of three months or less.
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
five 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 discounted future cash flows, and is charged to expense in the period
identified.
Financial Instruments -- The Company does not have any derivative financial
instruments as of December 31, 1999. However, the Company is exposed to interest
rate risk. The Company employs established policies and procedures to manage its
exposure to changes in the market risk of its marketable securities, which are
classified as available for sale securities under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." At December 31, 1999, the
costs of the securities approximate their fair market value. The Company
believes that the market risk arising from holdings of its financial instruments
is not material. The carrying amounts for the Company's cash, investments, and
accounts receivable approximate fair value at December 31, 1999.
F-8
<PAGE> 41
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of its
holdings of cash and marketable securities. The Company's credit risk is managed
by investing its cash and marketable securities in money market instruments and
securities of the U.S. government and its agencies, municipalities and
high-quality corporate issuers. At December 31, 1999, the Company had no
significant concentrations of credit risk.
Net Income (Loss) Per Share -- Net income (loss) per share of the Company
is computed by dividing net income (loss) by the weighted average number of
shares outstanding. Diluted net income (loss) 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 18,930,371 in
1999, 17,854,390 in 1998 and 12,206,055 in 1997 after giving effect to the stock
dividends paid in August 1998 and March and June 1997. The weighted average
number of shares (diluted) was 18,930,371 in 1999, 19,838,583 in 1998 and
13,173,746 in 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic
Average shares outstanding............................... 18,930 17,854 12,206
======== ======= =======
Net income (loss)........................................ $(19,690) $11,570 $ 1,716
======== ======= =======
Per share amount......................................... $ (1.04) $ 0.65 $ 0.14
======== ======= =======
Diluted
Average shares outstanding............................... 18,930 17,854 12,206
Net effect of dilutive stock options based on the
treasury stock method using the average market
price................................................. -- 1,985 968
-------- ------- -------
Total.................................................... 18,930 19,839 13,174
======== ======= =======
Net income (loss)........................................ $(19,690) $11,570 $ 1,716
======== ======= =======
Per share amount......................................... $ (1.04) $ 0.58 $ 0.13
======== ======= =======
</TABLE>
Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these amounts.
Certain Reclassifications -- Certain reclassifications have been made to
the prior period statements to conform them to the current year classifications.
Recently Issued Accounting Pronouncements
In February 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for transactions
entered into in fiscal years beginning after December 31, 1998. The adoption of
SOP 98-1 did not have a material effect on the Company's consolidated financial
position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities" ("SOP 98-5"). SOP 98-5 is effective for the Company's
fiscal year ended December 31, 1999. SOP 98-5 requires costs of
F-9
<PAGE> 42
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
start-up activities and organization costs to be expensed as incurred. The
adoption of SOP 98-5 did not have a material effect on the Company's
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133, as amended, is effective for fiscal years beginning after June 15,
2000. SFAS 133 requires all derivative instruments to be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designed as part of a hedge transaction and, if it is,
the type of hedge transaction. The Company does not expect that the adoption of
SFAS 133 will have a material impact on its financial statements because the
Company does not currently hold any derivative instruments.
2. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Accounts receivable -- trade............................... $33,912,215 $18,802,382
Other...................................................... 219,835 293,884
----------- -----------
34,132,050 19,096,266
Allowance for doubtful accounts............................ (9,538,878) (494,542)
----------- -----------
$24,593,172 $18,601,724
=========== ===========
</TABLE>
The following table summarizes activity in the allowance for doubtful
accounts for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period..................... $ 494,542 $303,022 $ --
Additions:
Charged to costs and expenses.................... 10,990,519 275,000 71,120
Charged to other accounts(1)..................... -- -- 231,902
Deductions(2)...................................... 1,946,183 83,480 --
----------- -------- --------
Balance at end of period........................... $ 9,538,878 $494,542 $303,022
=========== ======== ========
</TABLE>
- ---------------
(1) Recorded in connection with net assets acquired from Strategic Data
Systems, Inc. in March 1997.
(2) Represents amounts written off as uncollectible.
F-10
<PAGE> 43
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Computer equipment....................................... $ 19,397,149 $ 16,583,024
Office equipment......................................... 4,696,818 3,923,522
Automobiles.............................................. 239,687 228,287
Airplanes................................................ 3,167,581 3,167,581
Leasehold improvements................................... 4,128,906 1,601,695
------------ ------------
31,630,141 25,504,109
Accumulated depreciation................................. (17,450,341) (13,679,322)
------------ ------------
$ 14,179,800 $ 11,824,787
============ ============
</TABLE>
Depreciation expense was approximately $4,063,000, $3,179,000, and
$2,263,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
4. RESEARCH AND DEVELOPMENT
Research and development costs were approximately $6,807,000, $4,981,000
and $2,009,000 for the years ended December 31, 1999, 1998 and 1997,
respectively, including capitalized software costs of approximately $1,612,000,
$1,998,000 and $819,000.
5. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Costs in excess of net assets acquired, net of accumulated
amortization of $2,550,767 and $2,119,521............... $47,920,956 $32,896,217
Acquired software, net of accumulated amortization of
$84,461 and $2,290,500.................................. 1,740,863 4,609,500
Other intangibles, net of accumulated amortization of $0
and $406,328............................................ -- 2,820,614
Software license agreement................................ -- 1,623,750
Capitalized contract implementation costs................. 5,278,897 432,064
Other assets.............................................. 1,329,130 1,617,745
----------- -----------
$56,269,846 $43,999,890
=========== ===========
</TABLE>
Amortization expense was approximately $5,123,000, $3,031,000 and
$1,738,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company recognized an impairment charge in September 1999 of
$16,756,701 for certain intangible assets, including a substantial portion of
the goodwill and software acquired in the purchases of Strategic Data Systems,
Inc. in March 1997 and Paragon Interface, Inc. in April 1998, the software
license associated with the Company's agreement with Cover-All Systems, Inc.
entered into in October 1997, and internally capitalized software 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
F-11
<PAGE> 44
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Effective April 1, 1999, INSpire entered into an Asset Purchase Agreement
with The Robert Plan Corporation ("The Robert Plan"), pursuant to which INSpire
agreed to acquire from The Robert Plan certain assets and employees used in the
conduct of its policy and claims administration. Costs in excess of net assets
acquired associated with The Robert Plan acquisition were $9,524,000.
Effective June 1, 1999, INSpire entered into an Asset and Employee Transfer
Agreement with Island Insurance Company, Ltd. ("Island Group"), pursuant to
which INSpire agreed to acquire from Island Group certain assets and employees
used in the conduct of its policy and claims administration. Costs in excess of
net assets acquired associated with the Island Group acquisition were
$9,046,000, which included the fair value of an option issued to Island Group to
purchase 105,000 shares of common stock, par value $.01 per share ("Common
Stock") of INSpire (the "Island Option"). The fair value of the Island Option on
the date of grant was estimated to be approximately $951,000 using the
Black-Scholes option pricing model, assuming a risk-free interest rate of 6%, no
dividends, an expected option life of ten years and a volatility factor of 58%.
6. OTHER ACCRUED EXPENSES
Other accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Accrued acquisition costs................................... $ 9,100,000 $ --
Accrued severance costs..................................... 1,380,050 --
Other accrued expenses...................................... 8,563,085 2,455,309
----------- ----------
$19,043,135 $2,455,309
=========== ==========
</TABLE>
7. LONG-TERM DEBT
On August 22, 1997, the Company entered into a note agreement with a
financial institution to pay the cost of three-year professional liability and
directors and officers insurance policies. The note was payable in monthly
principal and interest installments of $54,424 through July 1999 and had a
balance of $383,402 at December 31, 1998.
F-12
<PAGE> 45
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Federal income tax benefit (expense) consists of the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $ (409,709) $(2,019,220) $(3,048,994)
State and local............................. (41,340) (278,329) (634,881)
Deferred:
Federal..................................... 5,363,885 (758,861) 2,554,340
State and local............................. 814,488 (111,597) 328,317
Other:
Tax deduction credited to paid in capital
from exercise of stock options........... (1,384,025) (3,538,424) --
----------- ----------- -----------
$ 4,343,299 $(6,706,431) $ (801,218)
=========== =========== ===========
</TABLE>
A reconciliation of income tax expense computed by applying the federal
statutory tax rate of 34% to income before income taxes, to the reported income
taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Income tax benefit (expense) at statutory
rate......................................... $ 8,171,351 $(6,213,928) $(855,881)
State income taxes, net of federal income tax
benefit (expense)............................ 386,566 (295,294) (91,000)
Valuation of temporary differences............. -- -- 277,000
Tax-exempt interest............................ 417,168 555,765 --
Goodwill....................................... (4,205,245) (369,367) (254,512)
Research and development credits............... -- 100,000 100,000
Other.......................................... (426,541) (483,607) 23,175
----------- ----------- ---------
$ 4,343,299 $(6,706,431) $(801,218)
=========== =========== =========
</TABLE>
F-13
<PAGE> 46
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable...................................... $ 3,720,162 $ 153,871
Accrued expenses......................................... 2,033,581 1,022,815
----------- -----------
5,753,743 1,176,686
Noncurrent:
Prepaid royalties........................................ 633,263 --
Property and equipment................................... 91,807 --
----------- -----------
725,070 --
Total deferred income tax assets................. 6,478,813 1,176,686
----------- -----------
Deferred income tax liabilities:
Noncurrent:
Property and equipment................................... -- 462,723
Capitalized contract implementation costs................ 1,982,276 --
Capitalized research and development..................... 69,485 977,295
Acquired software........................................ 678,938 2,166,927
----------- -----------
Total deferred income tax liabilities............ 2,730,699 3,606,945
----------- -----------
Net deferred income tax assets (liabilities)............... $ 3,748,114 $(2,430,259)
=========== ===========
Represented on the balance sheet as:
Current deferred income tax assets....................... $ 5,753,743 $ 1,176,686
Noncurrent deferred income tax liabilities............... (2,005,629) (3,606,945)
----------- -----------
$ 3,748,114 $(2,430,259)
=========== ===========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
periods with respect to which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits of
these deductible differences.
9. RELATED PARTY TRANSACTIONS
The Company provides outsourcing services and software and software
services to Millers Insurance, 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. Total fees earned under these agreements were approximately
$28,458,000, $25,750,000, and $18,864,000 in 1999, 1998, and 1997, respectively.
F-14
<PAGE> 47
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
From July 1, 1995 through December 31, 1997, the Company had various
agreements with Millers Insurance to provide the Company with management and
administrative services. Total fees paid by the Company in 1997 were
approximately $1,290,000. Effective January 1, 1998, a new agreement was entered
into, 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 for 1999 and 1998 were $180,000 each year.
The Company incurred rental expenses to Millers Insurance for office space,
totaling approximately $273,000 and $316,500 for 1998 and 1997, respectively. In
November 1998, Millers Insurance sold the building in which INSpire's
headquarters are located to a partnership which is 100% owned by certain members
of the Company's board of directors and the Company's chief executive officer.
INSpire incurred approximately $835,000 and $138,000 of rental expense under
this agreement for the years ended December 31, 1999 and 1998, respectively.
There was a net receivable due from Millers American of approximately
$5,189,000 and $1,996,000 at December 31, 1999 and 1998, respectively.
10. EMPLOYEE BENEFIT PLANS
Prior to August 1997, substantially all of the Company's employees were
covered by a defined benefit pension plan (the "Pension Plan") sponsored by
Millers Insurance that provided retirement, death and disability benefits for
full-time employees completing at least 1,000 hours of service. The Company made
annual contributions to the Pension Plan equal to the amounts accrued for
pension expense, including amortization of past service cost over 30 years.
Contributions to the Pension Plan were determined by consulting actuaries based
upon future periodic payments, including lump-sum distributions that were
attributable under the Pension Plan's provisions to the service employees had
rendered. No expense was incurred relative to the Pension Plan during 1997, as
the pension plan was over-funded. In addition, the Company participated in a
defined contribution profit sharing plan sponsored by Millers Insurance that
covered substantially all of its employees (the "Profit Sharing Plan"). There
were no contributions made by the Company to the Profit Sharing Plan in 1997. In
July 1997, the Board of Directors approved the termination of the Company's
participation in the Pension Plan and the Profit Sharing Plan. The effects of
termination of the Company's participation in the Pension Plan and the Profit
Sharing Plan were immaterial to the Company's financial position, results of
operations and cash flows.
In July 1997, the Company adopted a 401(k) plan (the "Plan") covering all
employees who meet certain minimum age and length of service requirements. The
Plan provides for payment of the employee's vested portion of the Plan upon
retirement, termination, disability or death. Discretionary contributions may be
made to the Plan under the direction of the Company's Board of Directors. The
Company made contributions of approximately $973,000, $592,000 and $434,000 and
incurred expenses of approximately $51,000, $19,000 and $8,000 related to the
Plan for the years ended December 31, 1999, 1998 and 1997, respectively.
F-15
<PAGE> 48
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE AND DIRECTOR STOCK OPTION PLANS
As of December 31, 1999, the Company's employee and director stock option
plans have authorized the grant of options to employees and outside directors
for up to 4,575,000 shares of the Company's Common Stock. The Company adopted
the Second Amended and Restated 1997 Stock Option Plan (the "Stock Option Plan")
in February 1998, which was approved by the shareholders in April 1998 and which
provides for the grant of incentive and nonqualified options to purchase up to
4,500,000 shares of Common Stock subject to certain adjustments as described in
the Stock Option Plan. Stock options are issuable only to eligible directors,
officers and employees of the Company. Options granted vest over a period
ranging from immediately to six years of continued employment or service to the
Company.
The per share exercise price of an incentive option may not be less than
the greater of par value or 100% of the fair value of the Common Stock on the
date the option is granted. Incentive options granted to an employee who owns in
excess of 10% of the voting stock of the Company must have an exercise price of
at least 110% of the fair value of the Common Stock at the date of grant.
Options may be exercised only if the option holder remains continuously
associated with the Company from the date of grant to the date of exercise,
subject to certain conditions as specified in the Stock Option Plan. Any options
that expire unexercised or that terminate upon an optionee's ceasing his or her
association with the Company become available once again for issuance.
On July 30, 1997, the Board of Directors adopted the Director Stock Option
Plan, which was amended by the Board of Directors in February 1998, and was
approved by the shareholders in April 1998 ("Director Plan"). The Director Plan
provides that each current nonemployee director be granted options to purchase
3,750 shares of Common Stock as of the effective date of the initial public
offering at an exercise price equal to the initial public offering price. Such
options became immediately exercisable as of the date of the initial public
offering. A total of 75,000 shares has been reserved for issuance pursuant to
the Director Plan. Each new nonemployee director who is elected (or appointed to
fill any vacancy) as a director of the Company will be granted options under the
Director Plan to purchase 3,750 shares of Common Stock at the fair market value
of the Common Stock on the date of grant. Also, each nonemployee director who
has previously been granted options under the Director Plan will be granted
additional options under the Director Plan to purchase 375 shares of Common
Stock on the day immediately after each annual meeting of shareholders of the
Company subsequent to the time at which such nonemployee director is first
elected or appointed as a director of the Company if such nonemployee director
continues to serve as a director on such date of grant. The options under the
Director Plan will vest and be exercisable as of the date of grant.
Effective December 21, 1999, the Board of Directors approved a stock option
repricing program pursuant to which 877,657 stock options were amended to have
an exercise price of $6.00. All other terms of the options, including vesting
and expiration dates, remained the same. Repriced options are reflected in the
stock option activity table below as forfeited and granted options at the date
of repricing.
F-16
<PAGE> 49
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the stock option activity under the Stock
Option Plan and Director Plan for the three years ended December 31, 1999 after
giving effect to the stock dividend paid in August 1998:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF EXERCISE PRICE AVERAGE
OPTIONS PER OPTION EXERCISE PRICE
---------- -------------- --------------
<S> <C> <C> <C>
Options outstanding as of January 1, 1997.... 0
Options granted............................ 3,038,814 $ 0.87-$ 8.00 $ 5.05
Options forfeited.......................... (40,345) $ 0.87-$ 8.00 $ 6.08
----------
Options outstanding as of December 31,
1997....................................... 2,998,469 $ 0.87-$ 8.00 $ 5.03
Options granted............................ 1,233,615 $13.96-$26.50 $21.31
Options exercised.......................... (698,958) $ 0.87-$ 8.00 $ 2.23
Options forfeited.......................... (308,279) $ 0.87-$22.00 $ 6.39
----------
Options outstanding as of December 31,
1998....................................... 3,224,847 $ 0.87-$26.50 $11.67
Options granted............................ 2,004,407 $ 4.11-$19.06 $ 8.97
Options exercised.......................... (312,457) $ 0.87-$ 8.00 $ 3.28
Options forfeited.......................... (1,741,650) $ 6.00-$26.50 $16.55
----------
Options outstanding as of December 31,
1999....................................... 3,175,147 $ 0.87-$26.50 $ 8.07
==========
Exercisable as of December 31, 1999.......... 1,617,185 $ 0.87-$26.50 $ 6.36
==========
Options available for grant.................. 388,438
==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model, based on the following assumptions for
options granted in 1999, 1998 and 1997, respectively: risk-free interest rates
of 6.7%, 5.5% and 6.3%; expected lives of 4.5 years, 4.7 years and 4.7 years;
volatility factors of 70%, 58% and 17%; and no dividends.
Under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," the Company recognized no compensation expense for the
years ended December 31, 1999 and 1998, as the exercise price of all stock
options granted under the terms of the Stock Option Plan was at or above the
fair market value of the Common Stock at the date of grant. For the year ended
December 31, 1997, the Company recognized $3,949,000 of compensation expense
relating to stock options as the stock options granted were at an exercise price
that was less than the estimated fair market value of the Common Stock at the
date of grant. Had the Company implemented SFAS 123, "Accounting for Stock-Based
Compensation," the Company's compensation expense would have increased by
approximately $8,317,000, $6,337,000 and $126,000 for the years ended December
31, 1999, 1998 and 1997, respectively. The Company's pro forma net income
(loss), net income (loss) per share (basic) and net income (loss) per share
(diluted), considering the effects of implementing SFAS 123, net of tax effects,
would have been approximately $(25,013,000), $7,512,000 and $1,633,000, $(1.32),
$0.42 and $0.13, $(1.32), $0.38 and $0.13, respectively, for the years ended
December 31, 1999, 1998 and 1997.
The weighted average fair value of options granted during the year ended
December 31, 1999 was $4.83 compared to $11.47 for the year ended December 31,
1998 and $3.04 for the year ended December 31, 1997. There were no options
granted during 1999 at a value less than market value on the date of grant. All
options granted expire six years from date of grant.
F-17
<PAGE> 50
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the stock options outstanding under the
Stock Option Plan and Director Plan as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF REMAINING WEIGHTED NUMBER OF WEIGHTED
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.87-$ 2.50.. 376,523 3.2 $ 0.87 376,523 $ 0.87
$ 2.51-$ 4.50.. 404,000 6.0 $ 4.11 0 $ 0.00
$ 4.51-$ 7.50.. 907,712 4.4 $ 6.02 263,750 $ 6.00
$ 7.51-$10.50.. 912,352 3.6 $ 8.00 912,352 $ 8.00
$10.51-$18.50.. 300,000 5.0 $16.13 60,000 $16.13
$18.51-$26.50.. 274,560 4.2 $22.02 4,560 $23.50
--------- --- ------ --------- ------
3,175,147 4.3 $ 8.07 1,617,185 $ 6.36
========= === ====== ========= ======
</TABLE>
12. EMPLOYEE STOCK PURCHASE PLAN
In July 1997 the Board of Directors adopted the Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which a total of 637,500 shares of
Common Stock has been reserved for issuance. Any employee who has been employed
by the Company for 90 days is eligible to participate in offerings under the
Stock Purchase Plan.
The Stock Purchase Plan was initially implemented by an offering of 37,500
shares of Common Stock from October 1, 1997 to December 31, 1997. Pursuant to
such offering, 9,360 shares of Common Stock were purchased by participants under
the Stock Purchase Plan. During 1998 and 1999, offerings of 75,000 shares each
were made on January 1 and July 1, respectively. As a result of these offerings,
participants purchased 16,760 and 13,741 shares in 1998 and 18,455 and 30,691
shares in 1999, respectively, of Common Stock. The Company anticipates that the
Stock Purchase Plan will be further implemented by four additional semiannual
offerings of Common Stock beginning on January 1 and July 1 for each of the
years 2000 and 2001. The maximum number of shares issued in each semi-annual
offering will be 75,000 shares plus the cumulative number of unissued shares
from prior offerings under the Stock Purchase Plan.
On the commencement date of each offering under the Stock Purchase Plan, a
participating employee will be deemed to have been granted an option to purchase
a maximum number of shares of Common Stock equal to: (i) the percentage of the
employee's base pay that such employee has elected to be withheld (not to exceed
10%), (ii) multiplied by such employee's base pay during the period of such
offering and (iii) divided by the lower of 85% of the closing market price of
the Common Stock on the applicable offering commencement date or 85% of the
closing market price of the Common Stock on the offering termination date.
Options held by a participant shall be exercisable only by that participant.
No employee may be granted options to participate in the Stock Purchase
Plan if, as a result of such grant, such employee would (i) own stock or hold
options to purchase stock possessing 5% or more of the total combined voting
power or value of all classes of stock of the Company or (ii) have rights to
purchase stock under all employee stock purchase plans of the Company that
accrue at a rate in excess of $25,000 in fair market value for any calendar
year.
Unless a participant gives written notice to the Company, such
participant's option for the purchase of Common Stock with payroll deductions
made during an offering shall be deemed to have been exercised automatically on
the offering termination date applicable to such offering, for the purchase of
the number of full shares of Common Stock that the accumulated payroll
deductions at that time will purchase at the applicable option price. A
participant may withdraw payroll deductions credited to his account under the
Stock Purchase Plan at any time prior to the offering termination date.
F-18
<PAGE> 51
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SHAREHOLDERS' EQUITY
On June 12, 1997, the Board of Directors and the shareholder of the Company
approved an amendment to the Articles of Incorporation of the Company providing
for an increase in the number of authorized shares of Common Stock from 1,000
shares to 14,000,000 shares. On July 30, 1997, the Board of Directors and the
shareholder of the Company approved an amendment to the Articles of
Incorporation of the Company providing for an increase in the number of
authorized shares of Common Stock from 14,000,000 shares to 50,000,000 shares.
On July 30, 1997, the Board of Directors authorized 300,000 shares of
Series A Junior Preferred Stock, par value $1.00 per share, adopted the Rights
Agreement ("Rights Agreement") and authorized and declared a dividend
distribution of one right (a "Right") for each outstanding share of Common Stock
to Millers Insurance under the terms of the Rights Agreement. One Right will
thereafter be issued for each share of Common Stock that was outstanding between
the date of adoption of the Rights Agreement and the earlier of the date the
Rights become exercisable or are redeemed and the termination of the Rights
Agreement. Accordingly, one Right has been issued for each share of Common Stock
outstanding. Each Right represents the right to purchase one one-hundredth of a
share of Series A Junior Preferred Stock at a price of $100.00, subject to
adjustment. The Rights are exercisable only in the event that a person or group
(with certain exceptions) becomes the beneficial owner of shares representing
15% or more of the voting power of the Company, or announces or commences a
tender or exchange offer that would result in the acquisition of such number of
shares. The Rights Agreement expires ten years from the date of adoption.
14. TRANSACTIONS WITH MAJOR CUSTOMERS
In addition to the outsourcing revenues derived from Millers American (see
Note 9), for the years ended December 31, 1999, 1998 and 1997 one customer
accounted for approximately 7%, 13% and 16% of revenues, respectively. In
addition, for the year ended December 31, 1999, two other customers accounted
for approximately 23% and 14% of revenues, respectively.
15. SALE OF SUBSIDIARY
On September 15, 1997, the Company sold Applied Quoting Systems, Inc.
("AQS"), a wholly-owned subsidiary of INSpire, for $2,500,000. The sale resulted
in a gain of approximately $1,634,000. For the period from March 12, 1997 (the
date of acquisition) through September 15, 1997 (date of sale), AQS had revenues
of approximately $2,535,000 and net income of approximately $376,000. Net income
per common share from the separate operations of AQS for the period of March 12,
1997 through September 15, 1997 was $.03. Total assets and total liabilities of
AQS on the date of sale were approximately $1,228,000 and $412,000,
respectively.
16. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases certain office space and equipment
under operating leases and a sublease for periods ranging from one to ten years.
Rentals on operating leases (exclusive of real estate taxes, insurance and other
expenses payable under the leases) amounted to approximately $9,368,000,
$5,660,000 and $3,818,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. These leases generally
F-19
<PAGE> 52
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contain optional renewal provisions for one or more periods. Future annual
minimum lease payments for each of the next five years and in the aggregate are:
<TABLE>
<S> <C>
2000.................................................... 7,640,586
2001.................................................... 6,327,234
2002.................................................... 5,045,198
2003.................................................... 4,098,519
2004.................................................... 2,873,046
Thereafter.............................................. 8,092,860
-----------
$34,077,443
===========
</TABLE>
Employment Agreements -- The Company has employment agreements with certain
key officers that provide for minimum annual salaries aggregating approximately
$735,000 and an annual bonus based on the Company's operating performance.
Other -- The Company participates in a self-insurance program for certain
of its employees that provides for the payment of employee health claims. The
program provides for specific excess loss reinsurance for aggregate claims
greater than a specified amount for any one claimant. The Company accrues the
estimated liabilities for the ultimate costs of both reported claims and
incurred but not reported claims.
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 (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. 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 intends to vigorously defend
this lawsuit, and has filed a counterclaim seeking recovery of approximately
$2.0 million invoiced to such customer and attorney fees. Management does not
believe the outcome of this lawsuit will have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
In December 1997, the Company entered into a contract with Sul America Cia
Nacional de Seguros ("Sul America") to provide a license for 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
F-20
<PAGE> 53
INSPIRE INSURANCE SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company intends to defend these suits vigorously in all aspects.
However, the ultimate outcome of this matter cannot presently be determined.
F-21
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 -- Stock Purchase Agreement, dated as of October 29, 1998,
by and among INSpire, ACM and the shareholders of ACM
(Incorporated by reference to Exhibit 2.1 of INSpire's
Form 8-K, dated December 1, 1998 and filed on December
14, 1998).
2.2 -- Asset Purchase Agreement, dated as of October 29, 1998,
by and between INSpire and AGIA (Incorporated by
reference to Exhibit 2.2 of INSpire's Form 8-K, dated
December 1, 1998 and filed on December 14, 1998).
2.3 -- Form of Stock Purchase Agreement, dated April 20, 1998,
by and among INSpire, Paragon and the shareholders of
Paragon (Incorporated by reference to Exhibit 2.1 of
INSpire's Form 10-Q for the three months ended March 31,
1998, filed on May 14, 1998).
3.1 -- Restated Articles of Incorporation of INSpire and
Articles of Amendment No. 1 thereto (Incorporated by
reference to Exhibit 3.1 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
3.2 -- Amended and Restated Bylaws of INSpire (Incorporated by
reference to Exhibit 3.2 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
3.3 -- Form of First Amendment to the Bylaws of INSpire
(Incorporated by reference to Exhibit 3.3 of INSpire's
Form 10-Q for the three months ended March 31, 1998,
filed on May 14, 1998).
4.1 -- Specimen Certificate for shares of Common Stock of
INSpire (Incorporated by reference to Exhibit 4.1 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
4.2 -- Form of Amended and Restated Rights Agreement, by and
between INSpire and U.S. Trust Company of Texas, N.A.,
dated as of December 18, 1998 (Incorporated by reference
to Exhibit 4.2 of INSpire's Form 10-K for the year ended
December 31, 1998, filed on March 25, 1999).
10.1 -- Benefits Administration Contract, dated as of July 1,
1997, by and between INSpire and Millers Mutual
(Incorporated by reference to Exhibit 10.1 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.2 -- Amended Service Contract, dated as of July 1, 1997, by
and among INSpire, Millers Mutual and Millers Casualty
(Incorporated by reference to Exhibit 10.2 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.3 -- Amended Information Services Contract, dated as of July
1, 1997, by and among INSpire, Millers Mutual and Millers
Casualty (Incorporated by reference to Exhibit 10.3 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.4 -- Form of Agreement to Lease Office Space, effective as of
May 1, 1996, by and between INSpire and Millers Mutual
(Incorporated by reference to Exhibit 10.4 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.5 -- Form of Sublease Agreement, effective as of January 1,
1997, by and between INSpire and Millers Mutual
(Incorporated by reference to Exhibit 10.5 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.6 -- Claims Life Cycle Services Agreement, effective as of
August 15, 1996, by and among INSpire, Blanch Wholesale
Insurance Services, Inc. and Blanch Insurance Services,
Inc. (Incorporated by reference to Exhibit 10.6 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.7 -- Amendment No. 1 to Claims Life Cycle Services Agreement,
dated as of June 27, 1997 (Incorporated by reference to
Exhibit 10.7 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.8 -- Policy Life Cycle Services Agreement, effective as of
August 15, 1996, by and among INSpire, Blanch Wholesale
Insurance Services, Inc., and Blanch Insurance Services,
Inc. (Incorporated by reference to Exhibit 10.8 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.9 -- Form of Amendment No. 1 to Policy Life Cycle Services
Agreement, effective as of August 15, 1996 (Incorporated
by reference to Exhibit 10.9 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
10.10 -- Administration Services Agreement, effective as of March
12, 1996, by and among State Corporation Commission of
the Commonwealth of Virginia as Deputy Receiver for HOW
Insurance Company, Home Warranty Corporation, and Home
Owners Warranty Corporation, In Receivership, and INSpire
(Incorporated by reference to Exhibit 10.10 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.11 -- Form of Indemnification Agreement with a schedule of
director signatories (Incorporated by reference to
Exhibit 10.11 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.12 -- Employment Agreement, effective as of July 1, 1997, by
and between INSpire and F. George Dunham, III
(Incorporated by reference to Exhibit 10.12 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.13 -- Form of License Agreement (Incorporated by reference to
Exhibit 10.24 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.14 -- Building Lease, dated March 12, 1997, between SDS and
Riverview Building, LLC (Incorporated by reference to
Exhibit 10.15 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.15 -- Form of System Support Agreement (Incorporated by
reference to Exhibit 10.25 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
10.16 -- Form of Implementation Support Agreement (Incorporated by
reference to Exhibit 10.26 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
10.17 -- Form of Accelerated Enhancement Plan Agreement
(Incorporated by reference to Exhibit 10.27 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.18 -- Form of Stock Option Agreement (Incorporated by reference
to Exhibit 10.29 of INSpire's Registration Statement on
Form S-1, Registration No. 333-31173).
10.19 -- Consolidated Federal Income Tax Allocation Agreement
effective January 1, 1994 by and between INSpire and
Millers Mutual, as amended by Addendum No. 1 and Addendum
No. 2 thereto (Incorporated by reference to Exhibit 10.30
of INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.20 -- Form of Policy Life Cycle Services Agreement, effective
as of May 1, 1997, by and between INSpire and Millers
Casualty (Incorporated by reference to Exhibit 10.31 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.21 -- Form of Claims Life Cycle Services Agreement, effective
as of June 1, 1997, by and between INSpire and Millers
Casualty (Incorporated by reference to Exhibit 10.32 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.22 -- Form of Employment Agreement, effective as of July 1,
1997, by and between INSpire and Jeffrey W. Robinson
(Incorporated by reference to Exhibit 10.35 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.23 -- Director Stock Option Plan (Incorporated by reference to
Exhibit 10.36 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.24 -- Form of Director Stock Option Agreement (Incorporated by
reference to Exhibit 10.37 of INSpire's Registration
Statement on Form S-1, Registration No. 333-31173).
10.25 -- Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.38 of INSpire's Registration Statement on
Form S-1, Registration No. 333-31173).
10.26 -- Claims Administration Agreement, effective April 1, 1997,
by and between INSpire and the Specialty Personal Lines
Division of Millers Mutual (Incorporated by reference to
Exhibit 10.39 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.27 -- Form of Management Agreement, effective as of January 1,
1996, by and between INSpire and Millers Mutual
(Incorporated by reference to Exhibit 10.40 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.28 -- Service Contract, effective as of January 1, 1996, by and
between INSpire, Millers Mutual and Millers Casualty
(Incorporated by reference to Exhibit 10.41 of INSpire's
Registration Statement on Form S-1, Registration No.
333-31173).
10.29 -- Form of Service Contract, effective as of December 1,
1996, by and between INSpire, Millers Mutual and Millers
Casualty (Incorporated by reference to Exhibit 10.42 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-31173).
10.30 -- Form of Information Services Contract, effective as of
October 1, 1996, by and between INSpire, Millers Mutual
and Millers Casualty (Incorporated by reference to
Exhibit 10.43 of INSpire's Registration Statement on Form
S-1, Registration No. 333-31173).
10.31 -- Software License and Support Services Agreement, dated
October 29, 1997, between INSpire and Cover-All Systems,
Inc. (Incorporated by reference to Exhibit 10.44 of
INSpire's Registration Statement on Form S-1,
Registration No. 333-47413).
10.32 -- Form of Contract to Provide Services and Acquire License
to Use Software, dated December 29, 1997, between INSpire
and Sul America Cia Nacional de Seguros (Incorporated by
reference to Exhibit 10.45 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.33 -- Form of Consulting Agreement, effective March 15, 1998,
between INSpire and Stuart Warrington (Incorporated by
reference to Exhibit 10.46 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.34 -- Form of Amendment No. 1 to Employment Agreement, dated
and effective as of January 1, 1998, for each of F.
George Dunham, III and Jeffrey W. Robinson (Incorporated
by reference to Exhibit 10.47 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.35 -- 1998 Annual Bonus Plan (Incorporated by reference to
Exhibit 10.48 of INSpire's Registration Statement on Form
S-1, Registration No. 333-47413).
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.36 -- Form of Claims Administration Services Agreement,
effective as of October 1, 1997, by and between INSpire,
Millers Mutual and Millers Casualty (Incorporated by
reference to Exhibit 10.49 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.37 -- Form of Policy Administration Services Agreement,
effective as of October 1, 1997, by and between INSpire,
Millers Mutual and Millers Casualty (Incorporated by
reference to Exhibit 10.50 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.38 -- Form of Second Amended Information Services Contract,
effective as of October 1, 1997, by and between INSpire,
Millers Mutual and Millers Casualty (Incorporated by
reference to Exhibit 10.51 of INSpire's Registration
Statement on Form S-1, Registration No. 333-47413).
10.39 -- Form of Amendment No. 1 to the Policy Life Cycle Services
Agreement, effective October 1, 1997, by and between
INSpire and Millers Casualty (Incorporated by reference
to Exhibit 10.52 of INSpire's Registration Statement on
Form S-1, Registration No. 333-47413).
10.40 -- Form of Amended and Restated Benefits Administration
Contract, effective as of January 1, 1998, by and between
INSpire and Millers Mutual (Incorporated by reference to
Exhibit 10.54 of INSpire's Registration Statement on Form
S-1, Registration No. 333-47413).
10.41 -- Employment Agreement, dated and effective as of April 28,
1998, by and between INSpire and William J. Smith, III
(Incorporated by reference to Exhibit 10.1 of INSpire's
Form 10-Q for the three months ended March 31, 1998,
filed on May 14, 1998).
10.42 -- Second Amended and Restated 1997 Stock Option Plan
(Incorporated by reference to Exhibit 10.2 of INSpire's
Form 10-Q for the three months ended March 31, 1998,
filed on May 14, 1998).
10.43 -- Form of First Amendment to the Director Stock Option Plan
(Incorporated by reference to Exhibit 10.3 of INSpire's
Form 10-Q for the three months ended March 31, 1998,
filed on May 14, 1998).
10.44 -- Form of executive employment agreement (Incorporated by
reference to Exhibit 10.46 of INSpire's Form 10-K for the
year ended December 31, 1998, filed on March 25, 1999).
10.45 -- Registration Rights Agreement, dated as of December 1,
1998 between INSpire and AGIA (Incorporated by reference
to Exhibit 10.2 of INSpire's Form 8-K dated December 1,
1998 and filed on December 14, 1998).
10.46 -- Option Agreement, dated as of December 1, 1998, between
INSpire and AGIA (Incorporated by reference to Exhibit
10.1 of INSpire's Form 8-K dated December 1, 1998 and
filed on December 14, 1998).
10.47 -- Commercial Lease Agreement, dated November 13, 1998,
between IIS Realty Ltd. and INSpire (Incorporated by
reference to Exhibit 10.50 of INSpire's Form 10-K for the
year ended December 31, 1998, filed on March 25, 1999).
10.48 -- Lease, dated April 10, 1996, between ADI Arrow Partners,
L.P. and AGIA (Incorporated by reference to Exhibit 10.51
of INSpire's Form 10-K for the year ended December 31,
1998, filed on March 25, 1999).
10.49 -- Office Lease, dated October 18, 1996, between Dr. Peter
Schmalisch and SDS (Incorporated by reference to Exhibit
10.52 of INSpire's Form 10-K for the year ended December
31, 1998, filed on March 25, 1999).
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.50 -- Amendment No. 1 to the Commercial Lease Agreement,
effective May 1, 1999, between IIS Realty Ltd. and
INSpire.
10.51 -- Amendment No. 2 to the Commercial Lease Agreement,
effective November 1, 1999, between IIS Realty Ltd. and
INSpire.
10.52 -- Letter agreement, dated as of October 14, 1999, between
INSpire and Kenneth J. Meister.
10.53 -- Letter agreement, dated as of October 14, 1999, between
INSpire and William J. Smith, III.
10.54 -- Letter agreement, dated as of December 10, 1999, between
INSpire and William J. Smith, III.
10.55 -- Master Services Agreement, dated as of December 30, 1999,
between INSpire and Millers American Group and its
affiliates.
11 -- Statement regarding Computation of Per Share Earnings.
21 -- Subsidiaries of the Registrant.
23 -- Consent of Deloitte & Touche LLP.
24 -- Power of Attorney (included on signature page of this
Form 10-K).
27 -- Financial Data Schedule (included in SEC-filed copy
only).
</TABLE>
<PAGE> 1
EXHIBIT 10.50
AMENDMENT NO. 1
TO
COMMERCIAL LEASE AGREEMENT
BY AND BETWEEN
IIS REALTY, LTD., AS LANDLORD
AND
INSPIRE INSURANCE SOLUTIONS, INC., AS TENANT
This Amendment No. 1 to the Commercial Lease Agreement dated as of November 4,
1998 by and between IIS Realty Ltd., a Texas limited partnership, as Landlord
and INspire Insurance Solutions, Inc., as Tenant, (the "Lease Agreement"), is
entered into as of the 1st day of May, 1999 by and between Landlord and Tenant.
W I T N E S S E T H:
WHEREAS, Tenant has heretofore leased from Landlord certain space
located on the first (1st), second (2nd) and third (3rd) floors of that certain
office building known as 300 Burnett Street, City of Fort Worth, Tarrant County,
Texas (hereinafter referred to as the "Building");
WHEREAS, Tenant hereby desires to increase the amount of square footage
covered by the Lease;
WHEREAS, such change will necessitate the amendment of the Lease
Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained and contained in the Lease Agreement, the parties do hereby agree and
amend such Lease Agreement as follows:
1. The demised premises shall be described as follows:
The entire first (1st), second (2nd), third (3rd) and a
portion of the fourth (4th) floor of that certain building located at
300 Burnett Street, Fort Worth, Texas, comprising approximately 101,610
rentable square feet.
2. Paragraph (a), on Page one (1) of the Lease is deleted in its
entirety and the following substituted therefor:
(a) RENT: Tenant agrees to pay the Landlord, without offset or
deduction, rent for the demised premises at the rate of (i) Eight
Dollars ($8.00) per rentable square foot, totaling
1
<PAGE> 2
Sixty Seven Thousand Seven Hundred Forty and 00/100 Dollars
($67,740.00) per month in advance effective May 1, 1999, for the
remainder of the first five (5) years of the term and (ii) Nine and
00/100 Dollars ($9.00) per rentable square foot, totaling Seventy Six
Thousand Two Hundred Seven and 05/100 Dollars ($76,207.50) per month in
advance for the remaining five (5) years of the term. One such monthly
installment shall be due and payable on or before the beginning date of
this lease, and a like monthly installment shall be due and payable on
or before the first day of each succeeding calendar month during the
term hereof; provided that, in the event the term hereof shall commence
or end during a calendar month, the rent for any fractional calendar
month following the commencement or preceding the end of the term of
this lease shall be pro rated by days.
Tenant has deposited with Landlord, upon delivery of this Lease, One
Hundred Twenty-eight Thousand Two Hundred Thirteen and 32/100 Dollars
($128,213.32) to be applied as follows:
3. Save and except the foregoing amendments, all other paragraphs and
covenants of the Lease Agreement shall remain in full force and effect as
therein stated.
EXECUTED to be effective the 1st day of May, 1999.
LANDLORD:
IIS Realty, Ltd., a Texas limited
partnership
By: Dunham Solutions, L.L.C., a Texas
limited liability company
By: /s/ F. GEORGE DUNHAM, III
-------------------------------
Name: F. George Dunham, III
Title: Managing Member
TENANT:
INSpire Insurance Solutions, Inc.
By: /s/ KENNETH J. MEISTER
------------------------------------
Name: Kenneth J. Meister
----------------------------------
Title: EVP & CFO
---------------------------------
2
<PAGE> 1
EXHIBIT 10.51
AMENDMENT NO. 2
TO
COMMERCIAL LEASE AGREEMENT
BY AND BETWEEN
IIS REALTY, LTD., AS LANDLORD
AND
INSPIRE INSURANCE SOLUTIONS, INC., AS TENANT
This Amendment No. 2 to the Commercial Lease Agreement dated as of November 4,
1998 by and between IIS Realty Ltd., a Texas limited partnership, as Landlord
and INspire Insurance Solutions, Inc., as Tenant, as amended by Amendment No. 1
to Commercial Lease Agreement dated May 1, 1999 (the "Lease Agreement"), is
entered into as of the 1st day of November, 1999 by and between Landlord and
Tenant.
W I T N E S S E T H:
WHEREAS, Tenant has heretofore leased from Landlord certain space located
on the first (1st), second (2nd), third (3rd) floors and a portion of the fourth
(4th) floor of that certain office building known as 300 Burnett Street, City of
Fort Worth, Tarrant County, Texas (hereinafter referred to as the "Building");
WHEREAS, Tenant hereby desires to increase the amount of square footage
covered by the Lease;
WHEREAS, such change will necessitate the amendment of the Lease Agreement.
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained and contained in the Lease Agreement, the parties do hereby agree and
amend such Lease Agreement as follows:
1. The demised premises shall be described as follows:
The entire first (1st), second (2nd), third (3rd) and fourth (4th)
floors of that certain building located at 300 Burnett Street, Fort Worth,
Texas, comprising approximately 129,380 rentable square feet.
2. Paragraph (a), on Page one (1) of the Lease is deleted in its entirety
and the following substituted therefor:
1
<PAGE> 2
(a) RENT: Tenant agrees to pay the Landlord, without offset or
deduction, rent for the demised premises at the rate of (i) Eight Dollars
($8.00) per rentable square foot, totaling Eighty Six Thousand Two Hundred
Fifty Three and 33/100 Dollars ($86,253.33) per month in advance effective
November 1, 1999, for the remainder of the first five (5) years of the term
and (ii) Nine and 00/100 Dollars ($9.00) per rentable square foot, totaling
Ninety Seven Thousand Thirty Five and 00/100 Dollars ($97,035.00) per month
in advance for the remaining five (5) years of the term. One such monthly
installment shall be due and payable on or before the beginning date of
this lease, and a like monthly installment shall be due and payable on or
before the first day of each succeeding calendar month during the term
hereof; provided that, in the event the term hereof shall commence or end
during a calendar month, the rent for any fractional calendar month
following the commencement or preceding the end of the term of this lease
shall be pro rated by days.
Tenant has deposited with Landlord, upon delivery of this Lease, One
Hundred Twenty-eight Thousand Two Hundred Thirteen and 32/100 Dollars
($128,213.32) to be applied as follows:
3. Save and except the foregoing amendments, all other paragraphs and
covenants of the Lease Agreement shall remain in full force and effect as
therein stated.
EXECUTED to be effective the 1st day of December, 1999.
LANDLORD:
IIS Realty, Ltd., a Texas limited partnership
By: Dunham Solutions, L.L.C., a Texas
limited liability company
By: /s/ F. GEORGE DUNHAM, III
----------------------------
Name: F. George Dunham, III
Title: Managing Member
TENANT:
INSpire Insurance Solutions, Inc.
By: /s/ WILLIAM J. SMITH, III
----------------------------
Name: William J. Smith, III
Title: President
2
<PAGE> 1
EXHIBIT 10.52
October 14, 1999
Kenneth J. Meister
INSpire Insurance Solutions, Inc.
300 Burnett Street Fort
Worth, TX 76102
Dear Ken:
This is to confirm our discussions regarding our agreement to waive certain
notice provisions under your employment agreement dated January 11, 1999 with
INSpire Insurance Solutions, Inc. (the "COMPANY") Section 8(c) of your
employment agreement provides that you may terminate the employment agreement
upon one (l) year written notice. Section 8(d) of the employment agreement
provides that the Company may terminate the employment agreement upon 180 days
notice. In view of the Company's decision to pursue strategic alternatives and
the inherent uncertainty regarding what, if any, alternatives may be pursued, we
have agreed that it would be appropriate to waive the notice requirements under
the employment agreement as described below.
Accordingly, we agree as follows:
A. You agree that no notice of termination of employment may be given by
you prior to January 1, 2000. After January 1, 2000, you may elect to
terminate the employment agreement upon 60 days prior written notice
to the Company; provided, however, that the effective date for
termination of employment shall not be earlier than March 31, 2000.
You agree to continue to perform the duties contemplated by your
employment agreement through at least March 31, 2000 and in connection
therewith you acknowledge that you will continue to serve as Chief
Financial Officer of the Company with responsibility for the
preparation, execution and filing of the Company's Annual Report or
Form 10K for the year ending December 31, 1999.
B. Subject to your compliance with Section A above, in the event that you
elect to terminate the employment agreement by giving notice after
January 1, 2000, (i) you will be entitled to the compensation upon
termination as specified in Sections 9(a) and 9(d) of your employment
agreement, and (ii) you may elect to receive a lump sum payment equal
to the present value of the amount of compensation upon termination
payable to you discounted by the then current Treasury Bill rate for
the remaining period of time during which such compensation is payable
pursuant to Section 9(d) of your employment agreement.
C. After January 1, 2000, the Company may elect to terminate your
employment agreement at any time upon 60 days written notice to you.
D. In the event of termination of your employment agreement by you or by
the Company, you agree to resign as of the date of such termination
any position you hold as an officer of the Company.
Except as specifically described above, this letter shall not be deemed to
be a waiver or modification of any other provision of your employment agreement.
INSpire Insurance Solutions, Inc.
By: /s/ F. GEORGE DUNHAM, III
------------------------------------------
F. George Dunham, III, Chairman and CEO
Acknowledged and Agreed:
/s/ KENNETH J. MEISTER
- -------------------------------
Kenneth J. Meister
<PAGE> 1
EXHIBIT 10.53
October 14, 1999
William J. Smith, III
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, TX 76102
Dear Bill:
This is to confirm our discussions regarding our agreement to waive certain
notice provisions under your employment agreement dated April 28, 1998 with
INSpire Insurance Solutions, Inc. (the "COMPANY"). Section 8(c) of your
employment agreement provides that you may terminate the employment agreement
upon one (l) year written notice. Section 8(d) of the employment agreement
provides that the Company may terminate the employment agreement upon 180 days
notice. In view of the Company's decision to pursue strategic alternatives and
the inherent uncertainty regarding what, if any, alternatives may be pursued, we
have agreed that it would be appropriate to waive the notice requirements under
the employment agreement as described below.
Accordingly, we agree as follows:
A. You agree that no notice of termination of employment may be given by
you prior to January 1, 2000. After January 1, 2000, you may elect to
terminate the employment agreement upon 7 days prior written notice to
the Company. In the event that you elect to terminate the employment
agreement by giving such notice, you will be entitled to the
compensation upon termination as specified in Sections 3(c)(ii), 9(a)
and 9(d) of your employment agreement.
B. After January 1, 2000, the Company may elect to terminate your
employment agreement at any time upon 7 days written notice to you.
C. In the event of termination of your employment agreement by you or by
the Company, you agree to resign as of the date of such termination
any position you hold as a director or officer of the Company.
Except as specifically described above, this letter shall not be deemed to
be a waiver or modification of any other provision of your employment agreement.
INSpire Insurance Solutions, Inc.
By: /s/ F. GEORGE DUNHAM, III
-------------------------------------
F. George Dunham, III, Chairman and CEO
Acknowledged and Agreed:
/s/ WILLIAM J. SMITH, III
- --------------------------------
William J. Smith, III
<PAGE> 1
EXHIBIT 10.54
William J. Smith, III
1225 Bent Creek Drive
Southlake, Texas 76092
December 10, 1999
F. George Dunham III
Chairman and CEO
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, TX 76102-2799
Dear George:
This is to confirm our discussion whereby I have indicated my intent to
resign my position as an officer and director of INSpire Insurance Solutions,
Inc. ("INSPIRE") effective January 7, 2000. You have agreed to waive the notice
of termination of employment requirement as currently set forth in my employment
agreement as amended by letter dated October 14, 1999 so that my intention to
resign may be communicated to the board of directors at its scheduled meeting on
December 10, 1999 rather than waiting to give such notice until January 1, 2000.
In consideration for your waiver of the notice requirement, I agree that
all of my outstanding stock options issued to me by INSpire are hereby canceled
and I waive any rights to exercise any stock options after the date of this
letter. Accordingly, this letter constitutes my release of INSpire from any
claim with respect to stock options issued to me, and I acknowledge that any
stock options I held are now canceled and no longer outstanding.
Yours truly,
/s/ WILLIAM J. SMITH, III
William J. Smith, III
Acknowledged and Agreed:
INSpire Insurance Solutions, Inc.
By:/s/ F. GEORGE DUNHAM, III
----------------------------
F. George Dunham, III
CEO
<PAGE> 1
EXHIBIT 10.55
================================================================================
MASTER SERVICES AGREEMENT
between
INSpire Insurance Solutions, Inc.
and
Each Millers Entity Executing a Service Addendum
Dated as of [12-30], 1999
================================================================================
THIS AGREEMENT IS SUBJECT TO ARBITRATION UNDER
THE RULES AND REGULATIONS OF THE AMERICAN
ARBITRATION ASSOCIATION AS PROVIDED
IN ARTICLE IX HEREOF.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I TERMS OF ENGAGEMENT FOR SERVICES ..................................... 1
Section 1.1 Terms and Conditions; Service Addendum ............................. 1
Section 1.2 Engagement to Provide the Addendum Services ........................ 7
Section 1.3 Exclusivity of the Addendum Services ............................... 7
Section 1.4 Addendum Service Fees; Adjustment of Addendum Service Fees ......... 8
Section 1.5 Taxes .............................................................. 9
Section 1.6 Right of First Refusal for Additional Services .................... 10
ARTICLE II REPRESENTATIONS AND WARRANTIES OF EACH CUSTOMER ..................... 11
Section 2.1 Corporate Status; Qualification ................................... 11
Section 2.2 Corporate Power and Authority ..................................... 11
Section 2.3 Enforceability .................................................... 11
Section 2.4 No Conflict; Consents ............................................. 11
Section 2.5 Infringement ...................................................... 11
ARTICLE III REPRESENTATIONS AND WARRANTIES OF INSPIRE ........................... 11
Section 3.1 Corporate Status; Qualification ................................... 12
Section 3.2 Corporate Power and Authority ..................................... 12
Section 3.3 Enforceability .................................................... 12
Section 3.4 No Conflict; Consents ............................................. 12
Section 3.5 Year 2000 ......................................................... 12
Section 3.6 Infringement ...................................................... 12
ARTICLE IV PERFORMANCE OF THE ADDENDUM SERVICES ................................ 12
Section 4.1 Designated Representatives ........................................ 12
Section 4.2 Evaluation and Review Process ..................................... 13
Section 4.3 Access to Records and Facilities .................................. 13
Section 4.4 Ownership of Property ............................................. 13
Section 4.5 Customer's Performance Obligations and Acknowledgements ........... 14
Section 4.6 Maintenance of Documents and Files ................................ 14
Section 4.7 Ultimate Discretion ............................................... 14
Section 4.8 Mail Received ..................................................... 14
Section 4.9 Service Error ..................................................... 14
Section 4.10 Year 2000 Compliance .............................................. 15
ARTICLE V CONFIDENTIALITY ..................................................... 15
Section 5.1 Nondisclosure ..................................................... 15
Section 5.2 No Solicitation or Hiring ......................................... 15
Section 5.3 Required Disclosure ............................................... 16
Section 5.4 Remedies for Breach ............................................... 16
Section 5.5 Survival .......................................................... 17
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VI TRADE SECRET AND PROPRIETARY RIGHTS ................................ 16
Section 6.1 No Rights to Software ........................................... 16
Section 6.2 Nondisclosure ................................................... 16
Section 6.3 Survival ........................................................ 17
ARTICLE VII TERMINATION ........................................................ 17
Section 7.1 Termination of Agreement ........................................ 17
Section 7.2 Procedure Upon Expiration and Termination ....................... 17
ARTICLE VIII REMEDIES AND LIMITATION OF LIABILITY ............................... 18
Section 8.1 Indemnification of the Parties .................................. 18
Section 8.2 Liability Limitation ............................................ 19
Section 8.3 Notice of Claim ................................................. 20
ARTICLE IX ARBITRATION ........................................................ 20
Section 9.1 Conditions Precedent ............................................ 20
Section 9.2 Choosing the Arbitrators ........................................ 20
Section 9.3 Procedure ....................................................... 20
Section 9.4 Costs ........................................................... 21
ARTICLE X MISCELLANEOUS ...................................................... 21
Section 10.1 Amendment ....................................................... 21
Section 10.2 Counterparts .................................................... 21
Section 10.3 Entire Agreement ................................................ 21
Section 10.4 Expenses ........................................................ 21
Section 10.5 Governing Law ................................................... 21
Section 10.6 No Assignment ................................................... 21
Section 10.7 No Third Party Beneficiaries .................................... 21
Section 10.8 Notices ......................................................... 21
Section 10.9 Public Announcements ............................................ 22
Section 10.10 Representation by Legal Counsel ................................. 22
Section 10.11 Severability .................................................... 22
Section 10.12 Successors ...................................................... 22
Section 10.13 Time of the Essence ............................................. 22
Section 10.14 Waiver .......................................................... 23
Section 10.15 Force Majeure ................................................... 23
Section 10.16 Attorney's Fees ................................................. 23
Section 10.17 Relationship of the Parties ..................................... 23
Section 10.18 Drafting ........................................................ 23
Section 10.19 Headings ........................................................ 23
APPENDIX A Definitions and Interpretations
SCHEDULE 1.4(e) Service Levels
EXHIBIT 1.1 Form of Service Addendum
</TABLE>
<PAGE> 4
MASTER SERVICES AGREEMENT
THIS MASTER SERVICES AGREEMENT (together with Appendix A, Exhibit 1.1
and each Service Addendum executed on or after the date hereof, this
"AGREEMENT"), dated as of [12-30], 1999 (the "SIGNING DATE"), is between
INSpire Insurance Solutions, Inc., a Texas corporation ("INSpire"), and each
Millers entity that executes a Service Addendum on or after the Signing Date
(each a "CUSTOMER"). INSpire and each Customer are sometimes collectively
referred to as the "PARTIES," and individually referred to as a "PARTY."
PRELIMINARY STATEMENTS
A. Each Customer desires INSpire to provide certain policy, claims and
other administration services to Customer, and INSpire desires to provide such
services to each Customer.
B. Each Party is willing to provide for such services in accordance
with the terms and conditions set forth in this Agreement.
C. Capitalized terms used in this Agreement are defined or indexed in
Appendix A. Appendix A is incorporated into this Agreement by this reference.
STATEMENT OF AGREEMENT
NOW, THEREFORE, in consideration of the preliminary statements and the
mutual agreements, covenants, representations and warranties set forth in this
Agreement and for other good, valid and binding consideration, the receipt and
sufficiency of which are hereby acknowledged, the Parties, intending to be
legally bound, hereby agree as follows:
ARTICLE I.
TERMS OF ENGAGEMENT FOR SERVICES
Section 1.1 Terms and Conditions; Service Addendum.
(a) General Applicability of this Agreement. This Agreement
sets forth the terms and conditions applicable to each Service Addendum. A
Party's execution of a Service Addendum will be deemed to be such Party's (i)
acknowledgement and acceptance of the terms and conditions set forth in this
Agreement and (ii) execution and delivery of this Agreement. If a conflict
exists between the terms and conditions of this Agreement and any Service
Addendum, then the terms and conditions set forth in such Service Addendum will
prevail.
(b) Service Addendum. Each Service Addendum will be in
substantially the form attached to this Agreement as Exhibit 1.1. Each Service
Addendum will specify, among other things, (i) the date on which such Service
Addendum was executed, (ii) the parties to such Service Addendum, (iii) the
services to be provided by INSpire pursuant to such Service Addendum (the
"ADDENDUM SERVICES"), (iv) the time period during which INSpire will perform the
Addendum Services (the "ADDENDUM TERM"), (v) the fees payable by Customer to
INSpire in consideration of the Addendum Services (the "ADDENDUM SERVICE FEES")
and (vi) any other
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terms and conditions applicable to such Service Addendum. Each Service Addendum
will constitute a separate, distinct and independent agreement and contractual
obligation of the Parties executing such Service Addendum.
(c) Policy Administration Services. If policy services are to
be provided pursuant to a particular Service Addendum, then, unless otherwise
specifically noted in such Service Addendum, that Service Addendum will be
deemed to require the policy administration services set forth in this
subsection. Specifically, INSpire will:
(i) provide the technical and administrative
services to support the acquisition of policies;
(ii) provide the necessary functions to satisfy all
applicable insurance department instructions for the specific services
provided under this Agreement;
(iii) develop expert system rules to incorporate
Customer's desired risk profiles. Each Party acknowledges and
understands that INSpire will not be defining any underwriting
guidelines for any Customer;
(iv) issue Customer's policies, process renewals,
cancellations, and reinstatements. INSpire will use such non-renewal or
cancellation notices as may be required by policy wording or regulatory
authority. Customer will advise INSpire of appropriate wording;
(v) process invoices for additional premiums and
renewal bills;
(vi) process refunds for return premiums;
(vii) handle inquiries from Producers, insureds,
premium finance and mortgage companies and other relevant third parties
(e.g. mortgagees);
(viii) provide data processing support for policy
processing, including imaging of documents, data entry, editing, expert
system underwriting, electronic workflow, rating, coding, reporting,
accounting, and maintenance of policy records;
(ix) insure that personnel assigned to support
Customer are appropriately licensed and trained and are provided with
the necessary space, furniture, fixtures, electrical power, computer
connections, telephones, and other required assets to support the
services;
(x) mail all necessary policy documents and
promotional material/marketing items at Customer's expense to relevant
parties;
(xi) support Customer billing through direct bill;
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<PAGE> 6
(xii) provide accounting services for premiums by receiving
and distributing premiums, maintaining trust accounts, agency accounts and
paying Producer commissions, in accordance with Customer's obligations
including, but not limited to:
(A) Premium Bank Account. Promptly upon receipt thereof,
INSpire will deposit all premiums and other funds collected
for business written by or on behalf of Customer into a
deposit-only bank account to be established and controlled by
Customer. INSpire will be deemed to have a fiduciary
responsibility to Customer with regard to such funds of
Customer;
(B) Operating Account. Customer will establish and fund a
separate bank account which INSpire may draw upon to pay
return premium due policyholders and commissions due Producers
(hereinafter called the "Operating Account"), INSpire will
reconcile all disbursements from the Operating Account each
month by type and amount of disbursement (e.g., return
premium, commissions due to or from Producers) and furnish a
copy to Customer;
(C) Monthly Reports. All month-end management reports in
printed format will be provided to Customer within 3 business
days after the end of each month. Further, a cash journal will
be provided to Customer within 3 business days after the end
of each month and all bank reconciliations will be provided to
Customer within 20 business days after the end of each month
with no material reconciling items carried over from the prior
month. All accounting end of the month electronic system
downloads will be transferred to Customer within 2 business
days after the end of each month;
(D) Required Reports. Reports with the information and
statistical data required by Insurance Services Office and
necessary for Customer to prepare any reports required by the
National Association of Insurance Commissioners will be
provided to Customer as necessary or required to prepare such
reports.
(xiii) will calculate and pay commissions to the producer on
Customer's behalf, or will invoice and receive the return of commission from the
producer on return premium transactions and will prepare and mail a Federal 1099
tax statement for each producer paid a commission during a tax year;
(xiv) will handle non underwriting questions from
policyholders, insured and producers concerning policy and/or endorsement
issuance or billing;
(xv) will provide policy, premium and payment information and
on-line access to the policy master file;
(xvi) will establish and maintain written operational
procedures to handle all business related to the policies;
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<PAGE> 7
(xvii) will charge Customer for all agreed upon
additional reports or modifications as requested in writing by Customer
on a time and materials basis utilizing the appropriate mix of service
personnel required to perform the modifications or produce new reports.
Rates for such personnel are listed in the applicable Service Addendum;
(xviii) will maintain a disaster recovery plan to be
implemented in the event of an occurrence of a catastrophic event; and
(xix) Positive Pay will be established for all
business currently being serviced by INSpire for all the entities
executing this Agreement as it becomes available for programs, but no
later than 180 days after the execution of this agreement. Future
business serviced by INSpire under the terms of a Service Addendum will
have Positive Pay established on the Addendum Effective Date of such
Service Addendum.
(d) Claims Administration Services. If claims services are to
be provided pursuant to a particular Service Addendum, then, unless otherwise
specifically noted in such Service Addendum, that Service Addendum will be
deemed to require the claims administration services set forth in this
subsection. Specifically, INSpire will:
(i) investigate, evaluate, and handle each claim
reported according to applicable state law, the terms and conditions of
the policy and any written standards provided by Customer using
appropriately trained and licensed personnel. Customer grants INSpire
the authority to provide the foregoing claims administration services;
provided, however that INSpire will not have any authority to alter or
discharge any policy or waive any policy provision or condition.
(ii) establish a claims operation center that will
function as a control unit;
(iii) verify coverage on all cases;
(iv) administer the appraisal/assessment process
using a combination of staff, independent appraisers and direct repair
facilities reasonably acceptable to Customer;
(v) perform all reasonable and necessary
administrative and clerical work in connection with claim or loss
reports;
(vi) establish and maintain a claim file for each
reported claim or loss. The claim file will have a daily activity log,
which will be available for review at any and all reasonable times by
Customer subject to the provisions of the Agreement;
(vii) record and report each claim promptly to
Customer with a recommended reserve; and will consult with, and seek
consent from, Customer with respect to any of the following:
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(A) any loss or claim resulting in legal action being
instituted against Customer's insured, INSpire or Customer;
(B) any loss or claim causing a complaint to be
filed with any regulatory authority;
(C) any inquiry from any regulatory authority,
including but not limited to any insurance department, with respect to
any claim or claims, even if no complaint causes such inquiry;
(D) any claim in which INSpire deems appropriate to
rescind policy coverage for material misrepresentation;
(E) any claim involving an allegation of extra
contractual obligations, or bad faith claim handling;
(F) any claim involving a fatality, major amputation,
spinal cord or brain damage, loss of eyesight, extensive burns,
poisoning, or multiple fractures;
(G) any claim that Customer desires to be kept
advised of during the life of the claim; or
(H) any claim where there has been a demand for
policy limits and INSpire does not evaluate the value of the claim to
include settlement at that amount;
(I) any claim involving asbestos, pollution, toxic
waste and lead or paint poisoning;
(J) potential subrogation in excess of $40,000;
(K) any claim which is very likely to result in the
commencement of litigation within 30 days;
(L) any claim involving pharmaceuticals, communicable
diseases, rape, child molestation or multiple claim food poisoning;
(viii) provide monthly and year-to-date reports on all claims
activity including new claims reported, claims pending, claims closed and
reserve changes. The reports will include:
(A) information and statistical data (1) required by
Insurance Services Office, (2) necessary for Customer to prepare any
reports required by National Association of Insurance Commissioners, or
(3) other reports reasonably requested by Customer;
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<PAGE> 9
(B) loss runs with paid claims and outstanding
reserves remaining at the end of each monthly report period,
categorized as indemnity, medical payment, loss adjustment expense
separated by other expense and legal expense (to the extent that
Customer properly inputs the necessary data), plus any other
information required by the Annual Statement instructions or state
regulatory agencies;
(C) check registers;
(D) reports needed by Customer for the filing of
reinsurance claims or quarterly reinsurance updates;
(ix) perform a periodic review at mutually agreed upon
intervals of outstanding claim reserves, and recommend changes to outstanding
claim reserves;
(x) prepare checks and vouchers, compromises, releases,
agreements and any other documents reasonably necessary to finalize and close
claims. INSpire will issue payments of claims and allocate loss adjustment
expenses only within the guidelines as authorized by Customer. For purposes of
settling claims and paying claim-related expenses, Customer has agreed to
establish, maintain and fund a separate bank account from which INSpire may draw
against as hereinafter set forth (the "CLAIM ACCOUNT"). Customer agrees to
deposit additional funds into the Claim Account on a weekly basis if necessary
to maintain it at a level sufficient to allow INSpire to carry out its
obligations under this Agreement. INSpire will regularly provide information and
estimates to Customer to enable Customer to maintain the Claim Account at an
appropriate level. Customer will provide to INSpire such information as is
necessary for INSpire to draw checks on the Claim Account. INSpire hereby
guarantees that any check it prepares will be signed and issued only in
accordance with the procedures set forth below:
<TABLE>
<CAPTION>
CHECK AMOUNT NUMBER OF TYPE OF SIGNATURE AUTHORIZED
SIGNATURES SIGNATORY
REQUIRED
<S> <C> <C> <C>
0.01 - $1,999.99 1 1 Facsimile INSpire
$2,000.00 - $9,999.99 2 1 Facsimile & 1 Original INSpire
$10,000.00 - $19,999.99 2 2 Original signatures INSpire
$20,000+ 2 2 Original signatures 1 INSpire,
1 Customer
</TABLE>
Facsimile signatures can be replaced with original signatures. Original
signatures may not be replaced with facsimile signatures. Exceptions will be
submitted to INSpire in writing by Customer.
INSpire will promptly deposit any monies collected through salvage and
subrogation to the Claim Account, and maintain a register of all such
collections and deposits (the
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<PAGE> 10
"SALVAGE AND SUBROGATION REGISTER"). The Salvage and Subrogation Register will
include, but will not be limited to, the following information: date of deposit,
date of receipt of funds, the claim number, the payer, and the amount and
purpose of such payment. (The "CLAIM REGISTER" will include, but will not be
limited to, the following information: claim number; date of check; payee;
amount; and check number.) INSpire will reconcile the Claim Register and the
Salvage and Subrogation Register to the Claim Account on a monthly basis;
(xi) maintain service standards and claims documentation in
accordance with standards set by Customer and agreed to by INSpire. INSpire will
be in compliance with all state regulations dealing with the adjusting and
handling of claims. INSpire will periodically review the development of the
claims handling procedure with Customer to identify problems and recommend
corrective action;
(xii) pursue and prosecute diligently Customer's salvage and
subrogation rights relating to any losses. INSpire will use reasonable efforts
to collect and deposit funds arising from the enforcement of such rights into
the Claim Account. INSpire will report monthly on salvage/subrogation receipts;
(xiii) provide Special Investigative Services in accordance
with guidelines agreed to by Customer on a time and expense basis;
(xiv) provide Customer claim information to prepare reports
(A) required by the Internal Revenue Service, and (B) other reports reasonably
requested by Customer;
(xv) will maintain a disaster recovery plan to be implemented
in the event of an occurrence of a catastrophic event;
(xvi) upon (A) receipt by INSpire of a demand for arbitration
or notice that litigation has been filed concerning a claim or feature or (B) a
determination by Customer that it is necessary to commence litigation of a
claim, feature, or salvage or subrogation claim, INSpire will promptly provide
the Designated Representative with written notice of Customer's option to assume
all further responsibility for the administration of the disputed claim or
feature; and, in the event Customer elects within ten (10) days to assume such
responsibility for the disputed claim or feature, INSpire will promptly transfer
to Customer such disputed claim or feature, and will promptly deliver to
Customer the original claim file, notes, photographs and any Special
Investigation Unit files, which material will be returned to INSpire at the
conclusion of the arbitration or litigation. Notwithstanding Customer's election
with respect to the Party responsible for the administration of any disputed
claim or feature, Customer will be responsible for all expenses, including
attorneys' fees, incurred after receipt by INSpire of a demand for arbitration
or after receipt by INSpire of notice that litigation has been filed concerning
a claim or feature; and
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(xvii) Positive Pay will be established for all
business currently being serviced by INSpire for all the entities
executing this Agreement as it becomes available for programs, but no
later than 180 days after the execution of this agreement. Future
business serviced by INSpire under the terms of a Service Addendum
will have Positive Pay established on the Addendum Effective Date of
such Service Addendum.
Section 1.2 Engagement to Provide the Addendum Services. Each Customer
engages INSpire to provide the Addendum Services set forth in each Service
Addendum to which such Customer is a Party, and INSpire will provide the
Addendum Services to such Customer, each upon the terms and conditions set forth
in this Agreement.
Section 1.3 Exclusivity of the Addendum Services. During each Addendum
Term, INSpire will be the sole and exclusive provider of the Addendum Services
to Customer (other than Customer's rendering an incidental amount of the
Addendum Services on its own behalf, which will not in any way affect the amount
of Addendum Service Fees due to INSpire). In furtherance of the immediately
preceding sentence, Customer acknowledges that during each Addendum Term (a)
INSpire will have the sole and exclusive right to provide the Addendum Services
to Customer, (b) Customer will not use or engage any other person or entity
(including Customer or an Affiliate of Customer) to render the Addendum
Services, (c) Customer will not take any actions or do any things the intent or
effect of which is to circumvent or affect adversely the provisions of this
Section and (d) INSpire will have no restrictions on its right to market to, and
perform services for, the property and casualty insurance industry which are
similar to the Addendum Services provided pursuant to this Agreement.
Section 1.4 Addendum Service Fees; Adjustment and Discount of Addendum
Service Fees.
(a) Monthly Addendum Service Fees. During each Addendum Term,
Customer will pay to INSpire for the performance of the Addendum Services the
monthly Addendum Service Fees set forth on the applicable Service Addendum.
Customer will pay to INSpire the Addendum Service Fees within 15 days of
Customer's receipt of INSpire's invoice for the Addendum Services performed
during the previous calendar month. Customer's payment of the Addendum Service
Fees will not be deemed to be Customer's acceptance regarding the amount or
calculation of such Addendum Service Fees, and each Party agrees to resolve in
good faith any dispute regarding the amount or calculation of Addendum Service
Fees.
(b) Negotiated Adjustment of Addendum Service Fees. Each Party
agrees to negotiate in good faith for an adjustment to the Addendum Service Fees
in the event (i) of any statutory, regulatory or judicial change or other
circumstance not within the control of any Party that results in a material
increase or decrease in the Addendum Services to be provided pursuant to the
applicable Service Addendum or (ii) the Parties agree to a material increase or
decrease in the Addendum Services to be provided pursuant to the applicable
Service Addendum.
(c) Discount of Addendum Service Fees. The amount of the
monthly Addendum Service Fees due and payable to INSpire will be reduced when
such monthly Addendum Service Fees reach certain levels, as set forth below. The
Parties agree that the
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following discounts will be based on and apply to the aggregate monthly amount
of Addendum Service Fees due to INSpire as a result of performing the Addendum
Services for all Service Addendums attached hereto. In calculating the aggregate
monthly amount of Addendum Service Fees, the service fees paid to INSpire
pursuant to the Millers American Group/INSpire Service Agreement dated September
1, 1999 will also be used to calculate the discount pursuant to this section.
<TABLE>
<CAPTION>
Aggregate Monthly
Addendum Service Fees
(excluding Catastrophe Fees) Discount
---------------------------- ----------------------------------------
<S> <C>
up to 2,125,000 $0
from 2,125,001 to 2,375,000 $0 + 10% of amount over $2,125,000
from 2,375,001 to 2,625,000 $25,000 + 12% of amount over $2,375,000
from 2,625,001 to 2,875,000 $55,000 + 14% of amount over $2,625,000
from 2,875,001 to 3,125,000 $90,000 + 16% of amount over $2,875,000
from 3,125,001 to 3,375,000 $130,000 + 18% of amount over $3,125,000
from 3,375,001 to 3,625,000 $175,000 + 19% of amount over $3,375,000
over 3,625,000 $222,500 + 20% of amount over $3,625,000
</TABLE>
(d) Benchmark Adjustment. After the completion of the fifth
Contract Year of each Service Addendum, the then-effective Addendum Service Fees
applicable to such Service Addendum will be adjusted, if at all, through the use
of an independent third party benchmarking services. Prior to the completion of
the fifth Contract Year of each Service Addendum, the Parties will mutually
agree on the scope of, and the methodology to be used in, the benchmarking
process. The fees and services charged by the party conducting the benchmark
service will be borne equally by the parties to such Service Addendum. If the
benchmark process demonstrates that the quality of the Addendum Services
received by Customer in relation to the Addendum Service Fees are not in the
upper half of the comparison group used in the benchmark process, then INSpire
will promptly adopt a plan (including corrective action and/or a reduction in
the Addendum Service Fees) that will remedy any deficiencies identified in the
benchmark process.
(e) Penalty/Award Payments. From (i) the later to occur of an
Addendum Effective Date or the termination of an Addendum Implementation Period
(if applicable), until (ii) the earlier of the termination of that Service
Addendum or its Addendum Expiration Date, INSpire will achieve each of those
service levels set forth on Schedule 1.4(e) that are applicable to the Addendum
Services set forth on the applicable Service Addendum (the "SERVICE LEVELS"). If
INSpire fails to achieve or exceeds the Service Levels with the frequency or in
the manner set forth on Schedule 1.4(e), then INSpire will be responsible for
the penalty payments, or entitled to the award payments, as the case may be,
specified on Schedule 1.4(e). After the Parties have reviewed and agreed upon
the content of the Monthly Service Report, the penalty payments and award
payments will be detailed on INSpire's monthly invoice, and will be subject to
the same payment terms specified in subsection (a) above. Each Party
acknowledges that the payments specified on Schedule 1.4(e) will not subject to
the limitations set forth in Section 8.2(a).
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<PAGE> 13
(f) Adjustment for Changes in the Consumer Price Index. For
purposes of calculating the Addendum Services Fees payable with respect to each
Service Addendum, all fixed dollar amounts set forth in Paragraph 5 (or the
applicable Addendum Service Fee paragraph of such Service Addendum) of each
Service Addendum will be subject to increase or decrease at the beginning of
each Contract Year equal to the percentage change in the Consumer Price
Index--All Urban User (Fort Worth, Texas) for the latest twelve month period
ending on the date of each anniversary of the Addendum Effective Date.
Section 1.5 Taxes. Customer will pay all tariffs and taxes, however
designated or levied, that are applicable to any Addendum Services and/or any
Addendum Service Fees. Such tariffs and taxes include state and local sales and
use taxes and any other tariff or tax based on the Addendum Services performed
or the payment of the Addendum Service Fees. Notwithstanding the foregoing,
Customer will not be responsible for, and INSpire will pay (a) any franchise or
income taxes based upon the income of INSpire and (b) any personal property or
similar taxes based upon the personal or real property owned or leased by
INSpire. All Parties will take all reasonable actions necessary to minimize and
mitigate any tariffs or taxes, however designated, that may be levied on or
after the Signing Date and will confer with the other Party prior to making any
filing on or behalf of such Party.
Section 1.6 Right of First Refusal for Additional Services.
(a) Notice of Bid for Additional Services. Subject to Section
1.3, if, at any time and from time to time during an Addendum Term, any Customer
elects to solicit a bid from third parties (a "BID") to perform any services
similar to the Addendum Services set forth in the Service Addendums (such
additional services, the "ADDITIONAL SERVICES"), such Customer will provide to
INSpire all the information necessary for INSpire to submit a Bid on a timely
basis for such Additional Services.
(b) Grant of Right of First Refusal. If such Customer decides
to accept any bona fide Bid other than INSpire's Bid, then, prior to such
Customer's acceptance of such competing bona fide Bid, such Customer will
provide to INSpire written notice setting forth the terms of such competing Bid,
including the price, service levels, technology to be employed and time table to
implement the Additional Services (the terms of such competing Bid, the
"COMPETING TERMS"). At any time during the fifteen (15) day period immediately
following INSpire's receipt of the notice setting forth the Competing Terms,
INSpire will have the exclusive right, but not the obligation, to amend its Bid
to meet or exceed the Competing Terms (or terms as similar as reasonably
possible).
(c) Exercise of the Right of First Refusal. INSpire will
exercise its right of first refusal granted pursuant to this Section, if at all,
by delivering written notice thereof ("EXERCISE NOTICE") to such Customer within
the fifteen (15) day period specified above. If INSpire timely delivers the
Exercise Notice, then INSpire will implement the Additional Services on terms
substantially the same as set forth in INSpire's amended Bid.
(d) Failure to Deliver an Exercise Notice. If INSpire fails to
timely deliver the Exercise Notice or, having timely delivered such Exercise
Notice, fails to implement the
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<PAGE> 14
Additional Services within the time period specified in INSpire's amended Bid,
then such Customer, at any time within one hundred thirty-five (135) days after
INSpire's failure to take such appropriate action, may accept the competing Bid
on the Competing Terms. If Customer does not accept the competing Bid on the
Competing Terms within such one hundred thirty-five (135) day period, then such
Customer will again be required to comply with the provisions of this Section.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF EACH CUSTOMER
Each Customer represents and warrants that the statements contained in
this Article are correct and complete as of the Signing Date and as of the
Addendum Effective Date, except in each case as specifically stated:
Section 2.1 Corporate Status; Qualification. Customer is an entity
duly organized, validly existing and in good standing under the laws of the
state of its formation. Customer is duly qualified and in good standing as a
foreign entity under the laws of each jurisdiction where qualification is
required, except where the lack of such qualification would not have a Material
Adverse Effect.
Section 2.2 Corporate Power and Authority. Customer has the requisite
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder, to consummate the transactions contemplated hereby.
Customer has taken all requisite action necessary to authorize the execution and
delivery of this Agreement, the performance of its obligations hereunder and the
consummation of the transactions contemplated hereby.
Section 2.3 Enforceability. This Agreement has been duly executed and
delivered by Customer and constitutes a legal, valid and binding obligation of
Customer enforceable against it in accordance with the terms of this Agreement,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
Section 2.4 No Conflict; Consents. The execution, delivery and
performance by Customer of this Agreement will not (a) violate any code,
statute, law, rule, regulation, judgment, decree or injunction of any
governmental authority ("LAW"), (b) violate the articles or certificate of
incorporation or the bylaws of Customer, (c) violate any consent decree, decree,
injunction, judgment, order or writ of any arbitrator or governmental authority
("ORDER") to which Customer is a party or by which any of its assets are bound,
(d) breach any material contract, real property lease or personal property lease
to which Customer is a party, (e) result in the creation of an encumbrance of
any kind on Customer or any of its assets or (f) require any consent or approval
from any person, entity or governmental authority.
Section 2.5 Infringement. During the Term, Customer's Owned Software
and the use by Customer of its Systems as contemplated by this Agreement does
not and will not violate or
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<PAGE> 15
infringe, or constitute an infringement or misappropriation of, any patent,
copyright, trademark, trade secret or other proprietary or contractual rights of
any third party.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF INSpire
INSpire represents and warrants that the statements contained in this
Article are correct and complete as of the Signing Date and as of the Addendum
Effective Date, except in each case as specifically stated:
Section 3.1 Corporate Status; Qualification. INSpire is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Texas. INSpire is duly qualified and in good standing as a foreign
entity under the laws of each jurisdiction where qualification is required,
except where the lack of such qualification would not have a Material Adverse
Effect.
Section 3.2 Corporate Power and Authority. INSpire has the corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
INSpire has taken all corporate action necessary to authorize its execution and
delivery of this Agreement, the performance of its obligations hereunder and the
consummation of the transactions contemplated hereby.
Section 3.3 Enforceability. This Agreement has been duly executed and
delivered by INSpire and constitutes a legal, valid and binding obligation of
INSpire enforceable against it in accordance with the terms of this Agreement,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
Section 3.4 No Conflict; Consents. The execution, delivery and
performance by INSpire of this Agreement will not (a) violate any Law, (b)
violate the articles of incorporation or the bylaws of INSpire, (c) violate any
Order to which INSpire is a party or by which any of its assets are bound, (d)
breach any material contract, real property lease or personal property lease to
which INSpire is a party, (e) result in the creation of an encumbrance of any
kind on INSpire or any of its assets or (f) require any consent or approval from
any person, entity or governmental authority.
Section 3.5 Year 2000. All of INSpire's Systems are and will continue
to be Year 2000 Compliant.
Section 3.6 Infringement. During the Term, INSpire's Owned Software
and the use by INSpire of its Systems as contemplated by this Agreement does not
and will not violate or infringe, or constitute an infringement or
misappropriation of, any patent, copyright, trademark, trade secret or other
proprietary or contractual rights of any third party.
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ARTICLE IV.
PERFORMANCE OF THE ADDENDUM SERVICES
Section 4.1 Designated Representatives. Each Party will designate a
person (such person, or the person designated in writing from time to time by
the appropriate Party to replace such person, a "DESIGNATED REPRESENTATIVE") who
will (a) oversee and manage the performance of such Party's obligations under
this Agreement, (b) serve as such Party's primary managerial point of contact
with the other effected Party, (c) be authorized to act for such Party and on
its behalf with respect to all operational matters relating to this Agreement
and (d) review the operational, procedural and such other changes mutually
agreed upon in writing by the Parties. The Designated Representative will not
have the authority (acting in such person's capacity as a Designated
Representative) to amend this Agreement pursuant to Section 10.1.
Section 4.2 Evaluation and Review Process.
(a) Delivery of Monthly Service Reports. During the Term,
INSpire will provide Customer with a monthly service report within 30 days after
the end of each calendar month that measures actual service levels for the most
recently completed month against the Service Levels set forth on Schedule 1.4(e)
applicable to Customer (the "MONTHLY SERVICE REPORT").
(b) Review of the Addendum Services. The Designated
Representatives will meet on a monthly basis after the delivery of the Monthly
Service Report to review INSpire's performance hereunder and will meet at such
other times as may be reasonably requested by either Designated Representative
to discuss any related matters. The senior executives of each Party to whom such
Designated Representatives report will meet on a periodic basis to review the
relationship between the Parties and to discuss ways to improve the
relationship.
Section 4.3 Access to Records and Facilities.
(a) Customer's Access to INSpire's Records and Facilities.
INSpire will provide Customer and its Affiliates and Representatives reasonable
access to INSpire's facilities and all books, records and accounts necessary to
verify INSpire's compliance with this Agreement. Such access will be made
available upon prior written notice during normal business hours and during the
periods in which INSpire is required to maintain such records. INSpire will
provide the appropriate state insurance departments reasonable access to its
facilities and all necessary books, records and accounts in their then-current
form. Customer will be responsible for ensuring that all persons given access
pursuant to this subsection comply with the confidentiality provisions of
Article V.
(b) INSpire's Access to Customer's Records and Facilities.
Customer will provide, and will cause each of its Affiliates to provide, to
INSpire and its Affiliates and Representatives reasonable access to Customer's
and its Affiliates' facilities and all books, records and accounts necessary to
verify Customer's compliance with this Agreement. Such access will be made
available upon prior written notice during normal business hours and during the
periods in which Customer is required to maintain such records. Customer will
provide the
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appropriate state insurance departments reasonable access to its facilities and
all necessary books, records and accounts in their then-current form. INSpire
will be responsible for ensuring that all persons given access pursuant to this
subsection comply with the confidentiality provisions of Article V.
Section 4.4 Ownership of Property.
(a) Customer's Property. Customer will own all right, title
and interest in and to the content of the policy or claims files, accounting and
Producer files and computer images and storage discs products (back-up of data)
created or developed in connection with, as a result of or incident to the
performance of the Addendum Services.
(b) INSpire's Property. Subject to the foregoing, INSpire
will own all right, title and interest in and to any and all tools, techniques,
processes, procedures, inventions, software, patents, know how, trade secrets
and other copyrights existing on the Signing Date or first discovered, created
or developed by INSpire in connection with, as a result of or incident to the
performance of the Addendum Services.
Section 4.5 Customer's Performance Obligations and Acknowledgements.
INSpire's performance of the Addendum Services require the support and
cooperation of Customer. As such, Customer agrees and acknowledges as follows:
(a) Provide Information. Customer will provide, in a timely
manner and in a format reasonably acceptable to INSpire, the data necessary for
INSpire to perform the Addendum Services, including policy jackets, Customer's
banking institution account information, corporate and subsidiary logos (if
applicable), style and specifications of printed documents such as insurance
policies.
(b) Access to Third Party Software. Subject to Section 2.6 and
any lawful right or restriction, Customer will provide INSpire access to all of
Customer's Software that is necessary for INSpire to perform the Addendum
Services.
Section 4.6 Maintenance of Documents and Files. During each Addendum
Term, INSpire will maintain, as applicable, (a) records of amounts billable to
and payments made on behalf of Customer, (b) records of claims made and losses
incurred, and (c) copies of all policies and applications and correspondence
relating to such policies. INSpire will not destroy these records and documents
without the written permission of Customer for a period of at least five years
from the loss or termination date of the applicable policy, or the period
specified by the applicable state or federal statute regulating preservation of
records, whichever is longer. INSpire may, at its discretion, use magnetic,
optical, and other types of technology to store such data. INSpire agrees to
provide to Customer reasonable supporting documentation regarding any disputed
invoice or claim amount within fifteen days after Customer provides written
notification of the dispute to INSpire.
Section 4.7 Ultimate Discretion. INSpire acknowledges and agrees that
Customer, being at risk and having ultimate responsibility for the policy and
claims to be administered by
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INSpire, will at all times have ultimate discretion with respect to all issues
pertaining to such matters.
Section 4.8 Mail Received. INSpire may receive and open all mail
addressed to Customer or its Affiliates and deal with the contents thereof in
its discretion to the extent that such mail and the contents thereof relate to
the Addendum Services. INSpire agrees to deliver, or to cause to be delivered,
to Customer all mail received by INSpire which is addressed to Customer and does
not relate to the Addendum Services.
Section 4.9 Service Error. If data is processed in error due to an
error or defects in the Addendum Services provided by INSpire, then, upon
INSpire receiving notice of such error or defect, INSpire will reprocess such
data without charge to Customer. If data is processed in error due to an error
caused by Customer or its Representatives, then, upon INSpire's receiving notice
of such error or defect, INSpire will reprocess such data at Customer's expense.
Each Party will be responsible for all remedial expenses related to its error,
including all expenses associated with remailings, help lines and processing
time. Each Party acknowledges that the remedial expenses specified in this
Section will not be subject to the limitations set forth in Section 8.2(a).
Section 4.10 Year 2000 Compliance. To the extent that it is reasonably
determined by any Party that a Party's Systems, the Systems that a Party is
providing access to or use of in accordance with this Agreement or any portion
thereof are not Year 2000 Compliant, INSpire, on the one hand, and each
Customer, on the other hand, agrees to assist in any reasonable manner and to
cooperate and conform its work processes and methodologies to the extent it is
reasonably necessary to assist a Party to formulate and implement promptly a
plan of action to modify its System so that such System is Year 2000 Compliant.
INSpire, on the one hand, and each Customer, on the other hand, will be
obligated to (a) reimburse the other Party for any reasonable expenses incurred
by the other Party in connection with complying with the terms of this Section
and (b) indemnify, defend, and hold harmless the other Party from and against
any Claim incurred by the other Party that arises out of or directly relates to
such Party's Systems not being Year 2000 Compliant. If any of Customer's Systems
are determined not to be Year 2000 Compliant, then the Parties agree (y) to
adjust equitably the Service Levels applicable during the period in which the
plan of action to modify Customer's Systems is being implemented and (z) the
applicable Addendum Implementation Period or Addendum Term, as the case may be.
ARTICLE V.
CONFIDENTIALITY
Section 5.1 Nondisclosure. The Parties hereby agree as follows:
(a) Use of Information. All Confidential Information will be
used solely for the purpose of performing the Addendum Services. In no event
will Confidential Information be used by any party or person receiving
Confidential Information for business or competitive purposes.
(b) Confidentiality. All Confidential Information will be kept
strictly confidential by the Receiving Party and the Receiving Party will
restrict disclosure of
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Confidential Information to only those employees, agents and advisors of the
Receiving Party who have a need to know such information for the purpose of
performing the Addendum Services.
(c) Disclosure to Representatives. Representatives of the
Receiving Party will be informed by the Receiving Party of the confidential
nature of such information and the covenant of confidentiality by the Receiving
Party hereunder, and they will be directed by the Receiving Party to treat such
information confidentially. Before any disclosure or dissemination of any
Confidential Information subject to this Agreement is made to any person, other
than an officer or director of the Receiving Party or its counsel or independent
accountants, the Receiving Party will provide the person to whom such disclosure
is made with a copy of this Agreement.
Section 5.2 No Solicitation or Hiring. During each Addendum Term and
for the six month period immediately following the Addendum Expiration Date,
each Party agrees that, without the effected Party's prior written consent, no
Party nor any of its Affiliates will solicit for employment, employ or otherwise
contract for the services of any person who is or was employed by any other
Party, provided that this Section will not apply to (a) general commercially
published solicitations for employment by a Party or its Affiliates, (b) the
solicitation or hiring of an employee who was not an employee of any other Party
at any time during the six months immediately preceding such solicitation or
hiring.
Section 5.3 Required Disclosure. In the event the Receiving Party or
its Representatives are requested or required in a judicial, administrative or
governmental proceeding to disclose any Confidential Information, the Receiving
Party will cooperate with the Disclosing Party and provide it with prompt notice
of any such request so that the Disclosing Party may seek an appropriate
protective order or waive the Receiving Party's compliance with the provisions
of this Agreement. If, in the absence of a protective order or the receipt of a
waiver hereunder, the Receiving Party or its Representatives are nonetheless, in
the opinion of the Receiving Party's attorneys, legally required to disclose
Confidential Information to any tribunal or else stand liable for contempt or
suffer other penalty, the Receiving Party may disclose such information to such
tribunal without liability hereunder, provided that the Receiving Party complies
with the notice provisions of this paragraph.
Section 5.4 Remedies for Breach. The Parties acknowledge that a breach
of the covenant of confidentiality contained in this Agreement will result in
irreparable and continuing damage to the Disclosing Party for which there will
be no adequate remedy at law. In the event of any breach of this Agreement, the
Receiving Party agrees that the Disclosing Party will be entitled to seek and
obtain specific performance of this Agreement by the Receiving Party, including,
upon making the requisite showing that it is entitled thereto, provisional
injunctive relief restraining the Receiving Party from committing such breach,
in addition to such other and further relief, including monetary damages, as
provided by law.
Section 5.5 Survival. THE OBLIGATIONS UNDER THIS ARTICLE V WILL
CONTINUE AFTER THIS AGREEMENT EXPIRES OR IS TERMINATED.
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ARTICLE VI.
TRADE SECRET AND PROPRIETARY RIGHTS
Section 6.1 No Rights to Software. Notwithstanding INSpire's use of
its Systems in the performance of the Addendum Services, neither this Agreement
nor the performance of any Addendum Services hereunder will be construed as a
grant to Customer of a license or any other interest in or to INSpire's Systems.
Further, this Agreement grants to Customer no right to possess or reproduce, or
any other interest in, any of INSpire's Software used in the performance of all
or any part of the Addendum Services or their specifications in any tangible or
intangible medium. Customer may not mortgage, hypothecate, sell, assign, pledge,
lease, transfer, license or sublicense any of INSpire's Software used in the
performance of all or any part of the Addendum Services, nor allow any person or
entity to transmit, copy or reproduce any such Software. In the event Customer
comes into possession of any of INSpire's Software used in the performance of
all or any part of the Addendum Services, Customer will immediately notify
INSpire and return such Software and all copies of any kind thereof to INSpire.
Section 6.2 Nondisclosure. Other than Customer's employees who need
access to INSpire's Systems for the performance of their duties, Customer
covenants and agrees not to use, disclose or otherwise make available to any
person any of INSpire's Systems used in the performance of all or any part of
the Addendum Services. Customer agrees to take all reasonable steps necessary to
obligate each of its employees who is given access to INSpire's Systems to a
level of care sufficient to protect such Systems from unauthorized use or
disclosure.
Section 6.3 Survival. THE OBLIGATIONS OF CUSTOMER UNDER THIS ARTICLE
VI WILL CONTINUE AFTER THIS AGREEMENT EXPIRES OR IS TERMINATED.
ARTICLE VII.
TERMINATION
Section 7.1 Termination of Agreement. This Agreement will be deemed
terminated upon the termination or expiration of all Service Addendums, whether
such Service Addendums are executed on or after the Signing Date. Each Service
Addendum may be terminated prior to the Addendum Expiration Date only as
follows:
(a) with respect to any material breach of this Agreement or
any material breach of the applicable Service Addendum, by written notice from
the non-breaching Party; provided, however, such termination will be effective
only after such breach remains substantially uncured for 30 days after written
notice specifying such breach is received by the breaching Party;
(b) by a Party in the event (i) the other Party makes a
general assignment for the benefit of creditors, (ii) the other Party files a
voluntary petition in bankruptcy or petitions for reorganization or similar
arrangement under the bankruptcy laws, (iii) a petition in bankruptcy is filed
against the other Party by a third party and such petition is not dismissed
within ninety days
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of its filing date, or (iv) a receiver or trustee is appointed for all or any
part of the property and assets of the other Party;
(c) with respect to a program specified in a Service Addendum,
by Customer in the event Customer discontinues (by sale or abandonment) such
program; provided, however, that a termination pursuant to this subsection will
be effective no earlier than six months after INSpire's receipt of written
notice of such program's termination pursuant to this subsection; or
(d) with respect to any state in which Customer maintains a
program specified in a Service Addendum, by written notice from Customer in the
event such Customer becomes subject to a cease and desist order or decree issued
by a public authority exercising valid jurisdiction over such Customer in such
state.
Section 7.2 Procedure Upon Expiration and Termination. Upon expiration
or termination of this Agreement or any Service Addendum:
(a) Return of Supplies. INSpire will promptly return to
Customer any forms or other supplies imprinted with Customer's or its
Affiliate's name, regardless of who incurred the cost for same as well other
supplies paid for by Customer;
(b) Provide Files. INSpire will provide promptly to Customer a
tape (or other then-current technology) back-up of all data files in a format
reasonably requested by Customer and the personnel necessary to assist with the
records layout and file structures of the data files for Customer. The costs and
expenses associated with complying with this subsection will be borne by (i) the
breaching Party in the event of a termination pursuant to Section 7.1(a), (ii)
by the other Party in the event of a termination pursuant to Section 7.1(b) and
(iii) by Customer in the event of a termination pursuant to Section 7.1(c).
(c) No Relief for Breach. Such expiration or termination will
not in any way limit, restrict or relieve any Party of liability for any breach
of this Agreement or the applicable Service Addendum.
(d) Payment of Termination Fee. Each Party acknowledges that
INSpire agreed to provide Customer an option to terminate a program pursuant to
Section 7.1(c) in reliance on, and in anticipation of, Customer's absolute
obligation to pay the applicable Termination Fee associated with the terminated
program. As used in this subsection, "TERMINATION FEE" means the aggregate
amount of INSpire's unamortized costs associated with the terminated program,
including (i) tangible and intangible assets, (ii) implementation costs and
(iii) transaction costs (e.g. legal fees, accounting fees, etc.). Each Party
further acknowledges that the amount of the Termination Fee is not punitive in
nature and represents the Parties' best estimate of INSpire's stranded costs
associated with an early termination of the specific program. As such, Customer
will pay to INSpire, upon the termination of the program pursuant to Section
7.1(c), the Termination Fee.
(e) Payment Obligation. Each Party acknowledges that
Customer's termination of a program pursuant to Section 7.1(d) will (i) impose
certain financial hardships on
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INSpire and (ii) result in Customer's absolute obligation to pay an amount equal
to the Addendum Services Fees (associated with the terminated program in such
state) paid to INSpire for the six (6) months immediately preceding the
termination pursuant to Section 7.1(d). Each Party further acknowledges that
such amount is not punitive in nature and represents the Parties' best estimate
of the financial hardship suffered by INSpire associated with an early
termination of the specific program in such state. As such, Customer will pay to
INSpire, upon the termination of a program in a particular state pursuant to
Section 7.1(d), the amount specified in this subsection.
ARTICLE VIII.
REMEDIES AND LIMITATION OF LIABILITY
Section 8.1 Indemnification of the Parties. Each Party (the
"INDEMNITOR") will indemnify, defend, and hold harmless any other Party (the
"INDEMNITEE") from and against any arbitration award, claim, cost, damage,
demand, expense, fine, liability, lawsuit, obligation, payment or penalty of any
kind or nature whatsoever, including any reasonable attorneys' fees and expenses
(a "CLAIM") incurred by the Indemnitee that arises out of or directly relates to
the Indemnitor's performance or breach of this Agreement or any Service
Addendum. Any series of Claims incurred by an Indemnitee that arise out of or
relate to a common cause or occurrence will be deemed to be a single Claim for
purposes of this Agreement. Upon an Indemnitee's request, the Indemnitor will
indemnify the Indemnitee's directors, employees, officers, agents, attorneys,
Representatives and shareholders to the same extent as such Indemnitee. No such
person, however, will be a third party beneficiary of the indemnification
provision set forth in this Agreement. To the extent that an Indemnitee requests
the Indemnitor to indemnify such Party's directors, employees, officers, agents,
attorneys, Representatives and shareholders, the Indemnitee will cause such
persons or entities to comply with the indemnification provisions and abide by
the indemnification limitations set forth in this Agreement.
Section 8.2 Liability Limitation.
(a) Liability Limitation. Subject to subsection (b) below:
(i) Deductible. No Party will be liable for any
Claim for damages or indemnification under this Agreement or any Service
Addendum until the aggregate amount of a Claim for damages and indemnification
for which such Party would otherwise be responsible exceeds $175,000 (such
amount, the "DEDUCTIBLE") and then such Party will only be responsible for the
amount in excess of the Deductible;
(ii) Single Claim Maximum Amount. No Party will
be liable for any Claim for damages or indemnification under this Agreement or
any Service Addendum to the extent that the amount of any single Claim paid by
such Party exceeds the aggregate amount of all the Addendum Services Fees paid
by the Customers to INSpire under all then-effective Service Addendums in the
one month immediately prior to the establishment of liability for such Claim
(or the last one month immediately prior to the expiration or termination of
this Agreement and all Service Addendums if applicable); and
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(iii) Maximum Aggregate Amount. No Party will be
liable for any Claim for damages or indemnification under this Agreement or any
Service Addendum to the extent that the aggregate amount of all Claims paid by a
Party exceeds twenty percent of the aggregate amount of all the Addendum
Services Fees paid by the Customers to INSpire since the Addendum Effective
Dates under all Service Addendums prior to the establishment of liability for
such Claims (or prior to the expiration or termination of this Agreement and all
Service Addendums if applicable).
(b) Exclusions from Liability Limitation. Notwithstanding the
provisions of subsection (a) above, the limitations or exculpations of liability
set forth in subsection (a) above are not applicable to any Claim for damages or
indemnification under this Agreement or any Service Addendum resulting from (i)
a breach of Articles V or VI, (ii) the willful misconduct or fraud of a Party or
its Representatives, (iii) any violation, infringement or misappropriation of
any patent, copyright, trademark, trade secret or other proprietary or
contractual rights of a Party or any third party and or (iv) any payments
required, or any costs or expenses incurred, pursuant to Section 1.4(e), Section
4.9 and Section 4.10.
(c) Exclusion of Certain Types of Damages. No Party will be
liable for any consequential, incidental, punitive or special damages with
respect to any breach of this Agreement; provided, however, that this subsection
will not limit the amount of a Claim for indemnification (as opposed to a Claim
for damages) which is based on an amount paid by an Indemnitee to an unrelated
third party that contains consequential, incidental, punitive or special damages
as a component of such amount paid by the Indemnitee to the unrelated third
party.
(d) Limitation Acknowledgment. Each Party expressly
acknowledges that the limitations set forth in this Section represent the
express agreement of the Parties with respect to the allocation of risks between
the Parties, including the level of risk to be associated with the performance
of the Addendum Services as related to the amount of the payments to be made to
INSpire for such Addendum Services, and each Party fully understands and
irrevocably accepts such limitations.
Section 8.3 Notice of Claim. Any award of damages or indemnification
pursuant to this Agreement is conditioned upon the Indemnitor having received
full and prompt notice in writing of the Claim and the Indemnitee allowing the
Indemnitor to direct fully the defense or settlement of such Claim; provided,
however, that the failure to receive prompt notice relieves the Indemnitor of
its obligations under this Article only if the Indemnitor is materially
prejudiced by the failure to receive such notice. The Indemnitor will not be
responsible for any settlement or compromise made without its consent.
ARTICLE IX.
ARBITRATION
Section 9.1 Condition Precedent. As a condition precedent to any right
of action hereunder, any dispute arising out of the interpretation, performance
or breach of this Agreement,
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including the formation or validity thereof, shall be submitted for decision to
a panel of three arbitrators. Notice requesting arbitration will be in writing
and sent certified or registered mail, return receipt requested.
Section 9.2 Choosing the Arbitrators. One arbitrator shall be chosen by
each Party and the two arbitrators shall, before instituting the hearing, choose
an impartial third arbitrator who shall preside at the hearing. If either party
fails to appoint its arbitrator within thirty (30) days after being requested to
do so by the other party, the latter, after ten (10) days notice by certified or
registered mail of its intention to do so, may appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator
within thirty (30) days of their appointment, the third arbitrator shall be
selected from a list of six individuals (three named by each arbitrator) by
a judge of the District Court for the Northern District of Texas, Fort Worth
Division, or if the District Court declines to act, the state court having
general jurisdiction in such area.
Section 9.3 Procedure. Within thirty (30) days after notice of
appointment of all arbitrators, the panel shall meet and determine timely
periods for briefs, discovery procedures and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be
bound by the strict rules of procedure and evidence. Arbitration shall take
place in Fort Worth, Texas. Insofar as the arbitration panel looks to
substantive law, it shall consider the law of the State of Texas. The decision
of any two arbitrators when rendered in writing shall be final and binding. The
panel is empowered to grant interim relief as it may deem appropriate.
Section 9.4 Costs. Each party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the cost of
the third arbitrator. The remaining costs of the arbitration shall be allocated
by the panel. The panel may, at its discretion, award such further costs and
expenses as it considers appropriate, including but not limited to attorneys
fees, to the extent permitted by law.
ARTICLE X.
MISCELLANEOUS
Section 10.1 Amendment. No amendment of this Agreement will be
effective unless in a writing signed by the Parties.
Section 10.2 Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be deemed to be an original agreement, but
all of which will constitute one and the same agreement.
Section 10.3 Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the Parties and supersedes all prior
agreements and understandings, both written and oral, with respect to the
subject matter of this Agreement.
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Section 10.4 Expenses. Each Party will bear its own expenses with
respect to the negotiation and preparation of this Agreement.
Section 10.5 Governing Law. THIS AGREEMENT WILL BE GOVERNED BY THE LAWS
OF THE STATE OF TEXAS REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER
THE CONFLICTS OF LAWS PRINCIPLES OF SUCH STATE.
Section 10.6 No Assignment. No Party may assign its benefits or
delegate its duties (other than a delegation of minor or incidental tasks
related to the Addendum Services) under this Agreement without the prior consent
of the other effected Parties. Any attempted assignment or delegation without
such prior consent will be void. Notwithstanding the foregoing, any Party may
assign its rights or delegate its duties under this Agreement to a purchaser of
all the assets or equity of such Party without the other effected Party's
consent, and any such purchaser and any subsequent purchasers of all of the
assets or equity of such Party may similarly assign or delegate such rights.
Section 10.7 No Third Party Beneficiaries. This Agreement is solely for
the benefit of the Parties and no other person or entity will have any right,
interest, or claim under this Agreement.
Section 10.8 Notices. All claims, consents, designations, notices,
waivers, and other communications in connection with this Agreement will be in
writing. Such claims, consents, designations, notices, waivers, and other
communications will be considered received (a) on the day of actual transmittal
when transmitted by facsimile with written confirmation of such transmittal, (b)
on the next following actual transmittal when transmitted by a nationally
recognized overnight courier, or (c) on the third Business Day following actual
transmittal when transmitted by certified mail, postage prepaid, return receipt
requested; in each case when transmitted to a Party at its address set forth
below (or to such other address to which such Party has notified the other
Parties in accordance with this Section to send such claims, consents,
designations, notices, waivers and other communications).
INSpire
Attn: President
300 Burnett Street
Fort Worth, Texas 76102-2799
Phone: 817-348-3999
Fax: 817-348-3787
Customer
Attn: Chief Executive Officer
The Millers American Group, Inc.
777 Main Street, Suite 1000
Fort Worth, Texas 76102
Phone: 817-348-1600
Fax: 817-348-1785
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Section 10.9 Public Announcements. The Parties will agree on the terms
of any press releases or other public announcements related to this Agreement,
and will consult with each other before issuing any press releases or other
public announcements related to this Agreement; provided, however, that any
Party may make a public disclosure if in the opinion of such Party's counsel it
is required by law or the rules of the Nasdaq National Market to make such
disclosure. The Parties agree, to the extent practicable, to consult with each
other regarding any such public announcement in advance thereof.
Section 10.10 Representation by Legal Counsel. Each Party is a
sophisticated entity that was advised by experienced legal counsel and other
advisors in the negotiation and preparation of this Agreement.
Section 10.11 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction will not invalidate the
remaining provisions of this Agreement or affect the validity or enforceability
of such provision in any other jurisdiction. In addition, any such prohibited or
unenforceable provision will be given effect to the extent possible in the
jurisdiction where such provision is prohibited or unenforceable.
Section 10.12 Successors. This Agreement will be binding upon and will
inure to the benefit of each Party and its heirs, legal representatives,
permitted assigns and successors, provided that this Section will not permit the
assignment or other transfer of this Agreement, whether by operation of law or
otherwise, if such assignment of other transfer is not otherwise permitted under
this Agreement.
Section 10.13 Time of the Essence. Time is of the essence in the
performance of this Agreement and all dates and periods specified in this
Agreement.
Section 10.14 Waiver. No provision of this Agreement will be considered
waived unless such waiver is in writing and signed by the Party that benefits
from the enforcement of such provision. No waiver of any provision in this
Agreement, however, will be deemed a waiver of a subsequent breach of such
provision or a waiver of a similar provision. In addition, a waiver of any
breach or a failure to enforce any term or condition of this Agreement will not
in any way affect, limit, or waive a Party's rights under this Agreement at any
time to enforce strict compliance thereafter with every term and condition of
this Agreement.
Section 10.15 Force Majeure. The Parties will not be liable or deemed
to be in default for any delay or failure in performance under this Agreement or
interruption of the Addendum Services resulting, directly or indirectly, from
acts of God, civil or military authority, labor disputes, shortages of suitable
materials, labor or transportation or any similar cause beyond the reasonable
control of the Parties.
Section 10.16 Attorney's Fees. In the event of any action, arbitration,
claim, proceeding or suit between or among the Parties seeking enforcement of
any of the terms and conditions of this Agreement, the prevailing party in such
action, arbitration, claim, proceeding or suit will be awarded its reasonable
costs and expenses, including its court costs and reasonable attorneys' fees.
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Section 10.17 Relationship of the Parties. The Parties are independent
contractors of one another, and there should be no instance in which they should
be construed as partners or joint venturers.
Section 10.18 Drafting. Neither this Agreement nor any provision
contained in this Agreement will be interpreted in favor of or against any Party
because such Party or its legal counsel drafted this Agreement or such
provision. No prior draft of this Agreement or any provision contained in this
Agreement will be used when interpreting this Agreement or its provisions.
Section 10.19 Headings. Article and section headings are used in this
Agreement only as a matter of convenience and will not have any effect upon the
construction or interpretation of this Agreement.
IN WITNESS WHEREOF, each Party has caused this Agreement to be executed
and delivered by a duly authorized officer as of the Signing Date.
INSpire: INSpire Insurance Solutions, Inc.
By: /s/ JEFFREY W. ROBINSON
----------------------------------------------------------
Jeffrey W. Robinson, President and Chief Operating Officer
CUSTOMER: The Millers Insurance Company
By: /s/ JOY J. KELLER EVP & CFO
----------------------------------------------------------
[Name, Title]
The Millers Casualty Insurance Company
By: /s/ JOY J. KELLER EVP & CFO
----------------------------------------------------------
[Name, Title]
Millers General Agency, Inc.
By: /s/ JOY J. KELLER CFO
----------------------------------------------------------
[Name, Title]
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APPENDIX A
DEFINITIONS AND INTERPRETATIONS
Definitions. Unless the context otherwise requires, the terms defined
in this Appendix will the meanings specified below for all purposes of this
Agreement:
"ADDENDUM EFFECTIVE DATE" will have the meaning established in
each applicable Service Addendum.
"ADDENDUM EXPIRATION DATE" will have the meaning established
in each applicable Service Addendum.
"ADDENDUM IMPLEMENTATION PERIOD" will have the meaning
established in each applicable Service Addendum.
"ADDENDUM SERVICE FEES" will have the meaning set forth in
Section 1.1(b), but will be established in each applicable Service Addendum.
"ADDENDUM SERVICES" will have the meaning set forth in Section
1.1(b), but will be established in each applicable Service Addendum.
"ADDENDUM TERM" will have the meaning set forth in Section
1.1(b), but will be established in each applicable Service Addendum.
"ADDITIONAL SERVICES" will have the meaning set forth in
Section 1.6(a).
"AFFILIATE" will mean with respect to a Party, any entity at
any time Controlling, Controlled by, under common Control with, or in the same
consolidated group for federal tax purposes as, such Party. "Control" and its
derivatives mean: (a) with regard to any entity, the legal, beneficial, or
equitable ownership, directly or indirectly, of more than fifty percent (50%)
of the capital stock (or other ownership interest, if not a corporation) of such
entity ordinarily having voting rights or (b) with regard to any entity, the
management control over such entity. For purposes of this Agreement, INSpire
will not be deemed to be an Affiliate of any Customer.
"AGREEMENT" will mean have the meaning set forth in the first
paragraph of the Agreement.
"BID" will have the meaning set forth in Section 1.6(a).
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York, New
York are authorized or obligated by law to close.
"CLAIM" will have the meaning set forth in Section 8.1.
"COMPETING TERMS" will have the meaning set forth in Section
1.6(b).
1
<PAGE> 29
"CONFIDENTIAL INFORMATION" will mean any information that is
expressly marked or identified as "Confidential" prior to its disclosure,
whether prepared by the Disclosing Party, its Representatives or otherwise,
which is furnished to the Receiving Party or on behalf of the Disclosing Party
after the date of this Agreement relating to the Disclosing Party or its
Affiliates or their respective businesses or operations. The term "Confidential
Information" does not include: (a) information which is or becomes generally
available to the public other than as a result of any unauthorized disclosure or
any wrongful acts of the Receiving Party; (b) information which is independently
developed by the Receiving Party without the use of or reference to Confidential
Information of the Disclosing Party; (c) information which is rightfully
received from a third party whose disclosure does not constitute a violation of
any confidentiality obligation or a breach of any agreement; or (d) information
which is approved for release by the Disclosing Party in a writing signed by the
Disclosing Party and specifying the information to be released.
"CONTRACT YEAR" will mean, with respect to each Service
Addendum, each of the twelve month periods during the Addendum Term beginning on
the anniversary of the Addendum Effective Date (or the Addendum Effective Date
in the case of the first Contract Year of each Service Addendum) and ending on
the day immediately preceding the next anniversary of the Addendum Effective
Date.
"CUSTOMER" will have the meaning set forth in the first
paragraph of this Agreement, but will be established in each applicable Service
Addendum.
"CUSTOMER GROUP" will mean Customer, its Affiliates, any
parent corporation, subsidiaries and Representatives.
"DATE DATA" will mean any data, formula, algorithm, process,
input or output that includes, calculates or represents a date, a reference to a
date or a representation of a date.
"DEDUCTIBLE" will have the meaning set forth in Section
8.2(a).
"DESIGNATED REPRESENTATIVE" will have the meaning set forth in
Section 4.1.
"DIRECT WRITTEN PREMIUMS" will mean the premiums written by an
insurer in consideration for the insurance coverage being provided before ceding
to a reinsurer less any cancellations and returns.
"DISCLOSING PARTY" will mean Customer Group or INSpire Group,
as the case may be, with respect to any Confidential Information provided by
such party to any other party.
"EARNED PREMIUMS" will mean monthly Direct Written Premium,
plus beginning unearned premium, minus ending unearned premium.
"EQUIPMENT" will mean all the computer hardware, including
central processing units, networking equipment and other peripheral devices, of
the named entity that is used in connection with this Agreement, whether such
equipment is owned or licensed by such entity.
2
<PAGE> 30
"EXERCISE NOTICE" will have the meaning set forth in Section
1.6(c).
"INDEMNITOR" will have the meaning set forth in Section 8.1.
"INDEMNITEE" will have the meaning set forth in Section 8.1.
"INSpire" will have the meaning set forth in the first
paragraph of this Agreement.
"INSpire GROUP" will mean INSpire, its Affiliates, any parent
corporation, subsidiaries and Representatives.
"LAW" will have the meaning set forth in Section 2.4.
"LICENSED SOFTWARE" will mean any computer software program
(including the available documentation, manuals and other materials necessary
for the use thereof) used in connection with this Agreement by the named entity
pursuant to a license or other arrangement.
"MATERIAL ADVERSE EFFECT" will mean, with respect to any
Party, the occurrence of an event or the existence of a circumstance that has a
material adverse effect on such Party's assets, business, cash flows, financial
condition, liabilities, operations, prospects, or relationships, including the
occurrence of any event or the existence of any circumstance that will cause
such an effect in the foreseeable future.
"MONTHLY SERVICE REPORT" will have the meaning set forth in
Section 4.2(a).
"ORDER" will have the meaning set forth in Section 2.4.
"OWNED SOFTWARE" will mean any computer software program used
in connection with this Agreement that is owned by the named entity, including
the available documentation, manuals and other materials necessary for the use
thereof.
"PARTY" and "PARTIES" will have the meanings set forth in the
first paragraph of this Agreement.
"POSITIVE PAY" will mean a process by which a data file
containing information related to checks issued (i.e. check number, check date
and check amount) is created and forwarded to a banking institution. The banking
institution will use this file to verify all checks presented for payment prior
to paying any check. The banking institution will create a listing of items that
did not match or were otherwise not included in the data file, hereby referred
to as the exception list. The exception list is made available for research and
a resolution on whether the exception items presented should be paid or returned
unpaid. The aforementioned is done daily.
"PRODUCER" will mean any person, entity, individual or
association that acts as an agent of, a broker for, or in any other similar
capacity on behalf of, a Customer for the solicitation and production of
insurance products.
3
<PAGE> 31
"RECEIVING PARTY" will mean Customer Group or INSpire Group,
as the case may be, with respect to any Confidential Information received by
such party from any other party.
"REPRESENTATIVE" will mean any director, officer, employee,
agent, attorney, accountant, advisor or other person acting on behalf of a Party
in connection with this Agreement; provided, however, "Representative" will not
include any person or entity which is a direct or indirect competitor of
INSpire.
"SERVICE CORRECTION" will mean a written request by Customer
to have INSpire remedy its System's inability to perform, respond, function or
operate as set forth in the applicable requirements document.
"SERVICE LEVELS" will have the meaning set forth in Section
1.4(e).
"SIGNING DATE" will have the meaning set forth in the first
paragraph of this Agreement.
"SOFTWARE" will mean the Owned Software and Licensed Software
of the named entity.
"SYSTEM MODIFICATION" will mean a written request by Customer
to alter programming code where such alteration to the coding specifically
changes, adds or otherwise alters the presentation or function of the existing
program with that being Customer's intent. Each Party acknowledges that a System
Modification is a separate and distinct concept from that concept embodied in
the definition of Service Correction.
"SYSTEMS" will mean the Equipment and Software of the named
entity.
"TERMINATION FEE" will have the meaning set forth in Section
7.1(d).
"YEAR 2000 COMPLIANT" will mean, with respect to the Systems
of a Party, (a) the functions, calculations, and other computing processes of
the System (collectively, "PROCESSES") perform in a consistent manner regardless
of the date in time on which the Processes are actually performed and regardless
of the Date Data input to the System, whether before, on, during or after
January 1, 2000 and whether or not the Date Data is affected by leap years, (b)
the System accepts, calculates, compares, sorts, extracts, sequences, and
otherwise processes Date Data, and returns and displays Date Data, in a
consistent manner regardless of the dates used in such Date Data, whether
before, on, during or after January 1, 2000, (c) the System will function
without interruptions caused by the date in time on which the Processes are
actually performed or by the Date Data input to the System, whether before, on,
during, or after January 1, 2000, (d) the System accepts and responds to
two-digit year-date input in a manner that resolves any ambiguities as to the
century in a defined, pre-determined and appropriate manner, (e) the System
stores and displays Date Data in ways that are unambiguous as to the
determinations of the century and (f) no Date Data will cause the System to
perform an abnormally ending routine or function within the Processes or
generate incorrect values or invalid results as a result of the date element
included in the Date Data.
4
<PAGE> 32
Accounting Terms. Except as otherwise provided in this Agreement, all
accounting terms defined in this Agreement will be construed, and all
calculations required by this Agreement will be performed, in accordance with
generally accepted accounting principles applied on a consistent basis.
Articles, Sections, Exhibits and Schedules. Except as specifically
stated otherwise, references to Articles, Sections, Exhibits and Schedules refer
to the Articles, Sections, Exhibits and Schedules of this Agreement.
Drafting. Neither this Agreement nor any provision contained in this
Agreement will be interpreted in favor of or against any Party because such
Party or its legal counsel drafted this Agreement or such provision. No prior
draft of this Agreement or any provision contained in this Agreement will be
used when interpreting this Agreement or its provisions.
Headings. Article and section headings are used in this Agreement only
as a matter of convenience and will not have any effect upon the construction or
interpretation of this Agreement.
Include. The term "include" or any derivative of such term does not
mean that the items following such term are the only types of such items.
Or. The term "or" will not be interpreted as excluding any of the items
described.
Plural and Singular Words. Whenever the plural form of a word is used
in this Agreement, that word will include the singular form of that word.
Whenever the singular form of a word is used in this Agreement, that word will
include the plural form of that word.
Pronouns. Whenever a pronoun of a particular gender is used in this
Agreement, if appropriate that pronoun also will refer to the other gender and
the neuter. Whenever a neuter pronoun is used in this Agreement, if appropriate
that pronoun also will refer to the masculine and feminine gender.
Statutes. Any reference to Law or any specific statute will include any
changes to such law or statute after the Signing Date, any successor law or
statute, and any regulations and rules promulgated under such law or statute and
any successor law or statute, whether promulgated before or after the Signing
Date.
5
<PAGE> 33
SCHEDULE 1.4(e)
SERVICE LEVELS
The following definitions apply to the documentation titled Schedule 1.1e:
SERVICE LEVEL DESCRIPTION:
Description of service level being measured.
MEASUREMENT:
Performance of service level required for determination of performance
score only applies to business processed on INSpire Systems.
DAILY FACTOR:
Based on frequency of requirement for this service level or on
frequency of interface availability as appropriate. The daily factor
will be based on Monday through Friday and be assigned a daily factor
of 5%. If the service level is not measured the value of N/A (not
applicable) is present.
WEIGHT:
Weighting factor used to determine relative impact on respective
service level standards.
MONTHLY RATING:
The purpose of the monthly rating is to develop an aggregate score for
measuring INSpire's performance as it relates to agreed upon service
levels. The aggregate score will be used to determine, in aggregate if
INSpire's performance will result in additional or reduced service fees
for the month.
The methodology used to determine the aggregate score is to determine,
for each measurement, whether or not INSpire met the desired service
level, exceeded the service level or fell below the service level. For
example, the service level average hold time is 60 seconds. Each day
the average hold time is 60 seconds, INSpire will have met the service
level. If the average hold time is greater than 60 seconds due to a
reason resulting from a direct omission or commission on the part of
INSpire, INSpire will have fallen below the service level. If the
average hold time is less than 60 seconds, INSpire will have exceeded
the service level.
Every time, (daily in this example) that INSpire meets the service
level, a score of one (1) is earned. If the service level is not met
for a reason that INSpire is responsible for, a score of zero (0) is
earned. If the service level is not met, but not due to a reason that
INSpire is responsible for, a score of one (1) is earned. Should the
service level be exceeded, INSpire will earn a score of two (2). The
following provides an example of one (1) month results:
1
<PAGE> 34
<TABLE>
<CAPTION>
DAY RESULT SCORE
<S> <C> <C>
1 Met SLA 1
2 Met SLA 1
3 Met SLA 1
4 Below SLA 0
5 Met SLA 1
6 Met SLA 1
7 Exceed SLA 2
8 Met SLA 1
9 Met SLA 1
10 Met SLA 1
11 Met SLA 1
12 Met SLA 1
13 Exceed SLA 2
14 Met SLA 1
15 Met SLA 1
16 Met SLA 1
17 Below SLA 0
18 Met SLA 1
19 Met SLA 1
20 Met SLA 1
---
TOTAL SCORE 20
</TABLE>
The total score for the SLA is then divided by the number of times the SLA is
applicable for the month. In this case 20/20= 1, for a score of 100% for this
SLA. The individual score is then multiplied by the weighing factor of %,
resulting in a weighed score, in this example, of 5%.
At the end of each month, a weighed score using the same methodology will be
used to determine an aggregate score. The aggregate score of each individual SLA
will be added together. INSpire and the Customer will mutually agree upon
aggregate scores each month.
If the aggregate score is between 100% and 95%, no adjustment to the service
fees will be made. For every percentage point above 100%, INSpire will receive
an additional .5% in service fees subject to a maximum of 5%. For every
percentage point below 95%, the monthly service fee will be reduced by .5%,
subject to a maximum of 5%.
Services fees subject to this provision include only those fees indicated for
policy and claims administration.
2
<PAGE> 35
<TABLE>
<CAPTION>
SERVICE LEVEL DESCRIPTIONS MEASUREMENT DAILY FACTOR WEIGHTING FACTOR
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
<S> <C> <C>
Call Center Availability Available between 8:00 a.m. until 5:30 p.m. Monday-Friday, local 5% 4.76%
time, utilizing toll free service.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Call Center Response Time Average hold time will not exceed 60 seconds. 5% 4.76%
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Call Center Abandonment No more than 5% of calls will be abandoned 5% 4.76%
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Major Error Rate Transactions will be processed with a Major Error rate (defined as 5% 4.76%
those errors effecting coverage or premium) of less than 3%.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Overall Error Rate Transactions will be processed with an Overall Error rate of less 5% 4.76%
than 6%.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
New Policy Transactions 90% of all new policies will be issued within three business days of 5% 4.76%
receipt of all of the information necessary to process the
transaction.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Renewal Transactions 95% of all renewal transactions will be processed 30 days (or the 5% 4.76%
number of days agreed to by Customer and INSpire) prior to
expiration of the policy. Renewals not processed at the request of
the customer due to pending rate changes will not be included in
this measurement.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Endorsement Transactions 90% of all endorsement transactions will be issued within six 5% 4.76%
business days of receipt all the information necessary to process
the transaction.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Billing Invoices 95% of all billing invoices will be mailed by the end of the 5% 4.76%
business day in which they are produced.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Refunds 95% of premium refunds will be mailed by the end of the business day 5% 4.76%
in which they are produced.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Cancellation Notices 99.9% of all cancellation notices will be mailed by the end of the 5% 4.76%
business day in which they are produced.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
Non-renewal Notices 99.9% of all non-renewal notices will be mailed by the end of the 5% 4.76%
business day in which they are produced.
- -------------------------- -------------------------------------------------------------------- ------------ ----------------
</TABLE>
1
<PAGE> 36
<TABLE>
<CAPTION>
SERVICE LEVEL DESCRIPTIONS MEASUREMENT DAILY FACTOR WEIGHTING FACTOR
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
<S> <C> <C>
Loss Reporting Loss reports will be taken 24 hours a day, 7 days a week utilizing 5% 4.76%
toll free service.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Claim Payments 90% of claim payments will be sent within two business days after 5% 4.76%
settlement and notification to INSpire by the Customer.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Table Change Updates 80% of customer requested modifications requiring table updates 5% 4.76%
only, will be delivered for testing within fifteen working days
after written request.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Modification Estimates High level time and cost estimates for Customer requested system 5% 4.76%
program modifications will be completed within 10 working days after
written request.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Cash Deposits 95% of all cash will be deposited within 2 business days of receipt. 5% 4.76%
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Claims Contact to Insureds 85% of claimants contacted within 1 business day. 5% 4.76%
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Claims Reserve Setup 90% of claims reserves will be setup within 2 business days. 5% 4.76%
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
NSF Posting 99.9% of all NSF checks will be posted into the system within 2 5% 4.76%
business days.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
Stop Payment of Checks 99.9% of all requests for stop payment to the bank will posted to 5% 4.76%
the proper bank account.
- --------------------------- -------------------------------------------------------------------- ------------ ----------------
</TABLE>
2
<PAGE> 37
[INSpire LETTERHEAD]
LETTER OF UNDERSTANDING
The parties executing this letter below, recognize and agree that the Master
Services Agreement entered into by INSpire Insurance Solutions, Inc. and Millers
American Group, and its affiliates, effective December 30, 1999 is subject to
approval by the Texas Department of Insurance. Both parties agree to use all
reasonable efforts to ensure such approval. Both parties further agree that they
are unaware of any reason or impediment to the granting of such approval.
INSpire Insurance Solutions, Inc. Millers American Group (and its affiliates)
Signed: /s/ JEFFREY W. ROBINSON Signed: /s/ JOY J. KELLER
-------------------------- -----------------------------------
Name: Jeffrey W. Robinson Name: Joy J. Keller
---------------------------- -------------------------------------
Title: President Title: EVP & CFO
--------------------------- ------------------------------------
Date: 12-30-99 Date: 12-30-99
---------------------------- -------------------------------------
<PAGE> 38
EXHIBIT 1.1
FORM OF
SERVICE ADDENDUM
THIS SERVICE ADDENDUM IS SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THAT
CERTAIN MASTER SERVICES AGREEMENT DATED AUGUST __, 1999. A PARTY'S EXECUTION OF
A SERVICE ADDENDUM WILL BE DEEMED TO BE SUCH PARTY'S (I) ACKNOWLEDGEMENT AND
ACCEPTANCE OF THE TERMS AND CONDITIONS SET FORTH IN THE MASTER SERVICES
AGREEMENT AND (II) EXECUTION AND DELIVERY OF THE MASTER SERVICES AGREEMENT.
1. Date of this Addendum:
[Insert the date of this Addendum.]
2. Parties to this Service Addendum:
o INSpire Insurance Solutions, Inc. ("INSpire").
o [Insert the appropriate Millers' party/parties] ("CUSTOMER").
3. Addendum Term:
The term during which INSpire will provide the Addendum Services (as
defined below) to Customer will commence on [date] (the "ADDENDUM
EFFECTIVE DATE") and will expire on [date] (as such date may be
extended pursuant to this paragraph, the "ADDENDUM EXPIRATION DATE")
unless extended pursuant to the terms of this paragraph or terminated
pursuant to the terms of the Agreement (the "ADDENDUM TERM"). The
Addendum Expiration Date will be extended automatically for a period of
one (1) year unless the parties to this Service Addendum gives written
notice of non-extension to the other effected party or parties at least
six (6) months prior to the then current Addendum Expiration Date.
4. Addendum Services: Lines of Business: Authorized States
a. [Policy/Claims] Administration Services. Except as
specifically noted in this Section 4.a, INSpire will provide the
[policy/claims] administration services set forth in Section
1.1[(c)/(d)] of the Agreement and the general management of such
services:
[INSERT ANY ADDITIONS TO, OR EXCLUSIONS FROM, THE
[POLICY/CLAIMS] ADMINISTRATION SERVICES SPECIFIED IN
SECTION 1.1(c) OF THE AGREEMENT.]
b. Authorized Lines of Business: [insert lines of business]
c. Authorized States: [insert states]
1
<PAGE> 39
5. Addendum Service Fees:
[Insert the service fees for the services to be provided pursuant to
this Addendum].
IN WITNESS WHEREOF, each party to this Service Addendum has caused this
Service Addendum to be executed and delivered by a duly authorized officer as of
the date written above.
INSpire: INSpire Insurance Solutions, Inc.
By:
-----------------------------------------------------------
Jeffrey W. Robinson, President and Chief Operating Officer
CUSTOMER: [insert a signature block for each applicable Millers entity]
By:
-----------------------------------------------------------
[Name, Title]
2
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Year ended
December 31, December 31,
--------------------- ---------------------
1999 1998 1999 1998
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Basic
Average shares outstanding ................................... 18,998 18,532 18,930 17,854
========== ======= ========== =======
Net income (loss) ............................................ $ (5,606) $ 3,442 $ (19,688) $11,570
========== ======= ========== =======
Per share amount ............................................. $ (.30) $ .19 $ (1.04) $ .65
========== ======= ========== =======
Diluted
Average shares outstanding ................................... 18,998 18,532 18,930 17,854
Net effect of dilutive stock options based on the
treasury stock method using the average market price ....... -- 2,042 -- 1,984
---------- ------- ---------- -------
Total ........................................................ 18,998 20,574 18,930 19,839
========== ======= ========== =======
Net income (loss) ............................................ $ (5,606) $ 3,442 $ (19,688) $11,570
========== ======= ========== =======
Per share amount ............................................. $ (.30) $ .17 $ (1.04) $ .58
========== ======= ========== =======
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
INSpire Claims Management, Inc., a Delaware corporation
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas
We consent to the incorporation by reference in Registration Statement No.
333-36271 of INSpire Insurance Solutions, Inc. on Form S-8 of our report dated
February 25, 2000, appearing in the Annual Report on Form 10-K of INSpire
Insurance Solutions, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 9, 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 YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 899
<SECURITIES> 16,775
<RECEIVABLES> 34,132
<ALLOWANCES> 9,539
<INVENTORY> 0
<CURRENT-ASSETS> 61,579
<PP&E> 31,630
<DEPRECIATION> 17,450
<TOTAL-ASSETS> 132,028
<CURRENT-LIABILITIES> 25,172
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 112,523
<TOTAL-LIABILITY-AND-EQUITY> 132,028
<SALES> 0
<TOTAL-REVENUES> 140,558
<CGS> 0
<TOTAL-COSTS> 165,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> (24,033)
<INCOME-TAX> (4,343)
<INCOME-CONTINUING> (19,690)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,690)
<EPS-BASIC> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
