The aggregate monthly rental expense for the properties listed above is $216,524. INSpire also leases satellite facilities with an aggregate monthly lease rate of $600.
The selected financial data of INSpire presented below as of December 31, 2001, 2000, 1999, 1998, and 1997, and for the years ended December 31, 2001, 2000, 1999, 1998, and 1997 have been derived from the audited financial statements of INSpire. The selected financial data should be read in conjunction with "
INSpire's revenues historically are derived principally from outsourcing services and 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.
Revenues from outsourcing services are recognized as services are rendered. INSpire is typically paid a percentage of premiums written or premiums collected for policy administration services, a percentage of premiums earned or claims incurred 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 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.
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 incurred 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 associated with software services are recognized in the period in which they are determined. Losses 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.
Intangibles and Other Assets - Costs in excess of net assets acquired are amortized over periods ranging from five to twenty years using the straight-line method. Acquired software and other intangibles are amortized over a period of three to ten years using the straight-line method. Deferred contract costs are comprised of the incremental fees and direct costs associated with long-term outsourcing service agreements and are amortized over the related contract period of up to ten years using the straight-line method. The Company periodically evaluates the carrying value of long lived assets to determine if impairment exists based upon estimated undiscounted future cash flows. The impairment, if any, is measured by the difference between net book value and estimated discounted future cash flows, and is charged to expense in the period identified.
Since February 15, 2002, the Company as been operating as a debtor-in-possession, subject to Chapter 11 of the U.S. bankruptcy Code. As a result, the Company's business activities have been disrupted by the distractions resulting from this bankruptcy filing. This filing has led to management distraction from business activity as the Company has sought to devote efforts to a successful reorganization. Further, the Company's resources have been constrained and personnel reduced by virtue of the bankruptcy filing. These distractions have had and may continue to have a material adverse affect on the Company's business. In addition, there is a risk of continued customer defections and inability to obtain new customers as a result of the filing for bankruptcy.
The Company has filed with the Bankruptcy Court, a proposed Plan of Reorganization (the "Plan"), and an accompanying Disclosure Statement for the Plan of Reorganization (the "Disclosure Statement"). The following is a summary of the Plan.
estates is eroding. It is important to the Company, the creditors and other interested constituencies that an asset purchase agreement be finalized and accepted as expeditiously as possible.
Revenues. Total revenues were $68.8 million for the year ended December 31, 2001 compared to $126.6 million for the year ended December 31, 2000, a decrease of $57.7 million or 45.6%. Outsourcing services revenues were $62.9 million for the year ended December 31, 2001 compared to $114.3 million for the year ended December 31, 2000, a decrease of $51.4 million or 45%. The decrease
in outsourcing services revenue is due in part to the termination of both the Island Group and Robert Plan contracts during the second half of 2000. This decrease is also the result of contractual rate decreases on two contracts and a reduction in The Millers Group's business. The Millers Group has sold certain books of business and has begun processing other books of business in-house, both of which will reduce The Millers Group's need for policy administration, claims administration and other services currently provided by the Company. Also, the Company and Millers American have renegotiated provisions of The Millers Group's MSA and may renegotiate additional terms of the MSA in the future. At this time, the Company estimates that the decrease in services to The Millers Group and the impact of the renegotiated provisions of The Millers Group's MSA will result in decreased revenues from The Millers Group in 2002 to approximately $8.2 million compared to 2001 revenues of $19.3 million. If the Company does not replace these revenues or decrease expenses proportional to the decline in revenue, these reductions will continue to have a material adverse impact on the Company's results of operations. Software and software services revenues were $5 million for the year ended December 31, 2001 compared to $11 million for the year ended December 31, 2000, a decrease of $6 million or 54.41%. The decrease in software and software services revenues is primarily attributable to the decision the Company made in December 1999 to reduce efforts directed toward increasing licensed software packages and services in order to focus on its outsourcing business. The Company has recently reversed this decision and is placing a renewed focus on software licensing and services.
Research and Development. Research and development expense decreased to $1.6 million for the year ended December 31, 2001 from $2.1 million for the year ended December 31, 2000. The decrease was primarily the result of a reduction in staffing costs.
Depreciation and Amortization. Depreciation and amortization expense was $6.3 million for the year ended December 31, 2001 compared to $8.3 million for the year ended December 31, 2000, a decrease of approximately $2.0 million or 24%. This decline is primarily due to the write-off of intangible and other assets associated with the termination of both the Island Group and Robert Plan contracts in 2000.
Intangible Assets Impairment. For the year ended December 31, 2001, the Company recorded an impairment charge of $31.5 million for contract acquisition costs in excess of net assets acquired and capitalized contract implementation costs related to the Arrowhead and Millers Phoenix Indemnity contracts. The Company re-evaluated the future cash flows under these contracts and determined that such intangible assets were in excess of the expected future cash flows. See Note 5, Intangibles and Other Assets. For the year ended December 31, 2000, the Company recorded an impairment charge of $31.6 million for certain intangible and other assets associated with the termination of Island Group and the Robert Plan contracts.
Income Tax Benefit/Expense. For the year ended 2001 the Company recorded a $ 15.8 million charge and includes the establishment of a valuation allowance for deferred tax assets as a result of the Company's assessment that it is more likely than not the deferred tax asset will not be realized. See Note 7, to the Consolidated Financial Statements, Income Taxes.
Cumulative Effect of Change in Accounting Principle. For the year ended December 31, 2000, the Company recognized a $4.9 million charge, net of the related tax benefit, for the cumulative effect of an accounting change, which resulted from the adoption of Staff Accounting Bulletin 101 - "Revenue Recognition in Financial Statements."
Net Loss. Net loss was $68.1 million, or $3.61 per basic and diluted share, for the year December 31, 2001 compared to net loss of $30.2 million or $1.58 per basic and diluted share, for the year ended December 31, 2000. The net loss for the year ended December 31, 2001 includes the aforementioned asset impairment charges of $31.5 million as well as a charge of $19.1 million related to the establishment of a valuation allowance for deferred tax assets. The net loss for the year ended December 31, 2000 includes the aforementioned asset impairment charges of $31.5 million as well as the $4.9 million charge for the cumulative effect of the accounting change described above. Excluding the impact from these charges, the net loss for the year ended December 31, 2001 would have been $17.5 million, or $0.91 per basic and diluted share versus net income of $6.2 million or $0.33 per basic and diluted share for the year ended December 31, 2000. The year-over-year decline in results is attributable to the reduction in revenues previously discussed, combined with an increased cost of outsourcing services and selling, general and administrative expenses expressed as a percentage of revenue.
Cost of Revenues. Cost of revenues, which is comprised mainly of personnel costs, increased $1.5 million, or 1.5%, over the prior year ended December 31, 1999. The increase resulted from an increase in staffing and equipment to support the above mentioned contracts. Cost of outsourcing as a percentage of outsourcing revenues increased to 84.1% for the year ended December 31, 2000 from 73.0% for the year ended December 31, 1999. This increase is primarily a result of the contractual rate decreases without a proportional decrease in costs incurred to provide outsourcing services under these contracts and the overall decrease in Millers American business without a proportional decrease in staffing. The increase in outsourcing services cost was partially offset by a decrease in cost of software and software services. The decrease is due to the Company shifting its focus from software licensing. As a percentage of software revenue, cost of software and software services decreased to 59.9% for the year ended December 31, 2000 from 71.0% for the year ended December 31, 1999. This decrease is due to lower costs associated with sustaining the software contracts than the initial installation process.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses declined $6.2 million, or 33.9%, for the year ended December 31, 2000. The decrease is due to a reduction of staff and management's overall attempt to reduce administrative costs such as travel and entertainment, advertising, and other expenses.
Litigation Expense. During 2000, the Company incurred litigation expenses of $1.0 million to defend lawsuits filed against the Company. Litigation expenses of $1.2 million incurred during 1999 include expenses associated with the collection of accounts receivable, as well as penalties or settlements to be paid in connection with various pending matters.
Other Expense. Other operating expenses for the year ended December 31, 1999 of approximately $800,000 represent the accrual of future payment obligations under operating leases for fixed assets no longer in use by the Company.
Cumulative Effect of Change in Accounting Principle. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 was effective no later than the fourth quarter of fiscal year 2000. Effective with the beginning of the fourth quarter of fiscal year 2000, the Company adopted SAB 101. The cumulative effect of the adoption of SAB 101 had a negative impact of $4.9 million on net income after tax effects for the year ended December 31, 2000.
Debtor-in-Possession. Since February 15, 2002, the Company as been operating as a debtor-in-possession, subject to Chapter 11 of the U.S. bankruptcy Code. As a result, the Company's business activities have been disrupted by the distractions resulting from this bankruptcy filing. This filing has led to management distraction from business activity as the Company has sought to devote efforts to a successful reorganization. Further, the Company's resources have been constrained and personnel reduced by virtue of the bankruptcy filing. These distractions have had and may continue to have a material adverse affect on the Company's business. In addition, there is a risk of continued customer defections and inability to obtain new customers as a result of the bankruptcy filing.
The original goal of the reorganization was to enable the Company to emerge as a stronger entity, of an efficient size with appropriate expense levels. The Company has since determined that the reorganization as an independent entity is neither feasible nor in the best interests of the Company's estate, creditors or shareholders. After careful deliberation and in consultation with the Creditors Committee, the Company determined that the only viable course of action, consistent with their fiduciary duties, is to seek to maximize the value of the Company's estates, through a sale of all or substantially all of their respective assets.
The Company also negotiated with ChoicePoint Inc. ("ChoicePoint"), for the potential sale of the Company's assets. Choicepoint filed a letter of intent with the Bankruptcy Court on October 24, 2002. Under the terms of the letter of
The Company is presently operating at a substantial net cash loss without any realistic prospect of reducing the rate at which the value of the estates is eroding. It is important to The Company, the creditors and other interested constituencies that an asset purchase agreement be finalized and accepted as expeditiously as possible.
Replacement of current business. In order to maintain the Company's operations it will have to replace revenues lost due to the termination of both the Island Group and Robert Plan contracts and the reduction of Millers American, Clarendon and Arrowhead business. Without the replacement of these revenues the Company will need to significantly reduce expenses to meet its liquidity requirements. If the Company cannot meet its liquidity requirements, its operations and financial conditions will be materially and adversely affected. The Company's Chapter 11 filing makes it much more difficult to obtain new customers.
Timely conversion of new customers. When INSpire enters into agreements with customers the time for conversion from the customers system to INSpire systems may or may not be specified. Conversions of the customers systems generally include an assessment of the requirements of conversion from the customers system to INSpire's systems, implementation of data and processing software, validation of the processes and software, and acceptance by the customer. In cases of conversion where a specified time is given, failure to complete the conversion on time allows the customer to withdraw from the contract and claim INSpire is in breach of the contract. In cases where there is no specified time for conversion, if INSpire is untimely in the conversion the Company is exposed to financial risks due to having to continue operating the customer's legacy system and investing additional time in the system conversion.
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. 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 "Item 3 - Legal Proceedings."
Volatility of trading price. The trading price of INSpire's 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."
Competition. The markets for policy and claims administration and IT service are highly competitive. Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Although the Company remains vigilant in assessing its competitors, the Company faces the chance of a sudden entrant from an unknown source into the market. The Company cannot assure that it will be able to compete successfully against current and future competitors. See " Item 1 - Business Competition."
under license agreements and other agreements with customers of the Company, and several such claims are currently pending. See "Item 3 - Legal Proceedings."
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.
In April 2002, the FASB issued Statement of Financial Accounting Standards, No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical
In June 2002, The FASB issued Statement of Financial Accounting Standards, No 146, "Accounting for Costs Associated With Exit or Disposal Activities" (SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS 146 to have a material effect on its consolidated financial statements.
The following table sets forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in fiscal 2001 and 2000. 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 following table reconciles the previously reported amounts to the above disclosed for the these changes (amounts in thousands, except per share data).
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: