<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 30, 1997.
REGISTRATION NO. 333-31173
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
INSPIRE INSURANCE SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
---------------------
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<S> <C> <C>
TEXAS 7373 75-2595937
(State or other jurisdiction of (Primary standard industrial (I.R.S. Employer
incorporation or organization) classification code number) Identification No.)
</TABLE>
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300 BURNETT STREET
FORT WORTH, TEXAS 76102-2799
TELEPHONE: (817) 332-7761
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
F. GEORGE DUNHAM, III
300 BURNETT STREET
FORT WORTH, TEXAS 76102-2799
TELEPHONE: (817) 332-7761
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
TERRY M. SCHPOK, P.C. FRED W. FULTON
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. THOMPSON & KNIGHT, A PROFESSIONAL CORPORATION
1700 PACIFIC AVENUE, SUITE 4100 1700 PACIFIC AVENUE, SUITE 3300
DALLAS, TX 75201-4675 DALLAS, TX 75201-4693
(214) 969-2800 (214) 969-1700
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INSPIRE INSURANCE SOLUTIONS, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K AND RULE 404
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ITEM NUMBER AND CAPTION IN FORM S-1 LOCATION OR CAPTION IN PROSPECTUS
----------------------------------- ---------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
3. Summary Information and Risk Factors....... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Outside Front Cover Page; Underwriting
6. Dilution................................... Risk Factors; Dilution
7. Selling Security Holders................... Principal and Selling Shareholders
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................. Description of Capital Stock
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the Prospectus Summary; Risk Factors; SDS
Registrant................................. Acquisition; Dividend Policy;
Capitalization; Use of Proceeds; Selected
Consolidated Financial Data of INSpire;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of INSpire; Selected
Consolidated Financial Data of SDS;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of SDS; Business; Management;
Principal and Selling Shareholders; Certain
Transactions; Description of Capital Stock;
Shares Eligible for Future Sale;
Underwriting; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Not Applicable
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 30, 1997
PROSPECTUS
4,500,000 SHARES
[INSPIRE INSURANCE SOLUTIONS, INC. LOGO]
COMMON STOCK
------------------------
Of the 4,500,000 shares of Common Stock offered hereby, 2,500,000 shares
are being issued and sold by INSpire Insurance Solutions, Inc. (the "Company")
and 2,000,000 shares are being sold by the Selling Shareholder. The Company will
not receive any proceeds from the sale of Common Stock being sold by the Selling
Shareholder. The Company has applied for quotation of the Common Stock on the
Nasdaq National Market under the symbol "NSPR." Prior to this offering, there
has been no public market for the Common Stock. It is currently estimated that
the initial public offering price will be between $9.00 and $11.00 per share.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price.
------------------------
SEE "RISK FACTORS" ON PAGES 6 THROUGH 12 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
Total(4)............................... $ $ $ $
=============================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses estimated at $556,000 payable by the Company.
(3) Before deducting expenses estimated at $444,000 payable by the Selling
Shareholder.
(4) The Company and the Selling Shareholder have granted to the Underwriters a
30-day option to purchase up to 675,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholder will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
certain other conditions including the right of the Underwriters to withdraw,
cancel, modify or reject any order in whole or in part. It is expected that
delivery of the shares will be made on or about , 1997 at the
offices of Raymond James & Associates, Inc., St. Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC. SOUTHWEST SECURITIES, INC.
The date of this Prospectus is , 1997.
<PAGE> 4
[INSPIRE INSURANCE SOLUTIONS LOGO]
THE ONE-SOURCE OUTSOURCING ANSWER
POLICY ADMINISTRATION
CLAIMS ADMINISTRATION
TECHNOLOGY AND SYSTEMS
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR
IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
The following text overlays a stylized multi-color geometric design:
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<S> <C>
INSpire
Provides
o Increased Efficiency
o Greater Flexibility/Quicker Response
o Ability to Maximize Surplus
o Ease of Entry
Policy Administration
o Processing Policies, Renewals, Cancellations, Reinstatements
o Document/Application Review
o Direct, Agency and Internet Marketing Support
o Billing and Accounting
o Issuing, Canceling, Amending Policies
o Inquiries By Agents, Insureds and Others
o Bureau Reporting
o Commission Handling
o Data Access/Reporting to Customer
[INSpire Insurance Solutions Logo]
P & C Insurance Industry
o Approximately 2,500 Existing Companies
o Approximately $260 Billion in Premium Revenues Claims Administration
o New Entrants o Coverage Verification
o Financial Institutions o Loss Reports to Insured and Agents
o Virtual Insurance Companies o Administering Appraisal/Assessment Process
o Other Start-ups o Administering Claim and Loss Reports
o Preparing Checks and Vouchers
o Compromises, Releases and Agreements
o Service Standards and Claims Documentation
Technology & Systems
o Integrated Systems
Customer o Policy and Claims Administration System
Goals o Windows into Property and Casualty System
o Software Productivity Tools
o Focus on Core Competencies o EmPower - Automated Workflow Management
o Reduce Fixed Costs o Underwriting Expert System
o Leverage Economies of Technology o Policy Set Production
o Create New Distribution Channels o Visual Rater
o "Year 2000" Solution o Software Services
o Regulatory Reporting o Installation
o Improve Customer Service o Customization/Conversion/Enhancements/Upgrades
o Maintenance
</TABLE>
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including notes thereto,
appearing elsewhere in this Prospectus. As used herein, the "Company" or
"INSpire" means INSpire Insurance Solutions, Inc., and "Millers Mutual" or the
"Selling Shareholder" means The Millers Mutual Fire Insurance Company, unless
the context otherwise requires. Unless otherwise indicated, all financial
information and share data in this Prospectus (i) have been adjusted to reflect
the stock splits effected as stock dividends on March 11, 1997 and June 18, 1997
and (ii) assume no exercise of the Underwriters' over-allotment option.
THE COMPANY
The Company is a provider of policy and claims administration solutions to
the property and casualty ("P&C") insurance industry, offering a comprehensive
choice of outsourcing services and software and software services. The Company's
outsourcing services, which generally are provided on a percentage of premiums
or claims paid basis, include application of underwriting and rating criteria
defined by the insurer, policy issuance, customer service, billing and
collections, claims adjusting and processing, and policyholder mailings. The
Company's software 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. These systems, which run on a variety
of platforms including IBM AS/400, IBM RS/6000, Windows 3.1, Windows 95 and
Windows NT, enable the Company's customers to conduct their policy and claims
administration more efficiently. The Company's software services include
installation, customization, conversion and maintenance of these systems to meet
customer specifications.
The Company was established in April 1995 as a wholly-owned subsidiary of
Millers Mutual, an insurance company chartered in Texas in 1898. The Company was
created to provide outsourcing services to other P&C insurers by capitalizing on
Millers Mutual's success in developing, implementing and managing software
systems for its internal use. As a result of the acquisition of Strategic Data
Systems, Inc. ("SDS") in March 1997 (the "SDS Acquisition"), the Company now
also develops and markets software and software services to the P&C insurance
industry. SDS offered software and software services to the P&C insurance
industry for 16 years prior to its acquisition by the Company. The Company
believes its services and products allow customers to focus on core
competencies, reduce costs by converting their fixed costs of in-house
information technology to variable costs and leverage the Company's investment
in software systems and productivity tools.
According to A.M. Best Company ("A.M. Best"), there were approximately
2,500 P&C insurance companies in the United States as of December 31, 1995,
generating more than $260 billion of premium revenues each year. According to
the National Association of Independent Insurers, information systems expenses
as a percentage of written premiums increased from 2.5% in 1992 to 3.3% in 1996.
Recent trends in the P&C insurance industry include selling policies directly to
policyholders rather than through independent agents and the emergence of new
entrants such as banks, credit unions and other financial services companies.
The Company believes the availability of outsourcing enables these insurers,
which often lack the necessary infrastructure to process policies and administer
claims, to improve efficiency, manage costs and increase customer satisfaction.
The Company's outsourcing services also allow these insurers to quickly enter
markets being exited by more established insurers seeking to reduce their
exposure to geographical risk due to the occurrence of recent natural
catastrophes.
The Company has experienced rapid growth since its inception as a result of
the development of its policy and claims administration facility in Fort Worth,
Texas, the expansion of its network of claims administration centers and the
acquisition of SDS. Pro forma revenues increased to $28.7 million for the first
six months of 1997 from pro forma revenues of $15.7 million for the first six
months of 1996, an increase of 83%. The Company's strategy is to become the
leading provider of policy and claims administration solutions to the P&C
insurance industry by offering a comprehensive choice of solutions, implementing
an integrated marketing plan, penetrating new markets, enhancing product
capabilities, generating recurring revenues and pursuing strategic acquisitions.
The Company's customers include Clarendon National Insurance Company,
3
<PAGE> 6
Employers Reinsurance Corporation, Firemen's Fund Insurance Company, Grinnell
Mutual Reinsurance Company, Interco, Inc., National Alliance Insurance Company,
Society Insurance Company, Zurich Insurance Company and Millers Mutual and
affiliated companies.
The Company was incorporated in Texas and recently changed its name to
INSpire Insurance Solutions, Inc. from MiliRisk, Inc. The Company's principal
executive office is located at 300 Burnett Street, Fort Worth, Texas 76102, and
its telephone number is (817) 332-7761.
THE OFFERING
Common Stock offered by the Company......... 2,500,000 Shares
Common Stock offered by the Selling
Shareholder................................. 2,000,000 Shares
Common Stock to be outstanding after this
offering.................................... 9,500,000 Shares(1)(2)
Use of Proceeds............................. For repayment of indebtedness
and general corporate purposes,
including working capital,
research and development and
possible acquisitions. See "Use
of Proceeds" and "Certain
Transactions."
Proposed Nasdaq National Market Symbol...... NSPR
- ---------------
(1) Excludes (a) 2,250,000 shares reserved for issuance under the Company's 1997
Stock Option Plan (the "Stock Option Plan"), pursuant to which options
covering 840,248 shares have been granted at an exercise price of $1.30 per
share and options covering 1,085,243 shares will be granted on the date of
this Prospectus at a per share exercise price equal to the initial public
offering price, (b) 50,000 shares reserved for issuance under a nonemployee
directors stock option plan (the "Director Plan"), pursuant to which options
covering 7,500 shares will be granted as of the date of this Prospectus at a
per share exercise price equal to the initial public offering price, and (c)
425,000 shares reserved for issuance under an employee stock purchase plan
(the "Stock Purchase Plan").
(2) The number of shares of Common Stock to be outstanding after this offering
would be 10,231,016 after giving effect to the issuance of 731,016 shares of
Common Stock issuable under outstanding options granted pursuant to the
Stock Option Plan applying the treasury stock method with an assumed initial
public offering price of $10.00 per share.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Prospectus, including without limitation statements under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of INSpire" and "Business" regarding the Company's financial
position, business strategy and plans and objectives of management of the
Company for future operations, are forward-looking statements. When used in this
Prospectus, words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or its
management, identify forward-looking statements. Such forward-looking statements
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. Actual
results could differ materially from those contemplated by the forward-looking
statements as a result of certain factors, such as those disclosed under "Risk
Factors," including but not limited to the Company's limited operating history
and dependence on major customers, competitive factors and pricing pressures,
changes in legal and regulatory requirements, technological change, product
development risks and general economic conditions. Such statements reflect the
current views of the Company with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of operations, growth strategy and liquidity of the Company. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this paragraph.
4
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
The historical information as of June 30, 1997 and for the period April 28,
1995 through December 31, 1995, the year ended December 31, 1996 and the six
months ended June 30, 1997 was derived from the audited consolidated financial
statements of the Company. The information presented as of and for the six
months ended June 30, 1996 was derived from the unaudited financial statements
of the Company. With respect to the unaudited financial information, the Company
is of the opinion that all material adjustments, consisting only of normal
recurring adjustments, necessary for the fair presentation of the Company's
interim results of operations have been included. The pro forma condensed
consolidated financial data are based on assumptions and adjustments described
in the notes to the pro forma condensed consolidated financial statements and
are not necessarily indicative of the results of operations that may be achieved
in the future. The information set forth below should be read in conjunction
with "Selected Consolidated Financial Data of INSpire," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of INSpire," the
Company's Consolidated Financial Statements and the Company's Pro Forma
Condensed Consolidated Financial Statements (Unaudited). The results of
operations presented below are not necessarily indicative of the results of
operations that may be achieved in the future.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD DECEMBER 31, SIX MONTHS ENDED JUNE 30,
APRIL 28, 1995(1) ----------------------- -------------------------------------------------
THROUGH PRO PRO PRO
DECEMBER 31, FORMA FORMA FORMA
1995 1996 1996(2) 1996 1996(2) 1997 1997(2)
----------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 3,907 $ 13,653 $ 37,317 $ 5,338 $ 15,710 $ 23,259 $ 28,671
Operating expenses.......... 5,518 14,430 36,920 5,752 15,884 27,668(3) 32,500(3)
Operating income (loss)..... (1,611) (777) 397 (414) (174) (4,409) (3,829)
Net income (loss)........... (1,262) (515) 148 (273) (188) (2,856) (2,417)
Net income (loss) per
share..................... (.16) (.07) .02 (.04) (.02) (.37) (.31)
Supplementary net income
(loss) per share(4)....... -- -- .07 -- -- -- (.30)
Weighted average common and
common equivalent shares
outstanding............... 7,658,195 7,658,195 7,731,016 7,658,195 7,731,016 7,658,195 7,731,016
</TABLE>
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<CAPTION>
JUNE 30, 1997
-------------------------
AS
ACTUAL ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 451 $13,124
Working capital............................................. (2,576) 14,492
Total assets................................................ 30,888 43,561
Current portion of long-term debt........................... 1,563 --
Due to parent............................................... 2,833 --
Long-term debt, excluding current portion................... 5,625 --
Shareholders' equity........................................ 9,558 32,252
</TABLE>
- ---------------
(1) The Company was incorporated April 28, 1995 and commenced operations July 1,
1995.
(2) Unaudited pro forma condensed consolidated statements of operations data for
the year ended December 31, 1996 and for the six months ended June 30, 1996
and 1997 reflect: (i) the acquisition of SDS using the purchase method of
accounting as if the SDS Acquisition, which occurred on March 12, 1997, had
occurred on January 1, 1996 and (ii) the results of operations of the
Company as if the Company had operated on an independent basis separate from
Millers Mutual since January 1, 1996. See the Company's Pro Forma Condensed
Consolidated Financial Statements (Unaudited).
(3) Includes $3.0 million of purchased research and development expenses
relating to the SDS Acquisition and $3.9 million of deferred compensation
expense relating to the grant of stock options to executive officers during
the period. Excluding the effect of such one-time, noncash expenses,
historical operating expenses, operating income and net income would have
been $20.7 million, $2.5 million and $1.6 million, respectively, and
historical net income per share would have been $0.21; and pro forma
operating expenses, operating income and net income would have been $25.6
million, $3.1 million and $2.0 million, respectively, and pro forma net
income per share and supplementary net income per share would have been
$0.26 and $0.27, respectively.
(4) Supplementary net income (loss) per share has been computed by adjusting pro
forma net income for the effect of the elimination of interest expense
associated with the repayment of $7.2 million of bank debt in conjunction
with this offering. Supplementary net income (loss) per share is not
presented for historical information as there is no significant difference
from net income (loss) per share as presented. See "Use of Proceeds."
(5) Adjusted to reflect: (i) the sale by the Company of 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, and (ii) the
application by the Company of its estimated net proceeds therefrom. See "Use
of Proceeds."
5
<PAGE> 8
RISK FACTORS
The following factors, which may affect the Company's current position and
future prospects, should be considered carefully in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.
LIMITED OPERATING HISTORY AND NET LOSSES
The Company has a limited operating history in the policy and claims
administration outsourcing business and only two significant outsourcing
customers, one of which is Millers Mutual. In addition, the Company recently
acquired SDS in March 1997. Although SDS had a significant operating history as
a provider of software and software services to the P&C insurance industry, the
Company has very little history conducting its operations on a consolidated
basis. The Company only recently began the process of integrating the SDS
operations into the Company's financial, managerial, administrative and
marketing functions. In addition, certain of the Company's senior management
personnel recently joined the Company. There can be no assurance that the
Company will be successful in this integration process or in implementing its
long-term operating strategy. Prior to the SDS Acquisition, the Company's
operations did not generate net income for any year. The Company had net losses
of $1.3 million for the period from inception through December 31, 1995 and
$515,000 for the year ended December 31, 1996. There can be no assurance that
the Company will be able to maintain revenue growth or that the Company will not
sustain net losses in the future. See "SDS Acquisition," "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
INSpire" and "Management."
ABILITY TO GROW AND EXPAND SERVICES
The Company 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 and expand sales of its software and software services
through the enhancement of existing products, development of new services and
products and the integrated marketing of its services and products. There can be
no assurance that the Company will have the financial, managerial,
administrative, marketing or other resources necessary to achieve these
objectives.
The success of the Company depends in large part on its ability to attract
and retain highly-skilled managerial, sales and marketing personnel. In
addition, the Company believes it will need to hire additional technical
personnel to enhance and develop its services and products. Competition for such
personnel is intense, and should the Company be unable to hire the necessary
personnel, the development and sale of new or enhanced services and products
would likely be delayed or prevented. There can be no assurance that the Company
will be able to attract, integrate and retain skilled personnel, manage its
infrastructure or overcome other difficulties associated with growth. If the
Company were to encounter difficulties in implementing the expansion or
development of its services and products, or in attracting, integrating and
retaining its personnel, such difficulties could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- The INSpire Strategy" and "Management."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; VOLATILITY OF TRADING PRICE
The Company has experienced and may continue to experience significant
quarter-to-quarter fluctuations in its results of operations. Quarterly results
of operations may fluctuate as a result of a number of factors, including the
introduction of new or enhanced services and products by the Company or its
competitors, customer acceptance or rejection of new services and products,
product development expenses, the timing of significant orders, the timing of
large scale catastrophes, the volume of usage of the Company's services and
products, competitive conditions in its industry and general economic
conditions. Many of these factors are beyond the Company's control.
The sales cycles for the Company's services and products are lengthy
(generally between three and twelve months for outsourcing services and six and
twelve months for software and software services) and subject to a number of
factors beyond the Company's control. As the Company recognizes a substantial
portion of
6
<PAGE> 9
revenues at the time new software systems are licensed, there can be significant
fluctuations from period to period in the revenues and operating income derived
from licensing activities. Customer decisions to enter into new license
agreements may be significantly affected by their decisions to replace current
systems. In addition, demand for the Company's claims administration services
fluctuates greatly depending on the occurrence of large scale catastrophes, such
as hurricanes. For these and other reasons, the revenues of the Company are
difficult to forecast, and the Company believes that period-to-period
comparisons of results of operations are not necessarily meaningful or
indicative of the results that the Company may achieve for any subsequent
quarter or fiscal year. Thus past operating results should not be considered a
reliable indicator of future performance.
The trading price of the Common Stock could be subject to wide fluctuations
in response to variations in the Company's quarterly operating results, changes
in earnings estimates by securities analysts, changes in the Company's business,
or changes in general market or 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 of INSpire."
DEPENDENCE ON MAJOR CUSTOMERS
The Company derives a substantial portion of its revenues from outsourcing
services provided to a few large customers, including Millers Mutual and its
subsidiary, The Millers Casualty Insurance Company ("Millers Casualty," and
collectively with Millers Mutual, the "Millers Group"), Clarendon National
Insurance Company ("Clarendon") and Interco, Inc. ("Interco"). The terms of the
contracts with the Millers Group expire in 2000 and automatically renew for
successive one-year periods if neither party terminates them. The Company
provides services to Clarendon through contracts with various subsidiaries of E.
W. Blanch Holdings Company, Inc. (collectively, "Blanch"), each of which is a
managing general agent of Clarendon. The Blanch contracts expire in 1999 and
automatically renew for an additional three years if neither party terminates
them. Blanch may terminate these contracts at any time without cause upon
payment of a specified termination fee. These contracts will also terminate if
the contracts between Blanch and Clarendon are terminated for any reason other
than a breach by Blanch. The Company provides services to Interco, the
administrator to the State Corporation Commission of the Commonwealth of
Virginia (the "Virginia Commission"), through a contract with the Virginia
Commission. The Virginia Commission may terminate this contract at any time
without cause upon the payment of a specified termination fee. The Millers
Group, Clarendon and Interco accounted for approximately 68%, 8% and 21%,
respectively, of the Company's historical revenues in 1996 and 25%, 3% and 8%,
respectively, of the Company's pro forma revenues in 1996. The Millers Group,
Clarendon and Interco accounted for approximately 32%, 18% and 8%, respectively,
of the Company's historical revenues for the six months ended June 30, 1997 and
26%, 18% and 7%, respectively, of the Company's pro forma revenues for such
period. 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 and results of operations. See "Business -- Customers."
TECHNOLOGICAL CHANGE AND NEW PRODUCT DEVELOPMENT RISKS
The markets in which the Company competes are increasingly characterized by
rapid technological change. The introduction of competing services or products
incorporating new technologies could render some or all of the Company's
services and products obsolete or unmarketable. The Company believes that its
future success depends on its ability to enhance its services and develop new
products that address the increasingly sophisticated needs of its customers. As
a result, the Company 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 the Company to
develop and introduce new or
7
<PAGE> 10
enhanced services or products in a timely and cost-effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Research and Development."
ACQUISITION RISKS
The Company completed the SDS Acquisition on March 12, 1997 and intends to
pursue acquisitions of other complementary businesses. There can be no
assurance, however, that the Company will be able to integrate the operations of
SDS with its own operations. Similarly, there can be no assurance that the
Company 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 the
Company's results of operations and (vi) the financial reporting effects of the
amortization of goodwill and other intangible assets. Furthermore, there can be
no assurance that SDS, or any business acquired in the future, will achieve
acceptable levels of revenue and profitability or otherwise perform as expected.
Currently, the Company has no arrangements or understandings with any party with
respect to any future acquisition. The Company, however, continues to monitor
potential acquisition opportunities. See "SDS Acquisition" and "Business -- The
INSpire Strategy."
LACK OF INDEPENDENT OPERATING HISTORY; CONTROL BY EXISTING SHAREHOLDER;
CONFLICTS OF INTEREST
The Company was formed in 1995 as a wholly-owned subsidiary of Millers
Mutual. Although SDS was an independent company prior to being acquired by the
Company in March 1997, the Company has not previously operated as a stand-alone
company. Following this offering, the Company will be required to develop
financial, managerial, administrative and other aspects of its infrastructure
previously provided to the Company by Millers Mutual. In addition, since
inception the Company has operated with negative working capital and satisfied a
significant portion of its cash requirements from capital contributions and
loans from Millers Mutual. The Company does not anticipate receiving any loans
or capital contributions from Millers Mutual in the future. The Company expects
to use a portion of its net proceeds from this offering to repay all outstanding
loans from Millers Mutual. In addition, Millers Mutual is substantially reducing
its investment in the Company as a result of its sale of Common Stock pursuant
to this offering. The Company believes that its net proceeds from this offering,
together with funds from operations, will be sufficient to fund anticipated
working capital requirements for at least one year. The Company may require
substantial additional funds for potential acquisitions and expansion. There can
be no assurance that the Company will be able to obtain any additional financing
or that the Company will not increase its outstanding indebtedness after this
offering to levels that may have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
and Millers Mutual have entered into several agreements that are intended to
ease the Company's transition to independent status, there can be no assurance
that the Company will be able to manage this transition or develop independent
resources successfully.
After this offering, Millers Mutual will beneficially own an aggregate of
52.6% of the outstanding shares of Common Stock (or approximately 47.6% if the
Underwriters' over-allotment option is exercised in full). As the Company's
majority shareholder, Millers Mutual will continue to have the ability to elect
a majority of the Board of Directors and maintain control of the Company after
this offering. Millers Mutual's ownership of a majority of the Common Stock
after this offering may discourage or prevent unsolicited mergers, acquisitions,
tender offers, proxy contests or changes of incumbent management, even when
shareholders other than Millers Mutual 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, the Company's President, Chief
Executive Officer and Chairman of the Board, also served as President and Chief
Executive Officer of each of Millers Mutual and Millers Casualty. On June 18,
1997, Mr. Dunham resigned from those positions with Millers Mutual and Millers
Casualty. However, Mr. Dunham serves as Vice Chairman of the Board of Directors
of each of Millers
8
<PAGE> 11
Mutual and Millers Casualty, and his father, Frank G. Dunham, Jr., serves as
Chairman of the Board and Chief Executive Officer of each of Millers Mutual and
Millers Casualty. In addition, the Company will continue to have a variety of
contractual relationships with Millers Mutual and Millers Casualty, including a
benefits administration agreement pursuant to which Millers Mutual provides
certain benefits administration services to the Company and certain contracts
pursuant to which the Company provides policy and claims administration services
to Millers Mutual and Millers Casualty. As the interests of the Company and the
Millers Group will differ, Mr. Dunham will face certain conflicts of interest.
See "Use of Proceeds," "Principal and Selling Shareholders" and "Certain
Transactions."
COMPETITION
The markets for policy and claims administration services and products are
highly competitive and subject to rapid changes in technology. The Company
competes in the following three markets serving the P&C insurance industry: (i)
outsourcing of policy administration, (ii) outsourcing of claims administration
and (iii) software and software services.
The policy administration outsourcing market is relatively new and is
dominated by a few large companies, including Policy Management Services
Corporation ("PMSC"). The Company competes for policy administration outsourcing
customers on the basis of customer service, performance 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 outsourcing
market is principally price driven. Two of the larger competitors in this market
are Lindsey Morden Claim Services Inc. and Crawford & Company, Inc. The P&C
insurance software and software services market is highly competitive and is
dominated by PMSC. The Company competes for software customers on the basis of
customer service, performance, product features, ability to tailor products and
services to specific customer requirements, timely delivery and price.
The Company believes that its most significant competition for policy and
claims administration software and outsourcing services comes from potential
customers' in-house personnel. Insurance companies that have developed
proprietary software systems to conduct all or most of their policy and claims
administration internally have made a significant investment in their policy and
claims information systems. In addition, insurance company personnel have a
vested interest in maintaining these responsibilities in-house.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company, including name recognition with current and potential customers. As
a result, these competitors may devote more resources to the development,
promotion and sale of services or products than the Company 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. There can be no assurance that the Company 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 and results of operations. See
"Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success will depend largely on the efforts and
abilities of its executive officers, including F. George Dunham, III, the
President and Chief Executive Officer of the Company, Stuart H. Warrington, an
Executive Vice President of the Company and founder of SDS, Robert K. Agazzi, an
Executive Vice President of the Company and former President of SDS, and certain
key technical, managerial and sales employees. The loss of the services of
Messrs. Dunham, Warrington or Agazzi, or any of the Company's other key
employees, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has an employment
agreement with Mr. Dunham that terminates in 2000 and employment agreements with
Messrs. Warrington and Agazzi that terminate in 1998.
9
<PAGE> 12
The Company maintains a key-man life insurance policy on Stuart H. Warrington,
but not on any other key employees. There can be no assurance that the Company
will be successful in retaining its key personnel. See "Business -- Competition"
and "-- Employees" and "Management."
RELIANCE ON INFORMATION PROCESSING SYSTEMS
The Company's outsourcing services depend on its ability to store,
retrieve, process and manage significant databases, and expand and upgrade
periodically its information processing capabilities. The Company's principal
computer equipment and software systems are maintained at the Company's
facilities in Fort Worth, Texas and Sheboygan, Wisconsin. Interruption or loss
of the Company'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 the Company's business, financial condition and results of operations.
Although the Company maintains business interruption insurance with an aggregate
limit of $5.0 million per occurrence, and has entered into an agreement with
International Business Machines, Inc. to provide disaster recovery services, if
needed, there can be no assurance 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 the
Company is unable to provide services. See "Business -- Customer Support and
Operations."
DEPENDENCE ON PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT
The Company regards the technology underlying its services and products as
proprietary. The Company has no registered copyrights or trademarks and relies
primarily on a combination of intellectual property laws, confidentiality
agreements and contractual provisions to protect its proprietary rights. Trade
secret and copyright laws afford the Company limited protection. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's software or obtain and use information
that the Company regards as proprietary. Policing unauthorized use of the
Company's software is difficult. There can be no assurance that the obligations
to maintain the confidentiality of the Company's proprietary information
(including software source code) will prevent disclosure of such information or
that the Company's proprietary information will not be independently developed
by the Company's competitors. Litigation may be necessary for the Company to
defend against claims of infringement or protect its intellectual property
rights, which could result in substantial costs to the Company and diversion of
management's efforts. There can be no assurance that the Company would prevail
in any such litigation. The absence of federal or state registrations for its
intellectual property could be detrimental to the Company in any infringement
litigation or other disputes regarding intellectual property. The inability of
the Company to protect its proprietary rights could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company is unaware of any claim that its software, trademarks or other
proprietary rights infringe the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
against the Company in the future. Any such claims, with or without merit, could
require the expenditure of significant time and money to defend, require the
Company to enter into royalty or license agreements or require the Company to
cease the alleged infringing activities. The failure to obtain such royalty or
license agreements, if required, and the Company's involvement in such
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property."
RISKS OF SOFTWARE DEFECTS
The sale and support of software by the Company 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 the Company's
software products could result in loss of revenues or delay market acceptance of
new products, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The
10
<PAGE> 13
Company's license agreements with its customers typically contain provisions
designed to limit the Company'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.
In February 1997, a lawsuit was filed against the Company by a customer
claiming damages in excess of $1.3 million. The customer alleges that the
software sold to such customer does not meet required specifications. The
Company and the former shareholders of SDS placed $1.5 million of the SDS
purchase price in an escrow account pending resolution of such claim. No
assurance can be given with respect to the outcome of this lawsuit, including
whether the amount of any judgment or settlement will exceed the escrowed funds
and require the Company to pay the amount of the excess. A successful product
liability or warranty claim against the Company could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "SDS Acquisition" and "Business -- Research and Development,"
"-- Intellectual Property" and "-- Legal Proceedings."
GOVERNMENT REGULATION
The P&C insurance industry is subject to extensive regulation by state
governments. As the Company markets and sells its services and products to P&C
insurers, certain aspects of the Company's business are affected by such
regulation. The Company must continuously update its software to reflect changes
in regulations. In addition, changes in regulations that adversely affect the
Company's existing and potential customers could have a material adverse effect
on the Company's business, financial condition and results of operations.
Although the Company's services and products are not directly subject to
insurance regulations in the states where the Company currently provides them,
the Company's outsourcing services may be subject to insurance regulations in
states where the Company may do business in the future. Such regulations could
require the Company to obtain a license as a managing general agent or third
party administrator. No assurance can be given with respect to the extent to
which the Company 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
after this offering could adversely affect the trading price of the Common
Stock. Immediately after this offering the Selling Shareholder will hold
5,000,000 shares, representing 52.6% of the outstanding shares of Common Stock
(47.6% if the Underwriters' over-allotment option is exercised in full). A
decision by the Selling Shareholder to sell shares of Common Stock could
adversely affect the trading price of the Common Stock. Upon consummation of
this offering, the Company will have 9,500,000 shares of Common Stock
outstanding (9,875,000 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, all shares sold in this offering (other
than those sold to affiliates of the Company) will be freely tradeable. All
remaining shares of Common Stock are subject to lock-up agreements with the
Underwriters. Such lock-up agreements restrict transfers of such shares without
the written consent of Raymond James & Associates, Inc. until 180 days after the
date of this Prospectus. After such 180-day period expires, approximately
5,000,000 shares (4,700,000 shares if the Underwriters' overallotment option is
exercised in full) will be eligible for sale pursuant to Rule 144 under the
Securities Act. In addition, 2,250,000 shares of Common Stock have been reserved
for issuance under the Stock Option Plan, 1,925,491 of which are issuable upon
exercise of options outstanding at the date of this Prospectus, including
options to purchase 584,075 shares exercisable as of the date of this Prospectus
or that will become exercisable within 180 days after the date of this
Prospectus, and 50,000 shares of Common Stock reserved for issuance under the
Director Plan, 7,500 of which will be issuable upon exercise of options that
will be outstanding and fully vested as of the date of this Prospectus. Such
shares issuable upon the exercise of options within 180 days after the date of
this Prospectus are subject to the lock-up agreements described above. An
additional 425,000 shares will be available for future purchase by employees of
the Company pursuant to the Stock Purchase Plan. The Company intends to register
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 "Management -- Stock Option Plan," "-- Director Stock Option Plan,"
"-- Employee Stock Purchase Plan" and "Shares Eligible For Future Sale."
11
<PAGE> 14
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Restated Articles of Incorporation (the
"Restated Articles"), the Company'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 the Company 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. The Company has no present plans to issue any shares of preferred
stock. In addition, the Company has adopted a shareholder rights plan that could
further discourage attempts to acquire control of the Company. Finally,
effective September 1, 1997, the TBCA will restrict certain business
combinations with any "affiliated shareholder," as defined therein and will
provide that directors serving on staggered boards of directors may be removed
only for cause unless the articles of incorporation otherwise provide. The
Company's Restated Articles do not otherwise so provide. See "Description of
Capital Stock -- Anti-Takeover Considerations" and "-- Preferred Stock."
NO PRIOR PUBLIC MARKET; DETERMINATION OF INITIAL PUBLIC OFFERING PRICE; DILUTION
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active public market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial public offering price. If an
active public market for the Common Stock does not develop, the trading price
and liquidity of the Common Stock will be materially and adversely affected. The
initial public offering price will be determined by negotiations among the
Company, the Selling Shareholder and the Underwriters and may not be indicative
of the trading price for the Common Stock after this offering.
Purchasers of shares of Common Stock in this offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. Prior to this offering, each share of Common Stock had a net tangible
book value of $(.81). Assuming an initial public offering price of $10.00 per
share: (i) after this offering each share of Common Stock will have a net
tangible book value of $1.79 and (ii) the net tangible book value dilution to
purchasers of Common Stock in this offering will be $8.21 per share. See
"Dilution," "Management -- Stock Option Plan" and "Underwriting."
SDS ACQUISITION
On March 12, 1997, the Company acquired all of the capital stock of
Strategic Data Systems, Inc., a Wisconsin corporation, for $18.0 million in
cash. Of this amount, $2.5 million remains in escrow to secure certain
indemnification obligations of the former SDS shareholders. The SDS Acquisition
was financed with a $7.5 million loan from NationsBank of Texas, N.A.
("NationsBank") and a capital contribution of $10.5 million from Millers Mutual.
The Company intends to repay the loan from NationsBank with a portion of its net
proceeds from this offering. SDS was merged into the Company in July 1997. See
"Use of Proceeds."
SDS began operations in 1981 as a provider of software and software
services to the P&C insurance industry. SDS's revenues and net income were $23.7
million and $698,000, respectively, in 1996 and $5.4 million and $231,000,
respectively, for the period from January 1, 1997 through March 11, 1997. SDS's
founder and Chief Executive Officer, Stuart H. Warrington, and its President,
Robert K. Agazzi, have become Executive Vice Presidents -- Software and Systems
of the Company.
The software acquired by the Company through the SDS Acquisition includes
policy and claims administration systems, as well as software that increases the
productivity of insurers by automating functions such as workflow management,
underwriting rules and guidelines, document production and rating algorithms.
12
<PAGE> 15
Through the SDS Acquisition, the Company gained the ability to provide
additional software services, including installation, customization, conversion
and maintenance of the SDS systems to meet customer specifications.
Prior to the SDS Acquisition, the Company's operations were focused solely
on providing outsourcing services to the P&C insurance industry. Millers Mutual
has utilized SDS software since 1993. The SDS Acquisition allows the Company to
offer a comprehensive choice of solutions, including software systems and
services to satisfy the needs of customers that choose to retain their
processing capabilities in-house. These software systems and services also
enhance the quality of the Company's outsourcing services. The Company believes
that utilization of the experienced sales and marketing personnel of SDS and
access to the SDS customer base will facilitate cross-selling opportunities and
expansion of the Company's outsourcing services.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company at an assumed initial public offering price
of $10.00 per share are expected to be approximately $22.7 million
(approximately $26.2 million if the Underwriters' over-allotment option is
exercised in full) after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company intends to use
approximately $7.2 million of such net proceeds to repay the outstanding
balance, including accrued interest, under its bank credit facility with
NationsBank (the "NationsBank Facility") incurred to fund part of the SDS
Acquisition and approximately $2.8 million to repay funds borrowed from Millers
Mutual for working capital purposes. The Company intends to use the remaining
net proceeds of approximately $12.7 million for general corporate purposes,
including working capital, research and development and possible acquisitions.
Currently the Company has no present commitments or understandings with respect
to the acquisition of any business, although the Company continues to monitor
potential acquisition opportunities. Pending such uses, the Company intends to
invest the net proceeds in short-term, investment grade, interest bearing
securities.
The NationsBank Facility is comprised of a revolving credit facility and a
term credit facility. The revolving credit facility provides for maximum
borrowings of $4.0 million, with an outstanding balance of $2.5 million as of
June 30, 1997. The term credit facility had an original principal amount of $5.0
million, with an outstanding balance of $4.7 million as of June 30, 1997. Both
facilities bear interest at floating rates that may be fixed for 180-day
periods. The interest rate is 7.4375% until September 29, 1997 under the term
credit facility and 7.5% until December 1, 1997 under the revolving credit
facility. The Company must pay a commitment fee of 0.25% per annum on the
average daily unused portion of the revolving credit facility. The term credit
facility matures March 12, 2001, and the revolving credit facility matures March
12, 1999.
The Company has borrowed from and repaid funds to Millers Mutual based on
the Company's working capital needs. The Company's borrowings from Millers
Mutual do not have a fixed maturity date and do not bear interest. The
outstanding balance of these borrowings was $2.8 million as of June 30, 1997.
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered by the Selling Shareholder. The net proceeds to be received
by the Selling Shareholder from the sale of the 2,000,000 shares offered by the
Selling Shareholder at an assumed initial public offering price of $10.00 per
share are expected to be approximately $18.2 million (approximately $20.9
million if the Underwriters' over-allotment option is exercised in full) after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Selling Shareholder. See "Principal and Selling Shareholders."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company intends to retain any future earnings to fund growth and does
not anticipate paying any cash dividends in the foreseeable future. Under the
terms of the NationsBank Facility, the Company cannot declare or pay any
dividends or return any capital to its shareholders or authorize or make any
other distribution, payment or delivery of property or cash to its shareholders
as such without the prior written consent of NationsBank.
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<PAGE> 16
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $(5.7) million, or $(.81) per share. "Net tangible book value per
share" represents the amount of total assets less total liabilities and
intangible assets divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in the net tangible book value
after June 30, 1997, other than to give effect to the receipt by the Company of
the estimated net proceeds from the sale of 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.00 per share, the net tangible book value of the Company as of June 30, 1997
would have been $17.0 million, or $1.79 per share. This represents an immediate
increase of net tangible book value of $2.60 per share to the existing
shareholder and an immediate dilution of $8.21 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.00
------
Net tangible book value per share before this offering.... $(.81)
Increase per share attributable to new investors.......... 2.60
-----
Net tangible book value per share after this offering(1).... 1.79
------
Dilution per share to new investors......................... $ 8.21
======
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the net
tangible book value after this offering would be $2.08 per share, resulting
in dilution to new investors in this offering of $7.92 per share.
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between the existing shareholder and the new investors
purchasing shares of Common Stock in this offering (at an assumed initial public
offering price of $10.00 per share) with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL
STOCK ACQUIRED CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholder.............. 7,000,000 73.7% $14,191,609 36.2% $ 2.03
New Investors..................... 2,500,000 26.3 25,000,000 63.8 10.00
---------- ----- ----------- -----
Total................... 9,500,000 100.0% $39,191,609 100.0% $ 4.13
========== ===== =========== =====
</TABLE>
The computations in the above table are determined without deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. Both tables set forth in this section assume no exercise of
outstanding stock options. As of June 30, 1997, options to purchase 840,248
shares of Common Stock were outstanding, with an exercise price of $1.30 per
share. To the extent outstanding options are exercised, there will be further
dilution to holders of Common Stock. See "Management -- Stock Option Plan."
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<PAGE> 17
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997, and as adjusted to reflect: (i) the sale by the
Company of 2,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $10.00 per share, after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company, (ii) the application of the estimated net proceeds therefrom and (iii)
the amendments to the Company's articles of incorporation effected by the
Restated Articles.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current portion of long-term debt........................... $ 1,563 $ --
Due to parent............................................... 2,833 --
Long-term debt, excluding current portion:
Term loan................................................. 3,125 --
Revolving credit facility................................. 2,500 --
Other..................................................... --
------- -------
Total long-term debt.............................. 5,625 --
------- -------
Shareholders' equity:
Preferred stock (par value $1.00 per share, 1,000,000
shares authorized and none issued)..................... -- --
Common stock (par value $0.01 per share, 50,000,000 shares
authorized, 7,000,000 shares issued and outstanding,
and 9,500,000 shares issued and outstanding as
adjusted(1))........................................... 70 95
Additional paid-in capital................................ 14,122 39,097
Accumulated deficit....................................... (4,634) (6,940)
------- -------
Total shareholders' equity........................... 9,558 32,252
------- -------
Total capitalization.............................. $19,579 $32,252
======= =======
</TABLE>
- ---------------
(1) Excludes (a) 2,250,000 shares reserved for issuance under the Stock Option
Plan, pursuant to which options covering 840,248 shares have been granted at
an exercise price of $1.30 per share and options covering 1,085,243 shares
will be granted on the date of this Prospectus at a per share exercise price
equal to the initial public offering price of the Common Stock and (b)
50,000 shares reserved for issuance under the Director Plan, pursuant to
which options covering 7,500 shares will be granted as of the date of this
Prospectus at a per share exercise price equal to the initial public
offering price.
15
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA OF INSPIRE
(IN THOUSANDS, EXCEPT SHARE DATA)
The selected consolidated financial data of the Company presented below as
of December 31, 1995 and 1996 and June 30, 1997 and for the period April 28,
1995 through December 31, 1995, the year ended December 31, 1996 and the six
months ended June 30, 1997 have been derived from the audited consolidated
financial statements of the Company. The information presented as of and for the
six months ended June 30, 1996 was derived from the unaudited financial
statements of the Company. With respect to the unaudited financial information,
the Company is of the opinion that all material adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the
Company's interim results of operations have been included. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
INSpire," the Company's Consolidated Financial Statements and the Company's Pro
Forma Condensed Consolidated Financial Statements (Unaudited). The results of
operations presented below are not necessarily indicative of the results of
operations that may be achieved in the future and the historical results for the
indicated six-month periods are not comparable between periods due to the SDS
Acquisition.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD DECEMBER 31, SIX MONTHS ENDED JUNE 30,
APRIL 28, 1995(1) ------------------------ ----------------------------------------------------
THROUGH PRO PRO PRO
DECEMBER 31, FORMA FORMA FORMA
1995 1996 1996(2) 1996 1996(2) 1997 1997(2)
------------------ ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Outsourcing services.... $ 3,907 $ 13,653 $ 13,653 $ 5,338 $ 5,338 $ 14,394 $ 14,394
Software and software
services.............. -- -- 18,239 -- 9,299 7,562 12,402
Other................... -- -- 5,425 -- 1,073 1,303 1,875
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.... 3,907 13,653 37,317 5,338 15,710 23,259 28,671
Expenses:
Cost of outsourcing
services.............. 4,885 10,543 10,543 4,202 4,202 10,098 10,098
Cost of software and
software services..... -- -- 11,609 -- 5,429 2,921 7,282
Cost of other
revenues.............. -- -- 2,699 -- 478 697 1,080
Selling, general and
administrative........ -- -- 4,666 -- 2,007 3,428 3,757
Research and
development........... -- -- 3,455 -- 1,821 680 945
Depreciation and
amortization.......... 33 787 3,768 350 1,857 1,695 2,299
Purchased research and
development........... -- -- -- -- -- 3,000(3) 3,000(3)
Deferred compensation... -- -- -- -- -- 3,949(3) 3,949(3)
Management fees to
parent................ 600 3,100 180 1,200 90 1,200 90
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses.... 5,518 14,430 36,920 5,752 15,884 27,668 32,500
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)... (1,611) (777) 397 (414) (174) (4,409) (3,829)
Other income (expense).... -- (2) (320) -- (196) (159) (219)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes
(benefit)............... (1,611) (779) 77 (414) (370) (4,568) (4,048)
Income taxes (benefit).... (349) (264) (71) (141) (182) (1,712) (1,631)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)......... $ (1,262) $ (515) $ 148 $ (273) $ (188) $ (2,856) $ (2,417)
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per
share................... $ (.16) $ (.07) $ .02 $ (.04) $ (.02) $ (.37) $ (.31)
========== ========== ========== ========== ========== ========== ==========
Supplementary net income
(loss) per share(4)..... $ -- $ -- $ .07 $ -- $ -- $ -- $ (.30)
========== ========== ========== ========== ========== ========== ==========
Weighted average common
and common equivalent
shares outstanding...... 7,658,195 7,658,195 7,731,016 7,658,195 7,731,016 7,658,195 7,731,016
</TABLE>
See notes on following page.
16
<PAGE> 19
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1997
------------------ -------------------------
1995 1996 ACTUAL AS ADJUSTED(5)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 22 $ 363 $ 451 $13,124
Working capital............................................. (1,072) (2,550) (2,576) 14,492
Total assets................................................ 2,817 5,232 30,888 43,561
Current portion of long-term debt........................... -- 2,500 1,563 --
Due to parent............................................... 1,569 996 2,833 --
Long-term debt, excluding current portion................... -- -- 5,625 --
Shareholders' equity........................................ 1,121 606 9,558 32,252
</TABLE>
- ---------------
(1) The Company was incorporated April 28, 1995 and commenced operations July 1,
1995.
(2) Unaudited pro forma condensed consolidated statements of operations data for
the year ended December 31, 1996 and for the six months ended June 30, 1996
and 1997 reflect: (i) the acquisition of SDS using the purchase method of
accounting as if the SDS Acquisition, which occurred on March 12, 1997, had
occurred on January 1, 1996 and (ii) the results of operations of the
Company as if the Company had operated on an independent basis separate from
Millers Mutual since January 1, 1996. See the Company's Pro Forma Condensed
Consolidated Financial Statements (Unaudited).
(3) Represents $3.0 million of purchased research and development expenses
relating to the SDS Acquisition and $3.9 million of deferred compensation
expense relating to the grant of stock options to executive officers during
the period. Excluding the effect of such one-time, noncash expenses,
historical operating expenses, operating income and net income would have
been $20.7 million, $2.5 million and $1.6 million, respectively, and
historical net income per share would have been $0.21; and pro forma
operating expenses, operating income and net income would have been $25.6
million, $3.1 million and $2.0 million, respectively, and pro forma net
income per share and supplementary net income per share would have been
$0.26 and $0.27, respectively.
(4) Supplementary net income (loss) per share has been computed by adjusting pro
forma net income for the effect of the elimination of interest expense
associated with the repayment of $7.2 million of bank debt in conjunction
with this offering. Supplementary net income (loss) per share is not
presented for historical information as there is no significant difference
from net income (loss) per share as presented. See "Use of Proceeds."
(5) Adjusted to reflect: (i) the sale by the Company of 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$10.00 per share, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company, and (ii) the
application by the Company of its estimated net proceeds therefrom. See "Use
of Proceeds."
17
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF INSPIRE
OVERVIEW
The Company's revenues are derived principally from: (i) outsourcing
services and (ii) software and software services. Revenues from outsourcing
services are derived from policy administration services and claims
administration services. Revenues from software and software services are
derived from contracts that grant customers a license to use the Company'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.
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 the Company 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. The Company recognizes the
annual fee charged for maintenance of the customer's system as revenue as hours
are expended over the maintenance contract period. Revenues from computer
hardware and equipment sales are recognized when the Company 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.
The Company incurs research and development costs that relate primarily to
the development of new products and major enhancements to existing services and
products. Research and development costs are comprised primarily of salaries.
The Company expenses or capitalizes, as appropriate, these research and
development costs in accordance with Statement of Financial Accounting Standards
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 five
to seven years, using the straight-line method. The cost and related accumulated
amortization of projects are written off as they become fully amortized.
Millers Mutual, the Company and the other subsidiaries of Millers Mutual
are parties to a Consolidated Federal Income Tax Allocation Agreement, effective
as of January 1, 1994 (as amended, the "Tax Sharing Agreement"). Under the Tax
Sharing Agreement, Millers Mutual must pay the Company an amount equal to any
decrease in the income taxes otherwise payable by the Millers Mutual
consolidated tax group attributable to any net losses of the Company.
Conversely, the Tax Sharing Agreement requires the Company to pay to Millers
Mutual the amount of any income taxes that the Company would have paid if it had
not been included in the Millers Mutual consolidated tax group. The Company
believes that the parties to the Tax Sharing Agreement will terminate such
agreement as it applies to the Company in contemplation of the Company leaving
the Millers Mutual consolidated tax group as a result of this offering. The
Company expects that the agreement to terminate the Company's participation in
the Tax Sharing Agreement will provide that the Company will indemnify the other
members of the Millers Mutual consolidated tax group for any of the 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 consolidated tax group other than the
Company. The agreement to so terminate the Tax Sharing Agreement will be subject
to approval by the Texas Department of Insurance ("TDI").
In view of the Company's limited operating history and recent acquisition
of SDS, the Company believes that period-to-period comparisons of its historical
results of operations are not necessarily meaningful.
18
<PAGE> 21
Accordingly, discussions of the pro forma results of operations that combine the
results of operations of the Company and SDS for the periods indicated are also
included. The results of operations presented should not be relied upon as an
indication of future performance.
RECENT DEVELOPMENTS
Purchase of SDS. On March 12, 1997 the Company acquired SDS for $18.0
million. The results of operations of SDS from March 12, 1997 through June 30,
1997 are included in the results of operations of the Company for the six months
ended June 30, 1997. SDS was merged into the Company in July 1997. See "SDS
Acquisition."
Sale of Subsidiary. In July 1997, the Company signed a nonbinding letter of
intent to sell Applied Quoting Systems, Inc., a wholly-owned subsidiary of the
Company, for $2.5 million. Applied Quoting Systems, Inc. sells the Applied
Quoting Systems Module ("AQS"), a DOS-based commercial lines policy
administration system. AQS automates commercial policy rating, issuance,
renewals and mid-term policy changes. Sales of AQS were $4.1 million during 1996
and $2.3 million during the six months ended June 30, 1997. There can be no
assurance that the sale of this subsidiary will be completed.
RESULTS OF OPERATIONS
The following table sets forth, with respect to the Company and for the
periods indicated, the percentage of total revenues represented by certain
revenue, expense and income items:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD DECEMBER 31, SIX MONTHS ENDED JUNE 30,
APRIL 28, 1995(1) ----------------- -------------------------------------
THROUGH PRO PRO PRO
DECEMBER 31, FORMA FORMA FORMA
1995 1996 1996(2) 1996 1996(2) 1997 1997(2)
------------------ ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services................ 100.0% 100.0% 36.6% 100.0% 34.0% 61.9% 50.2%
Software and software services...... -- -- 48.9 -- 59.2 32.5 43.3
Other............................... -- -- 14.5 -- 6.8 5.6 6.5
----- ----- ----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== ===== ===== =====
Expenses:
Cost of outsourcing services........ 125.0 77.2 28.2 78.7 26.7 43.4 35.2
Cost of software and software
services.......................... -- -- 31.1 -- 34.6 12.6 25.4
Cost of other revenues.............. -- -- 7.2 -- 3.0 3.0 3.8
Selling, general and
administrative.................... -- -- 12.5 -- 12.8 14.7 13.1
Research and development............ -- -- 9.3 -- 11.6 2.9 3.3
Depreciation and amortization....... 0.8 5.8 10.1 6.6 11.8 7.3 8.0
Purchased research and
development....................... -- -- -- -- -- 12.9 10.5
Deferred compensation............... -- -- -- -- -- 17.0 13.8
Management fees to parent........... 15.4 22.7 0.5 22.5 0.6 5.2 0.3
----- ----- ----- ----- ----- ----- -----
Total expenses................ 141.2 105.7 98.9 107.7 101.1 119.0 113.4
===== ===== ===== ===== ===== ===== =====
Operating income (loss)............... (41.2) (5.7) 1.1 (7.7) (1.1) (19.0) (13.4)
Other income (expense)................ -- (0.0) (0.9) -- (1.2) (0.7) (0.8)
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes
(benefit)........................... (41.2) (5.7) 0.2 (7.7) (2.3) (19.7) (14.2)
Income taxes (benefit)................ (8.9) (1.9) (0.2) (2.6) (1.2) (7.4) (5.7)
----- ----- ----- ----- ----- ----- -----
Net income (loss)..................... (32.3)% (3.8)% 0.4% (5.1)% (1.1)% (12.3)% (8.5)%
===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) The Company was incorporated April 28, 1995 and commenced operations July 1,
1995.
(2) Unaudited pro forma condensed consolidated statements of operations data for
the year ended December 31, 1996 and for the six months ended June 30, 1996
and 1997 reflect: (i) the acquisition of SDS using the purchase method of
accounting as if the SDS Acquisition, which occurred on March 12, 1997, had
occurred on January 1, 1996 and (ii) the results of operations of the
Company as if the Company had operated on an independent basis separate from
Millers Mutual since January 1, 1996. See the Company's Pro Forma Condensed
Consolidated Financial Statements (Unaudited).
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 ON A PRO FORMA BASIS
REVENUES. Pro forma revenues were $28.7 million for the six months ended
June 30, 1997 compared to $15.7 million for the six months ended June 30, 1996,
an increase of $13.0 million or 83%. Revenues from outsourcing services were
$14.4 million for the six months ended June 30, 1997 compared to $5.3 million
for
19
<PAGE> 22
the six months ended June 30, 1996, an increase of $9.1 million or 172%,
primarily as a result of three significant contracts entered into during or
after March 1996 under which the Company performed significantly more
outsourcing services. These three contracts included a claims administration
agreement with Interco as administrator for the Virginia Commission, a policy
administration agreement and a claims administration agreement with Clarendon
through Blanch. Revenues from software and software services were $12.4 million
for the six months ended June 30, 1997 compared to $9.3 million for the period
ended June 30, 1996, an increase of $3.1 million or 33%. This increase was
attributable to an increased number of software product installations and
customizations, primarily WPC (as hereinafter defined), due to increased sales
and marketing efforts. Revenues from other sources were $1.9 million for the six
months ended June 30, 1997 compared to $1.1 million for the six months ended
June 30, 1996, an increase of $800,000 or 73%. This increase was attributable to
increased hardware sales in connection with the increased software
installations.
COST OF REVENUES. Cost of outsourcing services, which consists primarily of
personnel costs, was $10.1 million for the six months ended June 30, 1997
compared to $4.2 million for the six months ended June 30, 1996, an increase of
$5.9 million or 140%, primarily as a result of costs associated with the
performance of the three significant contracts described above. Cost of software
and software services, which is comprised primarily of salaries, was $7.3
million for the six months ended June 30, 1997 compared to $5.4 million for the
six months ended June 30, 1996, an increase of $1.9 million or 35%, primarily as
a result of an increased number of software installations. Cost of revenues as a
percentage of total revenues decreased from 71% for the six months ended June
30, 1996 to 66% for the six months ended June 30, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include the costs of corporate operations, finance and
accounting, human resources and other general operations of the Company.
Selling, general and administrative expenses were $3.8 million for the six
months ended June 30, 1997 compared to $2.1 million for the six months ended
June 30, 1996, an increase of $1.8 million or 81%. This increase was due to
additional 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 from 13%
for the six months ended June 30, 1996 to 12% for the six months ended June 30,
1997. This decrease is attributable primarily to the Company performing more
outsourcing services under the three significant contracts described above while
the level of executive salaries and benefits administration fees remained
stable.
RESEARCH AND DEVELOPMENT. Research and development expense is comprised
primarily of direct salaries. Research and development expense was relatively
constant for the six months ended June 30, 1996 and 1997. Amortization of
research and development purchased as a result of the SDS Acquisition was
approximately $600,000 and $600,000 for the six months ended June 30, 1996 and
1997, respectively, and is included in depreciation and amortization for the
periods presented.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$2.3 million for the six months ended June 30, 1997 compared to $1.9 million for
the six months ended June 30, 1996, an increase of $400,000 or 21%. This
increase is primarily attributable to Millers Mutual's capital contribution of
approximately $2.5 million in depreciable property and equipment, including
computer and information system equipment, to the Company in January 1997.
NONRECURRING EXPENSES. 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 the six months ended June 30, 1997.
INCOME TAXES (BENEFIT). Historically, Millers Mutual filed a consolidated
tax return that included all subsidiaries of Millers Mutual, including the
Company. For financial accounting purposes, the Company recorded its pro rata
share, based on its taxable income or loss, of total consolidated taxable income
or loss.
20
<PAGE> 23
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 ON AN HISTORICAL BASIS
REVENUES. The Company's total revenues were $23.3 million for the six
months ended June 30, 1997 compared to $5.3 million for the six months ended
June 30, 1996, an increase of $18.0 million or 340%. This increase is
attributable primarily to: (i) the SDS Acquisition and (ii) revenues from the
three significant outsourcing contracts described above.
COST OF REVENUES. Total cost of revenues was $13.7 million for the six
months ended June 30, 1997 compared to $4.2 million for the six months ended
June 30, 1996, an increase of $9.5 million or 226%, primarily as a result of:
(i) the SDS Acquisition and (ii) the costs associated with the performance of
services under the three significant outsourcing contracts described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $4.6 million for the six months ended June 30, 1997
compared to $1.2 million for the six months ended June 30, 1996, an increase of
$3.4 million or 283%. This increase was primarily due to the SDS Acquisition.
Selling, general and administrative expenses as a percentage of total revenues
decreased from 23% for the six months ended 1996 to 20% for the six months ended
June 30, 1997. This decrease is attributable primarily to revenues from the
three significant outsourcing contracts described above while the level of
management services provided by Millers Mutual, and the resulting management
fees, remained stable.
RESEARCH AND DEVELOPMENT. Research and development expense was $680,000 for
the six months ended June 30, 1997. This expense was comprised primarily of
direct salaries related to software development. Prior to the SDS Acquisition,
the Company did not incur any significant research and development expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$1.7 million for the six months ended June 30, 1997 compared to $350,000 for the
six months ended June 30, 1996, an increase of $1.3 million or 371%. This
increase is primarily attributable to (i) Millers Mutual's capital contribution
of approximately $2.5 million in depreciable property and equipment to the
Company in January 1997 and (ii) amortization of goodwill recorded in connection
with the SDS Acquisition.
NONRECURRING EXPENSES. 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 the six months ended June 30, 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM INCEPTION
THROUGH DECEMBER 31, 1995 ON AN HISTORICAL BASIS
REVENUES. The Company's total revenues were $13.6 million for the year
ended December 31, 1996 compared to $3.9 million for the period from inception
through December 31, 1995, an increase of $9.7 million or 249%. This increase is
attributable primarily to (i) the Company conducting twelve months of operations
in 1996 compared to approximately six months in 1995 and (ii) revenues from the
three significant outsourcing contracts described above.
COST OF REVENUES. Cost of revenues was $10.5 million for the year ended
December 31, 1996 compared to $4.9 million for the period from inception through
December 31, 1995, an increase of $5.6 million or 114%. This increase is
attributable primarily to (i) the Company conducting twelve months of operations
in 1996 compared to approximately six months in 1995 and (ii) personnel and
other costs associated with the three significant outsourcing contracts
described above. Cost of revenues as a percentage of total revenues decreased
from 140% for the period from inception through December 31, 1995 to 100% for
the year ended December 31, 1996. This decrease was primarily a result of
economies of scale associated with spreading certain fixed costs over a larger
revenue base and lower personnel costs as a percentage of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3.1 million for the year ended December 31, 1996
compared to $600,000 for the period from inception through December 31, 1995, an
increase of $2.5 million or 417%. This increase is attributable primarily to the
Company conducting twelve months of operations in 1996 compared to approximately
six months in 1995.
21
<PAGE> 24
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$787,000 for the year ended December 31, 1996 compared to $33,000 for the period
from inception through December 31, 1995, an increase of $754,000 or 2,285%.
This increase is primarily attributable to Miller Mutual's capital contribution
of approximately $2.4 million in depreciable property and equipment during the
last six months of 1995 and the purchase of approximately $1.8 million in
depreciable property and equipment throughout 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations through cash generated
from operations, as well as borrowings and capital contributions from Millers
Mutual. Net cash provided by operating activities was $3.2 million in the six
months ended June 30, 1997 compared to $897,000 in the six months ended June 30,
1996. Cash flow used in operating activities was $459,000 and $0 for the year
ended December 31, 1996 and the period from inception through December 31, 1995,
respectively. In 1996, cash flow used in operating activities included an
increase in accounts receivable of approximately $1.2 million and a decrease in
amounts due to affiliates of approximately $573,000, which was offset by
depreciation expense of approximately $787,000 and an increase in accounts
payable and accrued expenses of approximately $1.1 million.
The Company entered into the NationsBank Facility on March 12, 1997,
pursuant to which the Company borrowed $5.0 million under a term credit facility
and $2.5 million under a revolving credit facility to finance in part the SDS
Acquisition. The term credit facility is payable in quarterly installments with
the final installment due and payable on March 12, 2001. The revolving credit
facility expires and is due and payable on March 12, 1999. Although the Company
intends to use a portion of its net proceeds from this offering to repay the
amounts owed under the NationsBank Facility, the Company intends to keep the
revolving credit facility in place for future borrowings. Borrowings under the
NationsBank Facility are secured by all accounts receivable, inventory,
equipment, servicing contract rights, all of the outstanding stock of the
Company's subsidiary and other personal property of the Company and the
Company's subsidiary. See "Use of Proceeds."
From time to time, the Company has received loans and capital contributions
from Millers Mutual. In March 1997, Millers Mutual made a $10.5 million capital
contribution to fund in part the SDS Acquisition. As of June 30, 1997, the
outstanding balance of the loans was $2.8 million. The Company intends to use a
portion of its net proceeds from this offering to repay these loans. The Company
does not anticipate receiving any loans or capital contributions from Millers
Mutual in the future. See "Use of Proceeds."
The Company believes that cash generated from operations and its net
proceeds from this offering will satisfy the Company's anticipated working
capital requirements for at least one year. The Company, however, may require
substantial additional funds for potential acquisitions and expansion. In the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business. The Company
has no present commitments or understandings with respect to any such
transaction. The Company, however, may acquire businesses, products or
technologies in the future.
22
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA OF SDS
(IN THOUSANDS, EXCEPT SHARE DATA)
The selected consolidated financial data of SDS presented below as of
December 31, 1995, 1996 and March 11, 1997, for the years ended December 31,
1994, 1995 and 1996 and for the period January 1, 1997 through March 11, 1997
have been derived from the SDS audited consolidated financial statements
appearing elsewhere in this Prospectus. The selected consolidated financial data
of SDS presented below as of December 31, 1992, 1993, and 1994 and for the years
ended December 31, 1992 and 1993 have been derived from audited consolidated
financial statements of SDS that are not included in this Prospectus. The
selected consolidated financial data of SDS presented below for the three months
ended March 31, 1996 are unaudited but have been prepared on the same basis as
the audited consolidated financial statements of SDS included herein and, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of SDS's consolidated financial
position and results of operations for such periods. The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of SDS" and SDS's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
PERIOD
THREE JANUARY 1,
MONTHS 1997
YEAR ENDED DECEMBER 31, ENDED THROUGH
----------------------------------------------- MARCH 31, MARCH 11,
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software services............................. $ 7,184 $ 9,199 $ 8,991 $ 8,677 $ 9,252 $ 2,396 $ 2,385
Software...................................... 6,207 5,682 4,313 9,068 8,987 2,132 2,455
Hardware...................................... 616 924 2,245 2,400 3,680 361 463
Other......................................... 245 349 455 1,016 1,745 184 109
------- ------- ------- ------- ------- ------- -------
Total revenues............................ 14,252 16,154 16,004 21,161 23,664 5,073 5,412
Expenses:
Salaries and compensation..................... 8,482 9,793 11,811 13,088 14,505 3,380 3,476
Depreciation and amortization................. 1,219 1,574 2,157 1,879 1,827 462 411
Cost of hardware sold......................... 459 738 1,862 1,979 2,699 291 384
Occupancy costs............................... 1,158 1,343 1,374 1,379 1,566 352 406
Other......................................... 1,536 1,536 1,831 1,667 2,032 379 372
------- ------- ------- ------- ------- ------- -------
Total expenses............................ 12,854 14,984 19,035 19,992 22,629 4,864 5,049
Operating income (loss)......................... 1,398 1,170 (3,031) 1,169 1,035 209 363
Interest income (expense), net.................. (264) (2) (134) (80) 77 (8) 24
Other income (expense), net..................... (15) 97 2 (2) 35 -- --
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes (benefit)..... 1,119 1,265 (3,163) 1,087 1,147 201 387
Income taxes (benefit).......................... 444 503 (1,253) 429 449 81 156
------- ------- ------- ------- ------- ------- -------
Net income (loss)............................... $ 675 $ 762 $(1,910) $ 658 $ 698 $ 120 $ 231
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------- MARCH 11,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 67 $ 492 $ 289 $ 529 $ 1,516 $ 940
Working capital................................... 302 993 (1,167) 572 1,785 1,694
Total assets...................................... 11,243 12,705 13,692 12,054 13,465 13,391
Current portion of long-term debt................. 299 361 557 689 525 439
Long-term debt, excluding current portion......... 2,428 2,674 2,570 2,028 1,883 1,879
Shareholders' equity.............................. 5,000 5,596 3,739 4,538 5,385 5,617
</TABLE>
23
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SDS
RESULTS OF OPERATIONS
The following table sets forth, with respect to SDS and for the periods
indicated, the percentage of total revenues represented by certain revenue,
expense and income items:
<TABLE>
<CAPTION>
PERIOD
JANUARY 1,
THREE MONTHS 1997
YEAR ENDED DECEMBER 31, ENDED THROUGH
------------------------- MARCH 31, MARCH 11,
1994 1995 1996 1996 1997
----- ----- ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Software services....................................... 56.2% 41.0% 39.1% 47.3% 44.1%
Software................................................ 27.0 42.9 38.0 42.0 45.3
Hardware................................................ 14.0 11.3 15.5 7.1 8.6
Other................................................... 2.8 4.8 7.4 3.6 2.0
----- ----- ----- ----- -----
Total revenues.................................... 100.0 100.0 100.0 100.0 100.0
===== ===== ===== ===== =====
Expenses:
Salaries and compensation............................... 73.8 61.8 61.3 66.6 64.2
Depreciation and amortization........................... 13.5 8.9 7.7 9.1 7.6
Cost of hardware sold................................... 11.6 9.4 11.4 5.7 7.1
Occupancy costs......................................... 8.6 6.5 6.6 6.9 7.5
Other................................................... 11.4 7.9 8.6 7.6 6.9
----- ----- ----- ----- -----
Total expenses.................................... 118.9 94.5 95.6 95.9 93.3
===== ===== ===== ===== =====
Operating income (loss)................................... (18.9) 5.5 4.4 4.1 6.7
Other income (loss)....................................... (0.8) (0.4) 0.5 (0.1) 0.4
----- ----- ----- ----- -----
Income (loss) before income taxes (benefit)............... (19.7) 5.1 4.9 4.0 7.1
Income taxes (benefit).................................... (7.8) 2.0 1.9 1.6 2.9
----- ----- ----- ----- -----
Net income (loss)......................................... (11.9)% 3.1% 3.0% 2.4% 4.2%
===== ===== ===== ===== =====
</TABLE>
COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE PERIOD JANUARY 1, 1997 THROUGH
MARCH 11, 1997 AND THE THREE MONTHS ENDED MARCH 31, 1996
REVENUES. SDS's revenues were $5.4 million for the period January 1, 1997
through March 11, 1997 and $5.1 million for the three months ended March 31,
1996, an increase of approximately $300,000 or 5.9%. This increase was due to
additional software installation revenues, primarily sales of WPC, as well as
increased hardware sales in connection with the increased software
installations.
OPERATING EXPENSES. Operating expenses were $5.0 million for the period
January 1, 1997 through March 11, 1997 and $4.9 million for the three months
ended March 31, 1996, an increase of approximately $100,000 or 2.0%. This
increase is attributable to: (i) the increased costs of computer hardware sold
associated with the corresponding increase in computer hardware sales revenues
and (ii) additional personnel and occupancy costs. Total operating expenses as a
percentage of revenues remained fairly constant.
COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995
REVENUES. SDS's revenues were $23.7 million for the year ended December 31,
1996 compared to $21.2 million for the year ended December 31, 1995, an increase
of $2.5 million or 11.8%. This increase is primarily attributable to increases
in services performed, including: (i) software service fees, (ii) software
installation revenues, primarily WPC installations, which contributed an
additional $1.2 million in revenues in 1996, and (iii) computer hardware sales
and commissions, which increased by $1.3 million from 1995 to 1996.
OPERATING EXPENSES. Operating expenses were $22.6 million for the year
ended December 31, 1996 compared to $20.0 million for the year ended December
31, 1995, an increase of $2.6 million or 13.0%. This increase is primarily
attributable to increased personnel costs of $1.4 million and the increase of
approximately $720,000 in the cost of computer hardware sold. Total operating
expenses as a percentage of revenues remained constant at approximately 95% for
the years ended December 31, 1995 and 1996.
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<PAGE> 27
COMPARISON OF SDS'S RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995
AND 1994
REVENUES. SDS's revenues were $21.2 million for the year ended December 31,
1995 compared to $16.0 million for the year ended December 31, 1994, an increase
of $5.2 million or 32.5%. This increase is attributable primarily to software
installations relating to: (i) several significant new customers in late 1994
and early 1995, as well as additional installations for existing clients, and
(ii) the introduction of new products, such as WPC and UES (as hereinafter
defined) that had been in development in the early 1990s and for which demand
increased in late 1994 and early 1995, resulting in increased software
installations. WPC alone contributed an additional $1.6 million in software
installation revenues in 1995 compared to 1994.
OPERATING EXPENSES. Operating expenses were $20.0 million for the year
ended December 31, 1995 compared to $19.0 million for the year ended December
31, 1994, an increase of $1.0 million or 5.3%. This increase was due primarily
to higher salaries and benefits expenses of approximately $1.3 million relating
to an increase in the number of SDS employees from approximately 230 at December
31, 1994 to approximately 250 at December 31, 1995. Total operating expenses as
a percentage of revenues decreased from 118.9% for the year ended December 31,
1994 to 94.5% for the year ended December 31, 1995 as a result of economies of
scale associated with spreading certain fixed costs over a larger revenue base
and lower personnel costs as a percentage of revenues.
LIQUIDITY AND CAPITAL RESOURCES
Historically, SDS funded its operations primarily through cash generated
from operations, supplemented by borrowings. Net cash provided by operating
activities was approximately $201,000 in the period from January 1, 1997 through
March 11, 1997 compared to approximately $317,000 in the three months ended
March 31, 1996. Cash flow provided by operating activities was $2.2 million,
$2.2 million and $1.2 million for the years ended December 31, 1996, 1995 and
1994, respectively. In 1996, cash flow provided by operating activities was
comprised primarily of $1.8 million of depreciation and amortization expense.
SDS entered into a letter agreement with Norwest Bank Wisconsin, National
Association ("Norwest") on September 21, 1994 (as amended, the "Norwest
Agreement"), pursuant to which SDS borrowed under a line of credit facility and
under certain promissory notes to help finance certain property acquisitions,
such as a building and business equipment, and the repurchase of SDS common
stock. In addition, SDS entered into a contract with the Redevelopment Authority
of Sheboygan, Wisconsin (the "Redevelopment Authority") on November 1, 1988 (the
"Authority Contract"), pursuant to which SDS borrowed $150,000 from the
Redevelopment Authority to finance the acquisition of certain land. In
connection with the SDS Acquisition, SDS transferred the building and land to
Riverview Building, LLC ("Riverview"), and Riverview assumed the debt associated
with the building under the Norwest Agreement and the debt associated with the
land under the Authority Contract. In addition, on June 23, 1997, SDS paid the
outstanding principal balance and accrued interest on the remaining outstanding
debt under the Norwest Agreement. As a result, there are no outstanding
borrowings under the Norwest Agreement or the Authority Contract. See "Certain
Transactions."
25
<PAGE> 28
BUSINESS
INTRODUCTION
The Company is a provider of policy and claims administration solutions to
the P&C insurance industry, offering a comprehensive choice of outsourcing
services and software and software services. The Company's outsourcing services,
which generally are provided on a percentage of premiums or claims paid basis,
include application of underwriting and rating criteria defined by the insurer,
policy issuance, customer service, billing and collections, claims adjusting and
processing, and policyholder mailings. The Company's software 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. These systems, which run on a variety of platforms including IBM
AS/400, IBM RS/6000, Windows 3.1, Windows 95 and Windows NT, enable the
Company's customers to conduct their policy and claims administration more
efficiently. The Company's software services include installation,
customization, conversion and maintenance of these systems to meet customer
specifications.
The Company was established in April 1995 as a wholly-owned subsidiary of
Millers Mutual, an insurance company chartered in Texas in 1898. The Company was
created to provide outsourcing services to other P&C insurers by capitalizing on
Millers Mutual's success in developing, implementing and managing software
systems for its internal use. As a result of the SDS Acquisition in March 1997,
the Company now also develops and markets software and software services to the
P&C insurance industry. SDS offered software and software services to the P&C
insurance industry for 16 years prior to its acquisition by the Company. The
Company believes its services and products allow customers to focus on core
competencies, reduce costs by converting their fixed costs of in-house
information technology to variable costs and leverage the Company's investment
in software systems and productivity tools.
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 personal lines of insurance
covering individuals and 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 kinds of
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, as of December 31, 1995, there were
approximately 2,500 P&C insurance companies in the United States generating
approximately $260 billion in annual premium revenues, of which approximately
53% were written by the top 20 insurers. Based on statistics released by the
Insurance Services Office, an industry advisory organization, premium revenues
for the P&C insurance industry over the past several years have been increasing
approximately 3% annually.
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. The
Company believes that these catastrophes have caused insurers to decrease their
exposure in areas prone to natural disasters. Much of the new 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.
The Company believes that its ability to deliver services priced as a percentage
of premiums or claims paid should be attractive to these new entrants, as it
will enable them to enter new markets without incurring substantial fixed
infrastructure costs.
According to a recent survey by the National Association of Independent
Insurers, information systems expenses as a percentage of written premiums
increased from 2.5% in 1992 to 3.3% in 1996. The Company believes that this
increasing investment in information systems is indicative of the demand for
automation in
26
<PAGE> 29
the P&C insurance industry. This demand promotes the sale of software and
software services and represents an opportunity to provide outsourcing services
for those insurers that do not wish to make increasing levels of capital
expenditures.
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 improve efficiency, manage costs and increase 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. The
focus of insurers has recently shifted away from finding more efficient means of
storing information toward more efficient ways of processing information.
The Company provides a wide variety of services and products to manage and
process policy and claims information more efficiently, including: (i) software
and software services, (ii) policy administration services, (iii) claims
administration services and (iv) "virtual insurance company" services (which
include the outsourcing of both policy and claims administration and related
functions). The Company believes that there are significant opportunities to
market its services and products 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. The Company's services and products allow
insurance companies to take advantage of economies of technology by
leveraging the Company's investment in software systems and productivity
tools.
- TREND TOWARD DIRECT SALES. Many personal lines insurers are reducing
costs by selling policies directly to policyholders rather than through
independent agents. By selling directly to policyholders, insurance
companies can reduce costs, which allows them to charge lower premiums.
This trend has created opportunities for the Company to market its
services and products to insurance companies that sell directly to
policyholders and those that continue to sell through independent agents.
Automation of the policy and claims administration functions allows
insurance companies selling directly to customers to provide services
efficiently that were traditionally performed by agents. Automation also
enables insurance companies that sell through agents to reduce
administration costs to compete more effectively with insurance companies
that sell directly to policyholders.
- YEAR 2000 PROBLEM. The Year 2000 problem manifests itself in a number of
ways in the policy and claims administration area. The Year 2000 problem
arose because, until recently, most software systems were not programmed
to recognize correctly dates beyond December 31, 1999. For example,
policy and claims administration systems process information based on
policy commencement and renewal dates, yet systems that are not Year 2000
compliant cannot correctly recognize policy dates beyond December 31,
1999. According to a survey conducted by the National Association of
Independent Insurers, as of November 1996 only 45% of insurance companies
had resolved this problem. The Company believes that many insurance
companies may resolve the Year 2000 problem by either: (i) purchasing new
software systems or (ii) entirely outsourcing their policy and claims
needs rather than incurring the cost of updating their old systems.
- STATE REGULATION. P&C insurers are subject to supervision and regulation
on a state-by-state basis with respect to numerous aspects of their
business. State insurance regulators closely regulate the product
offerings, claims processes and premium structure of insurance companies.
State regulators also require insurance companies to file annual and
other reports relating to their financial condition. Policy and claims
administration systems can facilitate compliance with numerous regulatory
requirements by automating statutory reporting and other compliance
tasks.
- CUSTOMER SERVICE. As policyholders demand faster, broader and better
service, P&C insurers that provide superior customer service enjoy a
competitive advantage. Dissatisfaction with policy or claims handling
processes is frequently cited as a cause of policy nonrenewal. In
addition, retaining an existing
27
<PAGE> 30
policyholder with good customer service is more cost effective for an
insurance company than attracting a new policyholder away from a
competitor. Automation and 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,
operating and maintaining information management and automation systems. The
Company 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. Deregulation has 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. The Company 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 the core marketing,
underwriting and financial aspects of the P&C insurance business.
THE INSPIRE STRATEGY
The Company's objective is to become the leading provider of policy and
claims administration solutions to the P&C insurance industry. The Company's
strategy to achieve this objective involves the following elements:
- OFFER A COMPREHENSIVE CHOICE OF SOLUTIONS. The Company offers an "a la
carte" menu of services and products that is attractive to a wide variety
of potential customers. This comprehensive and flexible approach enhances
customer stability and increases opportunities for new sales by allowing
the Company to sell multiple services and products to both existing and
new customers.
- IMPLEMENT AN INTEGRATED MARKETING PLAN. The Company is integrating its
sales and marketing efforts to capitalize on its ability to offer a
comprehensive choice of solutions. This integration process involves
28
<PAGE> 31
training the Company's sales and marketing personnel to sell a full line
of services and products, forming a dedicated sales team to focus on
larger accounts (generally defined as insurance companies with annual
premiums in excess of $250 million) and expanding sales and marketing
support staff to market directly to specialty line P&C insurance
companies and new entrants in the P&C insurance industry, such as banks,
credit unions and other financial services companies.
- GENERATE RECURRING REVENUES. The Company's services and products are
structured to generate revenues based on events that occur in the normal
course of a customer's business. Policy administration services generate
recurring revenues because the Company earns a percentage of each premium
received by the insurance company. Claims administration services
generate recurring revenues because the Company earns a percentage of
either each claim paid or each premium received by the insurance company.
Software licensing generates recurring revenues because most of the
Company's customers enter into systems support, maintenance or
enhancement agreements to purchase additional services and software
enhancements throughout the life of their systems.
- PENETRATE NEW MARKETS. Prior to the SDS Acquisition, SDS traditionally
marketed its software products and services to small to mid-size domestic
insurance companies. Utilizing the combined resources of the merged
companies, the Company intends to pursue sales opportunities with larger
insurance companies.
- ENHANCE PRODUCT CAPABILITIES. Maintaining technology leadership is
critical to remaining competitive in the Company's industry. The Company
plans to enhance continuously its existing services and products and
develop entirely new services and products to respond to constantly
changing customer requirements.
- PURSUE STRATEGIC ACQUISITIONS. The Company intends to consider potential
acquisition candidates that offer opportunities to increase market share
and expand the Company's line of outsourcing services and software and
software services.
SERVICES AND PRODUCTS
The Company offers a range of services and products to address the policy
and claims administration needs of the P&C insurance industry. The Company
installs, enhances and maintains a variety of policy and claims administration
software systems and offers outsourcing of policy and claims administration.
OUTSOURCING SERVICES. The Company's outsourcing services include
policyholder mailings, underwriting approval, policy rating and issuance, policy
acceptance, customer service, billing and collections, and claims adjusting and
processing. The customer determines the extent to which it uses the Company's
services. A team of Company and customer personnel work closely together to
ensure the seamless integration of the customer's outsourced and in-house
activities. The Company's outsourcing services include the following:
- POLICY ADMINISTRATION. Policy administration services describes the suite
of services the Company offers customers that desire to outsource their
policy administration. The customer retains all of the financial risk and
works with the Company to provide underwriting and rating guidelines. The
Company typically is paid a percentage of premiums 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
29
<PAGE> 32
- CLAIMS ADMINISTRATION. Claims administration services describes the
management of appraising, qualifying and settling P&C insurance claims.
The Company maintains a staff of claims adjusters and examiners. The
Company also uses independent claims adjusters when needed, such as when
a high level of claims arise from a major catastrophe. The Company
reviews insurance coverage, performs a claim analysis and prepares a
check for payment of the claim, if warranted. The Company typically is
compensated on either a percentage of premiums or claims paid basis.
SOFTWARE PRODUCTS. The Company sells 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 ("AS/400"), IBM RS/6000 ("RS/6000"), Windows 3.1, Windows
95 and Windows NT. The Company's software productivity tools add functionality
and flexibility to base systems. These productivity modules can be sold in
conjunction with the Company's base systems or as add-ons to other vendors' base
systems.
- INTEGRATED 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 AS/400 and RS/6000 platforms. PCA was originally
introduced in 1988 and the current version was introduced in 1995. The
Company has completed 38 AS/400 installations and 8 RS/6000
installations of PCA.
- 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. Since its introduction in 1992, the Company has
installed 22 WPC systems.
- 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, other vendors' systems or insurers'
proprietary systems to provide imaging and workflow management
technology. EmPower automatically processes the flow of information,
substantially reducing manual activities through the integration of
voice, data, image and text into one system. EmPower was introduced in
1996 and operates in a client/server environment using Microsoft
Windows. The Company plans to enhance EmPower to support claims
administration and commercial lines policy administration software.
- 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, as well as most systems
sold by other vendors or insurers' proprietary systems. UES was
introduced in 1993.
- 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. Introduced in
1995, PSP operates in a client/server environment and interfaces with
PCA and WPC, as well as most systems sold by other vendors or insurers'
proprietary systems.
- 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
30
<PAGE> 33
insurance processing. Visual Rater's "point and click" rating
construction and maintenance interface does not require a technical
programmer to operate. Instead, reusable rating components become
simple icons used as building blocks to create rating algorithms.
Visual Rater was introduced in 1995 and generally is sold with WPC.
SOFTWARE SERVICES. The Company customizes all of its software products to
meet customer specifications. The initial license fee paid to the Company gives
the customer the right to use the software, but does not cover customization,
conversion, enhancements or upgrades. The Company provides systems installation,
customization, conversion and maintenance on a time-and-materials basis.
Disaster recovery planning services and bureau reporting services are provided
on either a fixed fee or time-and-materials basis. Future enhancements and
upgrades to a system are provided for an annual fee equal to a percentage of the
initial license fee. Installations of upgrades and enhancements are performed on
a time-and-materials basis.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent introductions of new
products and enhancements. The Company's future success depends in part on its
ability to enhance its existing services and products and develop new services
and products to meet changing customer requirements. The Company's research and
development efforts are focused on enhancement of existing services and
products, expansion of operating system compatibility and development of new
applications for emerging insurance markets. In addition, the Company has in the
past acquired new services and products through the acquisition of complementary
businesses and may do so in the future. Currently, major areas of research and
development emphasis are (i) the expansion of EmPower to include claims
administration and commercial lines policy administration and (ii) the expansion
of software applications to address additional P&C insurance markets.
Since inception, the Company has made substantial investments in enhancing
and developing its services and products. Prior to being acquired by the
Company, SDS incurred expenses of approximately $3.7 million, $2.8 million and
$2.9 million in 1994, 1995 and 1996, respectively, for research and development
and the Company intends to devote substantial resources to research and
development in the future. As of June 30, 1997, the Company had approximately 56
employees that perform product development and quality assurance, as well as
participate in the initial installations of new products. There can be no
assurance that the Company will be successful in developing and marketing new or
enhanced services or products.
CUSTOMER SUPPORT AND OPERATIONS
The Company's policy administration outsourcing services are provided at
the Company's service center in Fort Worth, Texas. The Company maintains a
customer service phone center for policyholders and agents five days a week. The
Company employs approximately 30 people in the policy administration service
center to administer approximately 200,000 policies representing $170 million in
annual premiums to the insurers.
The Company provides claims administration outsourcing services at its
service centers in Fort Worth, Texas; Laguna Hills, California; Troy, Michigan;
and St. Petersburg, Florida. The Company employs approximately 20 full-time
claims administrators.
The Company provides software development, installation, maintenance and
enhancement services at its facilities in Sheboygan, Wisconsin; Hartland,
Wisconsin; Columbia, South Carolina; and Uxbridge, Massachusetts. The Company
recently signed a nonbinding letter of intent to sell the subsidiary that leases
the facilities in Hartland, Wisconsin. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of INSpire -- Recent
Developments." The Company employs approximately 150 people who provide software
support and maintains a customer help line five days a week.
SALES AND MARKETING
The Company markets its outsourcing services through insurance brokers,
industry consultants, managing general agents and reinsurers. Once an
opportunity is identified by one of these sources and a request for
31
<PAGE> 34
proposal is received, the Company prepares and submits a comprehensive proposal
directly to the prospective customer. The prospective customer is then invited
to Fort Worth to tour the Company's service center and discuss the customer's
requirements in detail. If the Company 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.
The Company's software and software services have traditionally been
marketed through a direct sales force located in Sheboygan, Wisconsin and
Columbia, South Carolina. To support its sales force of five people, the Company
conducts marketing programs that include direct mail, trade shows, public
relations, advertising and ongoing customer communication programs. The Company
also maintains strategic relationships with industry consultants who frequently
assist insurance companies in identifying vendors. While the software systems
sales cycle varies from customer to customer, it typically ranges from six to
twelve months.
The Company is in the process of integrating its sales and marketing
efforts to capitalize on its ability to offer outsourcing services as well as
software and software services. This integration process involves training the
Company's sales and marketing personnel to sell a full line of services and
products, forming a dedicated sales team to focus on larger accounts (generally
defined as insurance companies with annual premiums in excess of $250 million)
and expanding the Company's sales and marketing support staff to market directly
to specialty line insurance companies and new entrants into the P&C insurance
industry, such as banks, credit unions and other financial services companies.
COMPETITION
The markets for policy and claims administration services and products are
highly competitive and subject to rapid changes in technology. The Company
competes in the following three markets serving the P&C insurance industry: (i)
outsourcing of policy administration, (ii) outsourcing of claims administration
and (iii) software and software services.
The policy administration outsourcing market is relatively new and is
dominated by PMSC. The Company competes for policy administration outsourcing
customers on the basis of customer service, performance and price. The claims
administration market is highly fragmented, with competition from a large number
of claims administration companies of varying size as well as independent
contractors and in-house claims adjusters employed by P&C insurance companies.
Competition in the claims administration market is highly price driven. Two of
the larger competitors in the claims administration arena are Lindsey Morden
Claim Services Inc. and Crawford & Company, Inc. The P&C insurance software and
software services market is highly competitive and is dominated by PMSC. The
Company competes for software customers on the basis of customer service,
performance, product features, ability to tailor products and services to
specific customer requirements, timely delivery and price. Other competitors
include Computer Sciences Corporation, The Freedom Group, Inc. and The Wheatley
Group, Ltd.
The Company believes that its most significant competition for outsourcing
services and software comes from policy and claims administration and
information systems development performed in-house by insurance companies.
Insurers that perform in-house administration typically have made a significant
investment in their policy and claims administration systems. In addition,
insurance company personnel have a vested interest in maintaining these
responsibilities in-house.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company, 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 products than the Company 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. There
can be no assurance that the Company 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 and results of operations.
32
<PAGE> 35
CUSTOMERS
The Company currently provides claims administration outsourcing services
to reinsurers and managing general agents. The Company has four claims
administration customers, including the Millers Group, Clarendon and Interco.
The Company has two significant policy administration outsourcing customers,
Clarendon and Millers Casualty. The Company provides services to Clarendon
through contracts with Blanch. The Company provides services to Interco, the
administrator to the Virginia Commission, through a contract with the Virginia
Commission. Prior to its acquisition by the Company, SDS historically provided
its software and software services to P&C insurance companies with premium
revenues of less than $250 million. The Company intends to pursue sales
opportunities with larger insurance companies in the future. The Company
currently has over 130 software and software services customers, including
Employers Reinsurance Corporation, Zurich National Insurance Company, Providence
Washington Insurance Company, Firemen's Fund Insurance Company, Old Guard Group,
Inc., Colorado Farm Insurance Company, Society Insurance Company, Rockford
Mutual Insurance Company and National Alliance Insurance Company.
The Millers Group, Clarendon and Interco accounted for approximately 68%,
8% and 21%, respectively, of the Company's historical revenues in 1996 and 25%,
3% and 8%, respectively, of the Company's pro forma revenues in 1996. The
Millers Group, Clarendon and Interco accounted for approximately 32%, 18% and
8%, respectively, of the Company's historical revenues for the six months ended
June 30, 1997 and 26%, 15% and 7%, respectively, of the Company's pro forma
revenues for such period. 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 and results of operations.
EMPLOYEES
As of June 30, 1997, the Company had 471 full-time employees, of whom 11
were employed in sales and marketing functions, 172 in customer support
functions, 56 in product development, installations and quality assurance
functions, 190 in operations and 42 in finance and administration. The Company's
employees are not represented by any collective bargaining organization and none
of its employees are covered by a collective bargaining agreement. The Company
believes that its relationship with its employees is good. The Company regularly
seeks to identify skilled software engineers and other potential employee
candidates and experiences intense competition for personnel in the software
industry. The Company believes that its ability to recruit and retain highly
skilled technical, sales and marketing and other management personnel will be
critical to the Company's future success. There can be no assurance that the
Company will be able to hire a sufficient number of employees with the skills
necessary to enable the Company to attain its objective of becoming the leading
provider of policy and claims administration solutions to the P&C insurance
industry. As of June 30, 1997, the Company had 104 employees through Applied
Quoting Systems, Inc. The Company has entered into a nonbinding letter of intent
to sell this subsidiary. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of INSpire -- Recent Developments."
INTELLECTUAL PROPERTY
The Company licenses its software systems to customers under nonexclusive
and nontransferable license agreements, which generally provide for a paid-up
license fee or a license fee payable in installments. The initial license fee
grants the customer the right to use the version of the software system existing
at the time the license is granted and does not cover upgrades or enhancements.
The Company 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 customers and prospective customers prohibit disclosure of the Company's
trade secrets and proprietary information to third parties without the consent
of the Company and generally restrict the use of the Company's products to the
customers' operations. The Company 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, there can be no assurance that competitors of the Company could
not obtain unauthorized access to the Company's software source code and
33
<PAGE> 36
other trade secrets and proprietary information. The Company owns common law
trademarks, copyrights and service marks that it uses in connection with its
business, none of which are registered.
The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology. There
can be no assurance, 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, the Company 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 the Company in any
infringement litigation or other disputes regarding intellectual property.
LEGAL PROCEEDINGS
In February 1997, the Philadelphia Contributionship for the Insurance of
Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action No.
97-CV-1262) against the Company in the United States District Court for the
Eastern District of Pennsylvania. The suit alleges that the PCA, PSP and UES
systems that SDS sold to PCIHLF in 1995 did not meet PCIHLF's specifications.
PCIHLF claims damages in excess of $1.3 million. The Company and the former SDS
shareholders placed $1.5 million of the SDS purchase price in an escrow account
in respect of this claim. The Company has no recourse against the former SDS
shareholders to the extent that the aggregate of any judgment, settlement and
expenses exceeds the amount of the escrowed funds. SDS filed a counterclaim
against PCIHLF for $550,000 for amounts due under its agreements with PCIHLF.
There can be no assurance with respect to the outcome of this lawsuit.
The Company is not a party to any other legal proceedings that the Company
believes could have a material adverse effect on the Company's business,
financial condition or operating results.
PROPERTIES
The following table sets forth certain information with respect to the
principal facilities used in the Company's operations, all of which are leased:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
LOCATION FUNCTION SQ. FT. EXPIRATION DATE
-------- -------- ----------- ---------------
<S> <C> <C> <C>
Fort Worth, Texas................. Headquarters and policy and 19,000 Monthly
claims administration
Sheboygan, Wisconsin.............. Software and software services 28,100 February 2007
Columbia, South Carolina.......... Software and software services 17,800 August 2002
Sheboygan, Wisconsin.............. Software and software services 6,500 February 2002
Uxbridge, Massachusetts........... Software and software services 1,600 June 1998
Laguna Hills, California.......... Claims administration 3,200 October 1998
St. Petersburg, Florida........... Claims administration 2,500 December 1999
Troy, Michigan.................... Claims administration 1,600 May 2000
</TABLE>
The Company also leases approximately 5,600 square feet in Westborough,
Massachusetts under a lease expiring in December 1998, which the Company
subleases to a subtenant under a sublease expiring in December 1998. In
addition, Applied Quoting Systems, Inc. leases approximately 16,900 square feet
in Hartland, Wisconsin under a lease expiring in July 1999. The Company recently
signed a nonbinding letter of intent to sell this subsidiary. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
INSpire -- Recent Developments."
The Company believes that its existing facilities are adequate to meet the
Company's requirements for the foreseeable future.
34
<PAGE> 37
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
F. George Dunham, III...... 39 President, Chief Executive Officer, Chairman and
Director
Ronald O. Lynn............. 59 Executive Vice President and Chief Information
Officer
Terry G. Gaines............ 37 Executive Vice President and Chief Financial
Officer
Stuart H. Warrington....... 63 Executive Vice President -- Software and Systems
Robert K. Agazzi........... 53 Executive Vice President -- Software and Systems
Jeffrey W. Robinson........ 40 Executive Vice President -- Outsourcing
W. Scott Lewis............. 42 Executive Vice President -- Marketing
Harry E. Bartel............ 55 Director
R. Earl Cox, III........... 63 Director
Mitch S. Wynne............. 38 Director
</TABLE>
F. GEORGE DUNHAM, III has served as President, Chief Executive Officer and
a director of the Company since its inception in 1995. His current term as
director expires in 2000. Mr. Dunham served from inception to March 1996 as
Chairman of the Board of the Company and was again elected to that position in
June 1997. From 1994 to June 1997, Mr. Dunham served as President and Chief
Executive Officer of Millers Mutual and Millers Casualty. From 1992 to 1994, Mr.
Dunham served as Executive Vice President and Chief Financial Officer of Millers
Mutual and Millers Casualty. Mr. Dunham has served as a director of Millers
Mutual and Millers Casualty since 1992, and in June 1997 he was elected Vice
Chairman of the Board of both companies. From 1991 to 1992, Mr. Dunham served as
Vice President -- Finance of Lindsey Morden Claim Services, Inc., an insurance
claim services and administration company.
RONALD O. LYNN has served as Executive Vice President and Chief Information
Officer of the Company since March 1997 and, from March 1996 to March 1997, as
Vice President of the Company. Mr. Lynn also served as Executive Vice President
and Chief Information Officer from March 1997 to June 1997 and as Vice President
from 1993 to March 1997 of Millers Mutual and Millers Casualty. From 1992 to
1993, Mr. Lynn served as Vice President of Harco National Insurance Company,
where he was responsible for computer related functions. From 1988 to 1992, Mr.
Lynn served as Assistant Vice President of Property and Casualty Processing
Services for PMSC.
TERRY G. GAINES has served as Executive Vice President and Chief Financial
Officer of the Company since June 1997. From March 1997 to June 1997 Mr. Gaines
served as Vice President -- Finance and Administration of Federal Liaison
Services, Inc., a software development company, and from March 1996 to March
1997 as a Product Manager for that company. From 1992 to February 1996, Mr.
Gaines was Controller of the fixed income department of Rauscher Pierce Refsnes,
Inc., a regional investment banking firm, where he also served as Vice President
from August 1995 to February 1996. From 1989 to 1992 he served as Vice
President -- Finance of Richmond Petroleum Inc., an oil and gas company. Mr.
Gaines is a Certified Public Accountant and was employed by Deloitte & Touche
LLP from 1982 to 1989.
STUART H. WARRINGTON has served as Executive Vice President of Software and
Systems of the Company since July 1997. Mr. Warrington founded SDS and served as
its Chief Executive Officer from 1989 to July 1997, and as Chairman of the Board
from inception in 1981 until March 12, 1997. Mr. Warrington also served as
President of SDS from inception to 1989. Prior to 1981, Mr. Warrington served in
various executive management and analyst positions for several insurance and
software development companies.
ROBERT K. AGAZZI has served as Executive Vice President of Software and
Systems of the Company since July 1997. Mr. Agazzi served as President of SDS
from 1989 until July 1997 and as Vice President-Marketing
35
<PAGE> 38
of SDS from 1983 to 1989. Prior to 1983, Mr. Agazzi served in various management
positions with PMSC and several insurance and software development companies.
JEFFREY W. ROBINSON has served as Executive Vice President -- Outsourcing
of the Company since June 1997. From November 1996 to June 1997, Mr. Robinson
served as Vice President -- Policy Life Cycle of the Company, Millers Mutual and
Millers Casualty. From 1985 to March 1997, Mr. Robinson served in various
management positions with PMSC, including Vice President of the Risk Services
Division. Prior to 1985, Mr. Robinson served in various management and analyst
positions for Home Insurance Company and Business Computer Systems, an insurance
processing and administration company.
W. SCOTT LEWIS joined the Company in May 1997 as Executive Vice
President -- Marketing. From 1988 to May 1997, Mr. Lewis served as Regional
Sales Manager of The Wheatley Group, Ltd., a software development and policy and
claims administration company. Prior to 1988, Mr. Lewis served in various sales
and sales management positions with PMSC and other companies that develop
software and sell administration services.
HARRY E. BARTEL has served as a director of the Company since 1996 and his
current term as director expires in 2000. Mr. Bartel also served as a director
of Millers Mutual and Millers Casualty from March 1995 to June 1997. Mr. Bartel
has been a partner with the law firm of Cantey & Hanger, L.L.P. since 1968.
R. EARL COX, III has served as a director of the Company since 1996 and his
current term as director expires in 1998. Mr. Cox also served as a director of
Millers Mutual and Millers Casualty from March 1987 to June 1997. Since 1977,
Mr. Cox has served as president of R.E. Cox Realty Co. and has been a co-owner
of OFCO Office Furniture, Inc. since 1985. Mr. Cox has served as a director of
KBK Capital Corp., a factoring company, since 1995 and a director and Chairman
of the Board of Tandycraft, Inc., a manufacturer and retailer of craft products,
since 1985.
MITCH S. WYNNE was elected as a director of the Company in March 1997 and
his current term as director expires in 1999. Mr. Wynne also served as a
director of Millers Mutual and Millers Casualty from March 1997 to June 1997.
Mr. Wynne has owned and operated Wynne Petroleum Company, an oil and gas
production company, for more than five years.
EMPLOYMENT AND INDEMNIFICATION AGREEMENTS
The Company has entered into employment agreements with Messrs. Dunham,
Lynn, Robinson and Gaines, each of which terminates in June 2000, and which
provide for an annual salary for Mr. Dunham of $350,000 and annual salaries for
Messrs. Lynn, Robinson and Gaines of $115,000 each. As of the consummation of
this offering, Messrs. Dunham, Lynn, Robinson and Gaines will have options to
purchase 931,539; 158,362; 158,362; and 93,154 shares of Common Stock,
respectively, under the Stock Option Plan. Each of Messrs. Dunham, Lynn,
Robinson and Gaines is entitled to an annual bonus, based on the Company
achieving certain performance thresholds, of up to 50% of his base salary and is
subject to noncompetition and confidentiality provisions. Mr. Dunham's
employment agreement also permits him to serve as Vice Chairman of the Board of
Millers Mutual and Millers Casualty. See "-- Stock Option Plan."
Each employment agreement with Messrs. Dunham, Lynn, Robinson and Gaines
also provides that if there is a "change of control" of the Company, the
employee shall be paid, for the term of his employment agreement plus a period
of two years thereafter, his annual "cash compensation" (which is based upon
such employee's average cash compensation for the two years prior to such change
of control), along with an annual amount equal to 50% of such average annual
cash compensation (the "Bonus"). The total amount, however, cannot exceed the
amount that would cause such payment to be deemed a "parachute payment" under
Section 280G of the Internal Revenue Code. Each agreement also provides that the
payments to such employee will cease if he is terminated for cause or in the
event of reasonable proof of any violation of the noncompetition or
confidentiality provisions of his employment agreement. Also, if following a
change of control an employee voluntarily terminates employment for other than
good reason (as defined in the employment agreement), his annual cash
compensation and Bonus will be payable for only one year following such
termination.
36
<PAGE> 39
The Company also has entered into employment agreements with Messrs.
Warrington and Agazzi that terminate in March 1998. Mr. Warrington's agreement
provides for an annual salary of $190,500, options to purchase 93,154 shares of
Common Stock and deferred annual compensation of $40,000 to be paid each year
for the 20-year period commencing January 1, 1999 and ending December 31, 2018.
Mr. Agazzi's agreement provides for an annual salary of $169,000 and options to
purchase 93,154 shares of Common Stock. Messrs. Warrington and Agazzi are
subject to noncompetition and confidentiality provisions.
The Company has entered into indemnification agreements with each of its
directors. Each indemnification agreement provides that the Company shall
indemnify the director against certain liabilities and expenses actually and
reasonably incurred by the director in connection with any threatened, pending
or completed action, suit or proceeding, including an action by or on behalf of
shareholders of the Company or by or in the right of the Company, to which the
director is, or is threatened to be made, a party by reason of his status as a
director, provided that such individual did not derive an improper benefit, such
individual did not commit acts or omissions that were not in good faith or that
involved intentional misconduct or a knowing violation of the law, or such
indemnification is not otherwise disallowed under Texas law.
EXECUTIVE COMPENSATION
During 1995 and 1996 Mr. Dunham was the President and Chief Executive
Officer of both the Company and Millers Mutual, and Millers Mutual paid all
compensation of Mr. Dunham and certain other officers of the Company who were
also officers of Millers Mutual. In turn, the Company paid Millers Mutual a
management fee. Accordingly, the Company did not pay any compensation during
1995 or 1996 to its Chief Executive Officer, and the total salary and bonus that
the Company paid to its other executive officers in 1996 did not exceed $100,000
with respect to any individual. See "Certain Transactions."
EMPLOYEE BENEFIT PLANS
Millers Mutual has a defined benefit pension plan that covers the employees
of the Company. The Company believes that an agreement will be reached between
Millers Mutual and the Company to provide that the assets of this plan
attributable to the Company's employees will be treated as if the Company's
employees were terminated employees under such plan. Millers Mutual and the
Company, however, have not yet determined the terms of such agreement. In
addition, the Company maintains a defined contribution plan for its employees
that is qualified under Section 401(k) of the Internal Revenue Code of 1986.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Frank G. Dunham, Jr., Frank A. Bailey, III, R. Earl Cox, III, F. George
Dunham, III and Frank C. Wilson served as members of the Compensation Committee
of the Company in 1996. Each member of the Compensation Committee in 1996 also
served as a member of the compensation committees for Millers Mutual and Millers
Casualty in 1996. Frank G. Dunham, Jr. is the father of F. George Dunham, III
and both men served as executive officers of the Company, Millers Mutual and
Millers Casualty in 1996. The Company has entered into certain transactions with
Millers Mutual and Millers Casualty. See "Certain Transactions."
The Compensation Committee has established salary and bonus levels for the
executive officers of the Company, including the Chief Executive Officer, based
on a combination of objective and subjective criteria. In certain cases, an
executive officer's salary and potential bonus has been established in an
employment agreement. See "-- Employment and Indemnification Agreements."
The Board of Directors has appointed an Audit Committee, consisting of R.
Earl Cox, III, Harry E. Bartel and Mitch S. Wynne, which will have
responsibility for reviewing the results and scope of the annual audit of the
Company's financial statements and other services provided by the Company's
independent certified public accountants.
37
<PAGE> 40
STOCK OPTION PLAN
A total of 2,250,000 shares of Common Stock have been reserved for issuance
pursuant to the Stock Option Plan. The Stock Option Plan was initially adopted
by the Board of Directors in March 1997 and amended and restated by the Board of
Directors in July 1997. The Stock Option Plan is administered by the Board of
Directors and both nonqualified stock options and incentive stock options (as
defined in the Internal Revenue Code) may be granted. Incentive stock options
granted under the Stock Option Plan may be exercised solely by the grantee, or
in the case of a grantee's death or incapacity, by the grantee's executors,
administrators, guardians or other legal representatives and are not assignable
or transferable by such grantee. Nonqualified stock options (including the
pre-IPO options) may be transferred to certain permitted transferees under the
Stock Option Plan. The following executive officers and other employees have
been or will be granted options pursuant to the Stock Option Plan:
<TABLE>
<CAPTION>
PRE-IPO OPTIONS(1) IPO OPTIONS(2)
----------------------------- -----------------------------
NUMBER OF SHARES EXERCISE NUMBER OF SHARES EXERCISE
NAME UNDERLYING OPTIONS PRICE UNDERLYING OPTIONS PRICE
---- ------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
F. George Dunham, III................ 279,462 $1.30 652,077(3) (4)
Ronald O. Lynn....................... 93,154 1.30 65,208 (4)
Terry G. Gaines...................... -- -- 93,154 (4)
Stuart H. Warrington................. 93,154 1.30 65,208 (4)
Robert K. Agazzi..................... 93,154 1.30 65,208 (4)
Jeffrey W. Robinson.................. 93,154 1.30 65,208 (4)
W. Scott Lewis....................... -- -- 46,577 (4)
Other employees(5)................... 188,170 1.30 32,603 (4)
------- ---------
Total...................... 840,248 1,085,243
======= =========
</TABLE>
- ---------------
(1) The pre-IPO options are subject to a two-year vesting schedule, with
one-third becoming exercisable on the date of grant and an additional
one-third becoming exercisable on each of the first two anniversaries of the
date of grant.
(2) The Board of Directors has approved the grant of the IPO options effective
as of the date of this Prospectus. The IPO options, except for Mr. Dunham's,
will be subject to a four-year vesting schedule, with one-fifth becoming
exercisable on the date of this Prospectus and an additional one-fifth
becoming exercisable on each of the first four anniversaries of such date.
(3) The IPO options that will be granted to Mr. Dunham are subject to a two-year
vesting schedule, with one-third becoming exercisable on the date of this
Prospectus and an additional one-third becoming exercisable on each of the
first two anniversaries of such date.
(4) The exercise price of the IPO options will be the initial public offering
price per share of Common Stock.
(5) Excludes IPO options covering up to an aggregate of 100,000 shares of Common
Stock that may be granted by the Company effective on the date of this
Prospectus to additional employees. Such additional IPO options will be
granted with an exercise price equal to the initial public offering price
per share of Common Stock and will be subject to a five-year vesting
schedule with one-fifth of such options becoming exercisable on the first
anniversary of the date of grant and on each of the next four anniversaries
thereafter.
DIRECTOR STOCK OPTION PLAN
In July 1997 the Board of Directors adopted the Director Plan, which is
administered by the Board of Directors.
Each current nonemployee director will be granted options under the
Director Plan to purchase 2,500 shares of Common Stock effective as of this date
of this Prospectus at an exercise price equal to the initial public offering
price per share of Common Stock. Such options will vest and become exercisable
as of the date of this Prospectus.
38
<PAGE> 41
Each new nonemployee director who is elected (or appointed to fill any
vacancy) as a director of the Company after this offering will be granted
options under the Director Plan to purchase 2,500 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 250
shares of Common Stock on the day immediately after each annual meeting
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.
A total of 50,000 shares of Common Stock will be reserved for issuance
pursuant to the Director Plan. Options granted under the Director Plan may be
exercised solely by the grantee, or in the case of a grantee's death or
incapacity, by the grantee's executors, administrators, guardians or other legal
representatives and are not assignable or transferable by such grantee, except
for certain permitted transfers subject to the prior consent of the Board of
Directors.
EMPLOYEE STOCK PURCHASE PLAN
In July 1997 the Board of Directors adopted the Stock Purchase Plan, under
which a total of 425,000 shares of Common Stock are reserved for issuance. The
Board of Directors has appointed a committee to administer the Stock Purchase
Plan. 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 initially will be implemented by an offering of
25,000 shares of Common Stock beginning October 1, 1997 and terminating December
31, 1997. The Stock Purchase Plan will be further implemented by four annual
offerings of Common Stock beginning on January 1 in each of the years 1998,
1999, 2000 and 2001, and terminating December 31 of each such year. The maximum
number of shares issued in such years will be 100,000 shares in 1998, and
100,000 shares plus unissued shares from prior offerings, whether offered or
not, for each of 1999, 2000 and 2001.
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.
39
<PAGE> 42
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth the number and percentage of the outstanding
shares of Common Stock owned beneficially as of the date of this Prospectus by:
(i) each director of the Company, (ii) each executive officer of the Company,
(iii) all directors and executive officers as a group and (iv) the only
shareholder that beneficially owned more than 5% of the Common Stock as of the
date of this Prospectus.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF COMMON STOCK OF COMMON STOCK
PRIOR TO THIS OFFERING SHARES TO AFTER THIS OFFERING
----------------------- BE SOLD IN -----------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT THIS OFFERING SHARES PERCENT
------------------------ ---------- -------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
Millers Mutual...................... 7,000,000 100% 2,000,000(2) 5,000,000(3) 52.6%
F. George Dunham, III............... 310,513(1) 4.2 -- 310,513(1)(4) 3.2
Ronald O. Lynn...................... 44,093(1) * -- 44,093(1) *
Terry G. Gaines..................... 18,631(1) * -- 18,631(1) *
Stuart H. Warrington................ 44,093(1) * -- 44,093(1)(4) *
Robert K. Agazzi.................... 44,093(1) * -- 44,093(1) *
Jeffrey W. Robinson................. 44,093(1) * -- 44,093(1) *
W. Scott Lewis...................... 9,315(1) * -- 9,315(1) *
Harry E. Bartel..................... 2,500(1) * -- 2,500(1)(4) *
R. Earl Cox, III.................... 2,500(1) * -- 2,500(1)(4) *
Mitch S. Wynne...................... 2,500(1) * -- 2,500(1)(4) *
All directors and executive officers
as a group (10 individuals)....... 524,331(1) 7.0% -- 524,331(1) 5.2%
</TABLE>
- ---------------
* Less than 1%
(1) Represents shares of Common Stock subject to options exercisable as of the
date of this Prospectus and within 60 days thereafter.
(2) Assuming exercise in full of the Underwriters' over-allotment option,
Millers Mutual will sell 2,300,000 shares of Common Stock in this offering.
(3) Assuming exercise in full of the Underwriters' over-allotment option,
Millers Mutual will own 4,700,000 shares of Common Stock, constituting 47.6%
of the outstanding shares of Common Stock.
(4) Excludes any shares of Common Stock that may be purchased by such
individuals in this offering.
CERTAIN TRANSACTIONS
BENEFITS ADMINISTRATION CONTRACT
Effective July 1, 1997, the Company and Millers Mutual entered into a
benefits administration contract (the "Benefits Administration Contract")
pursuant to which Millers Mutual provides the Company with certain benefits
administration services, including payroll, and the Company pays Millers Mutual
a service fee of $15,000 per month. The term of the Benefits Administration
Contract is three years.
The Company and Millers Mutual were parties to a management agreement
effective as of July 1, 1995, as amended (the "Management Agreement"), under
which Millers Mutual provided certain management, administrative and support
services to and on behalf of the Company, including personnel, legal, banking,
investment, financial, payroll, accounting and recordkeeping, marketing and
sales, management information and electronic data processing. The Company paid
Millers Mutual a monthly fee of $200,000 plus an annual fee equal to a fixed
percentage, to be determined annually by mutual agreement of the parties, of the
Company's pre-tax income. For 1995 and 1996, the Company paid Millers Mutual
management fees of $600,000 and $3.1 million, respectively. For the six months
ended June 30, 1997, the Company paid Millers Mutual management fees of $1.2
million. The Management Agreement has been replaced by the Benefits
Administration Contract.
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SERVICE CONTRACT
Effective July 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into an amended and restated service contract (the "Service Contract"),
which provides for the Company to perform claims administration services for and
on behalf of Millers Mutual and Millers Casualty. Under the Service Contract,
each of Millers Mutual and Millers Casualty pays a monthly service fee equal to:
(i) 7.5% of monthly net earned premiums for the agribusiness line of business,
(ii) 10.2% of monthly net earned premiums for the commercial casualty line of
business, (iii) 8.5% of monthly net earned premiums for the commercial property
line of business and (iv) 7.5% of monthly net earned premiums for personal lines
of business (excluding the premiums written through Sun Coast General Insurance
Agency for Millers Mutual, as described below). The Service Contract provides
that these percentages will be adjusted annually based on the agreement of the
parties. The term of the Service Contract is three years.
The Company, Millers Mutual and Millers Casualty were parties to a service
contract effective as of December 1, 1996, as amended, under which the Company
provided claims administration services to Millers Mutual and Millers Casualty.
This contract has been replaced by the Service Contract. Under this contract,
each of Millers Mutual and Millers Casualty paid a monthly service fee equal to:
(i) 8.5% of monthly net earned premiums for agribusiness and commercial lines of
business and (ii) 7.5% of monthly net earned premiums for personal lines of
business (excluding the premiums written through Sun Coast General Insurance
Agency for Millers Mutual, as described below). Millers Mutual and Millers
Casualty paid the Company aggregate service fees under this contract of $3.4
million in 1995 and $7.6 million in 1996. For the six months ended June 30,
1997, Millers Mutual and Millers Casualty paid the Company aggregate service
fees under this contract of $3.2 million.
The Company and the Speciality Personal Lines Division of Millers Mutual
are parties to a service contract effective as of April 1, 1997 under which the
Company provides claims administration services to Millers Mutual with respect
to nonstandard auto policies issued by Sun Coast General Insurance Agency. Under
this contract, Millers Mutual pays a service fee of 7.0% of monthly earned
premiums and, with respect to catastrophes, a fee of $175.00 per claim. Millers
Mutual paid the Company fees under this contract of $590,000 in 1995 and $1.7
million in 1996. For the six months ended June 30, 1997, Millers Mutual paid the
Company fees under this contract of $1.0 million.
INFORMATION SERVICES CONTRACT
Effective July 1, 1997, the Company, Millers Mutual and Millers Casualty
entered into an amended and restated information services contract (the
"Information Services Contract"), which requires the Company to provide certain
information system services to Millers Mutual and Millers Casualty, including
telecommunications services, hardware services, application software services,
system software services, network services and system integration services.
Under the Information Services Contract, each of Millers Mutual and Millers
Casualty pays a monthly service fee equal to monthly net written premiums,
multiplied by 6% for the remainder of 1997, 5.5% in 1998, 5% in 1999, and
thereafter such percentage as may be agreed upon by the parties. The term of the
Information Services Contract is three years.
The Company, Millers Mutual and Millers Casualty were parties to an
information services contract, effective as of January 1, 1997, under which the
Company provided certain information system services. This contract has been
replaced by the Information Services Contract. Under this contract, each of
Millers Mutual and Millers Casualty paid a monthly service fee of 6% of monthly
net written premiums. For the six months ended June 30, 1997, Millers Mutual and
Millers Casualty paid the Company an aggregate of $2.7 million under this
contract.
OUTSOURCING SERVICES CONTRACTS WITH MILLERS CASUALTY
In May 1997, the Company and Millers Casualty agreed on the terms of a
policy administration services agreement (the "Policy Administration Services
Agreement") pursuant to which the Company will provide policy administration
services for Millers Casualty's homeowners line of business in Florida. Millers
Casualty will pay a monthly service fee equal to 5.6% of its monthly direct
written premiums, subject to a $50.51 per policy minimum. The term of the Policy
Administration Services Agreement will be three years, which will
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<PAGE> 44
automatically renew for additional three-year terms unless terminated by either
party. The Policy Administration Services Contract is subject to approval by the
TDI before it may be executed.
In June 1997, the Company and Millers Casualty agreed on the terms of a
claims administration services agreement (the "Claims Administration Services
Agreement") pursuant to which the Company will provide claims administration
services for Millers Casualty's homeowners line of business in Florida. Millers
Casualty will pay a monthly service fee equal to 7% of its monthly gross direct
earned premiums for noncatastrophe claims and 5% of incurred catastrophe loss
for catastrophe claims. The term of the Claims Administration Services Agreement
will be three years, which will automatically renew for additional three-year
terms unless terminated by either party. The Claims Administration Services
Contract is subject to approval by the TDI before it may be executed.
MISCELLANEOUS
As of June 30, 1997, the Company had outstanding borrowings from Millers
Mutual of $2.8 million for working capital purposes. The largest amount of
borrowings from Millers Mutual outstanding since the inception of the Company
was $4.3 million. See "Use of Proceeds."
In 1993, Millers Mutual licensed SDS software pursuant to a license
agreement with SDS. For 1994, 1995 and 1996, Millers Mutual paid SDS $16,222,
$31,077 and $31,662, respectively, for software and software services. For the
six months ended June 30, 1997, Millers Mutual incurred $442,000 under this
agreement.
The Company leases its principal Sheboygan, Wisconsin facility pursuant to
a lease, dated March 12, 1997 (the "Building Lease"). The building is owned by
Riverview, which is controlled by Stuart H. Warrington, an Executive Vice
President of the Company. The term of the Building Lease ends February 28, 2007.
Pursuant to the Building Lease, Riverview leases to the Company approximately
28,000 square feet of office space at a monthly rate of approximately $21,000
for the first four years, $23,000 for the next five years, and $25,000 for the
last year. For the six months ended June 30, 1997, the Company paid Riverview
approximately $75,000 under the Building Lease.
The Company leases its approximately 19,000 square foot headquarters in
Fort Worth, Texas from Millers Mutual pursuant to a month to month rental
agreement, effective as of May 1, 1996 (the "Lease"), which provides for monthly
rental payments of approximately $26,000. For 1996 and the six months ended June
30, 1997, the Company incurred rental expense of $207,000 and $158,000,
respectively, under the Lease. Prior to May 1, 1996, the Company incurred no
rental expense for office space provided by Millers Mutual.
The Company and Millers Mutual are parties to a sublease agreement, dated
as of January 1, 1997, pursuant to which Millers Mutual subleases to the Company
certain furniture, equipment and other personal property that Millers Mutual has
leased from third parties under various equipment leases for the benefit of the
Company. The sublease payments by the Company to Millers Mutual under the
sublease equal the lease payments by Millers Mutual to the lessors under the
respective leases.
Millers Mutual, the Company and the other subsidiaries of Millers Mutual
are parties to the Tax Sharing Agreement. Under the Tax Sharing Agreement,
Millers Mutual must pay the Company an amount equal to any decrease in the
income taxes otherwise payable by the Millers Mutual consolidated tax group
attributable to any net losses of the Company. Conversely, the Tax Sharing
Agreement requires the Company to pay to Millers Mutual the amount of any income
taxes that the Company would have paid if it had not been included in the
Millers Mutual consolidated tax group. For the period from April 28, 1995
through December 31, 1995, the Company received from Millers Mutual $337,000
under the Tax Sharing Agreement. The amounts of any payments for 1996 and 1997
have not yet been determined. The Company believes that the parties to the Tax
Sharing Agreement will terminate such agreement as it relates to the Company in
contemplation of the Company leaving the Millers Mutual consolidated tax group
as a result of this offering. The Company expects that the agreement to so
terminate the Tax Sharing Agreement will provide that the Company will indemnify
the other members of the Millers Mutual consolidated tax group for any of the
group's income taxes and related expenses attributable to the Company and
Millers Mutual will indemnify the Company for any income
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<PAGE> 45
taxes and related expenses attributable to any members of the consolidated tax
group other than the Company. The agreement to so terminate the Tax Sharing
Agreement will be subject to approval by the TDI.
DESCRIPTION OF CAPITAL STOCK
As of the date of this Prospectus, the authorized capital stock of the
Company consists of 50,000,000 shares of Common Stock, par value $0.01 per
share, of which 9,500,000 shares will be outstanding immediately following this
offering, and 1,000,000 shares of Preferred Stock, par value $1.00 per share
(the "Preferred Stock"), of which no shares will be outstanding immediately
following this offering. The following summary of the Company's capital stock is
qualified in its entirety by reference to the Company's Restated Articles and
its Bylaws, each of which is filed as an exhibit to the Registration Statement
of which this Prospectus is a part.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by shareholders, including the election of directors, and do
not have cumulative voting rights. Subject to the rights of holders of any then
outstanding shares of Preferred Stock, the holders of the Common Stock are
entitled to such dividends as may be declared in the discretion of the Board of
Directors out of funds legally available therefor. Holders of Common Stock are
entitled to share ratably in the net assets of the Company upon liquidation
after payment or provision for all liabilities and any preferential liquidation
rights of the Preferred Stock then outstanding. The holders of Common Stock have
no preemptive rights to purchase shares of stock in the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. All outstanding shares of
Common Stock are, and the shares of Common Stock to be issued by the Company
pursuant to this offering will be, upon payment therefor, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
will be subject to those of the holders of any shares of Preferred Stock the
Company may issue in the future. See "Dividend Policy."
PREFERRED STOCK
The Board of Directors may from time to time authorize the issuance of one
or more classes or series of Preferred Stock without shareholder approval.
Subject to the provisions of the Restated Articles and limitations prescribed by
law, the Board of Directors is authorized to adopt resolutions to issue the
shares, establish the number of shares, change the number of shares constituting
any series, and provide or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions on shares of Preferred Stock, including dividend
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences, in each case without any action or vote by
the shareholders. The Company has no current plans to issue any shares of
Preferred Stock of any class or series, except as described below and under
"Anti-Takeover Considerations -- Rights Agreement" below.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to discourage an attempt to obtain control of the Company by
means of a tender offer, proxy contest, merger or otherwise, and thereby protect
the Company's management. The issuance of Preferred Stock pursuant to the Board
of Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank prior to the Common Stock as to dividend rights, liquidation preference or
both, may have full or limited voting rights and may be convertible into shares
of Common Stock. Accordingly, the issuance of shares of Preferred Stock may
discourage bids for the Common Stock or may otherwise adversely affect the
trading price of the Common Stock.
The Board of Directors has authorized 300,000 shares of Series A Junior
Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), in
connection with the authorization and declaration of the Rights (as defined
below). Each holder of Series A Preferred Stock will be entitled to 100 votes
for each share on all matters voted upon by the shareholders, except as provided
in the Restated Articles. Each share of
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<PAGE> 46
Series A Preferred Stock will be entitled to a minimum preferential quarterly
dividend payment, out of funds legally available therefor, of the greater of:
(i) $1.00 per share or (ii) 100 times the dividend declared per share of Common
Stock. Upon any voluntary or involuntary liquidation, dissolution or winding up
of the Company, no distribution may be made to holders of Common Stock (or other
shares of capital stock ranking junior to Series A Preferred Stock) unless the
holders of Series A Preferred Stock shall have received an amount per share
equal to the greater of: (i) $100 per share, plus accrued and unpaid dividends,
or (ii) an aggregate amount per share equal to 100 times the aggregate amount to
be distributed per share to holders of Common Stock. Shares of Series A
Preferred Stock are not subject to any redemption provisions.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Under the Restated Articles, upon completion of this offering there will be
37,775,000 shares of Common Stock (assuming the Underwriters' over-allotment
option is not exercised and excluding an aggregate of 2,725,000 shares reserved
for issuance under the Stock Option Plan, the Director Plan and the Stock
Purchase Plan) and 1,000,000 shares of Preferred Stock available for future
issuance without shareholder approval. These additional shares may be utilized
for a variety of corporate purposes, including future public offerings to raise
additional capital or facilitate acquisitions. The Company does not currently
have any plans to issue additional shares of Common Stock or Preferred Stock
(other than shares of Common Stock issuable under the Stock Option Plan, the
Director Plan and the Stock Purchase Plan and as described under "Anti-Takeover
Considerations -- Rights Agreement" below).
SPECIAL PROVISIONS OF THE RESTATED ARTICLES, THE BYLAWS AND TEXAS LAW
The Texas Miscellaneous Corporation Laws Act (the "Texas Miscellaneous
Laws") authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their shareholders for monetary damages for breach
of their fiduciary duty as directors except for liability of a director
resulting from: (i) a breach of such director's duty of loyalty to the
corporation or its shareholders, (ii) an act or omission that is not in good
faith or that involves intentional misconduct or a knowing violation of laws,
(iii) a transaction from which the director received an improper personal
benefit or (iv) an act or omission for which the liability of the director is
expressly provided by an applicable statute. The Restated Articles limit the
liability of directors of the Company (in their capacity as directors but not in
their capacity as officers) to the Company or its shareholders to the fullest
extent permitted by the Texas Miscellaneous Laws. The inclusion of this
provision in the Restated Articles may reduce the likelihood of derivative
litigation against directors and may discourage or deter shareholders from suing
directors for breach of their duty of care, even though such an action, if
successful, might otherwise benefit the Company and its shareholders. The
inclusion of such provisions in the Restated Articles together with a provision
requiring the Company to indemnify its directors, officers and certain other
individuals against certain liabilities, is intended to enable the Company to
attract qualified persons to serve as directors who might otherwise be reluctant
to do so. The Securities and Exchange Commission has taken the position that
personal liability of directors for violations of the federal securities laws
cannot be limited and that indemnification by the issuer for such violations is
unenforceable.
The Company has entered into separate indemnification agreements with each
of its directors that may require the Company, among other things, to indemnify
them against certain liabilities that may arise by reason of their status or
service as directors to the maximum extent permitted under the TBCA and advance
their expenses incurred as a result of any proceeding against them for which
they could be indemnified, obtain directors' and officers' insurance or maintain
self-insurance in lieu thereof.
Under the TBCA, the board of directors of a corporation has the power to
amend and repeal the corporation's bylaws unless the corporation's articles of
incorporation reserve the power exclusively to the shareholders or a particular
bylaw expressly provides that the board of directors may not amend or repeal the
bylaw. The Restated Articles give the Board of Directors the power to amend and
repeal the Company's Bylaws. The Company's Restated Articles and Bylaws also
provide that the number of directors shall be fixed from time to time by
resolution of the Board of Directors. These provisions, in addition to the
existence of authorized but unissued capital stock, may have the effect, either
alone or in combination with each other, of discouraging an acquisition of the
Company deemed undesirable by the Board of Directors.
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<PAGE> 47
ANTI-TAKEOVER CONSIDERATIONS
ANTI-TAKEOVER STATUTE. Beginning September 1, 1997, the Company will become
subject to newly-enacted Part 13 of the TBCA ("Part 13"), which subject to
certain exceptions, prohibits a Texas corporation from engaging in any "business
combination" with an "affiliated shareholder" for three years following the date
that such shareholder became an affiliated shareholder, unless: (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the shareholder
becoming an affiliated shareholder or (ii) the business combination is
authorized at a meeting of shareholders called not less than six months after
such date by the affirmative vote of at least two-thirds of the outstanding
voting shares not owned by the affiliated shareholder.
Part 13 generally defines a "business combination" to include: (i) any
merger, share exchange or conversion involving the corporation and the
affiliated shareholder, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 10% or more of the assets of the corporation to
the affiliated shareholder, (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any stock of the
corporation to the affiliated shareholder, (iv) any transaction involving the
corporation that has the effect of increasing the proportionate ownership
percentage of the stock of any class or series of the corporation beneficially
owned by the affiliated shareholder, (v) any receipt by the affiliated
shareholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or (vi) any adoption
of a plan or proposal for the liquidation or dissolution of the corporation
proposed by, or pursuant to any agreement or understanding with, an affiliated
shareholder. In general, Part 13 defines an "affiliated shareholder" as any
entity or person beneficially owning 20% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. As Millers Mutual will own more than 20% of
the Common Stock outstanding before this offering, however, transactions between
Millers Mutual and the Company will not be subject to these restrictions. The
provisions of Part 13 could have the effect of delaying, deferring or preventing
a change of control of the Company even if a change of control were in the
shareholders' interests.
CLASSIFIED BOARD OF DIRECTORS. The Restated Articles provide for the Board
of Directors to be divided into three classes serving staggered three-year
terms. The term of office of the first class of directors will expire at the
1998 annual meeting of shareholders, the term of office of the second class will
expire at the 1999 annual meeting of shareholders and the term of office of the
third class will expire at the 2000 annual meeting of shareholders. The terms of
office of the current directors of the Company are set forth herein under
"Management -- Directors and Executive Officers."
At each annual meeting of shareholders, the class of directors to be
elected at such meeting will be elected for a three-year term, and the directors
in the other two classes will continue in office. As holders of Common Stock
will have no right to cumulative voting for the election of directors, at each
annual meeting of shareholders Millers Mutual, as the holder of a majority of
the shares of Common Stock, will be able to elect all of the successors of the
class of directors whose term expires at that meeting. In addition, the
staggered terms for directors may affect the shareholders' ability to change
control of the Company even if a change of control were in the shareholders'
interests.
SHAREHOLDER ACTION. If provided for in the articles of incorporation, the
TBCA permits shareholder action without a meeting, without prior notice, and
without a vote, upon the written consent of less than all of the holders of
outstanding stock. The Restated Articles prohibit shareholder action without a
meeting, except by unanimous written consent. The Company's Bylaws provide that
special meetings of the shareholders may be called only by the President,
Chairman of the Board, a majority of the Board of Directors or the holders of at
least 10% of all shares entitled to vote at the proposed meeting. These
provisions could have the effect of delaying, deferring or preventing a change
of control of the Company even if a change of control were in the shareholders'
interests.
RIGHTS AGREEMENT. The Board of Directors has authorized and declared a
dividend distribution of one right (a "Right") for each outstanding share of
Common Stock of the Company to the sole shareholder as of the date of the
adoption of the Rights Agreement (as defined below). One Right will thereafter
be issued for each share of Common Stock that becomes outstanding between the
date of adoption of the Rights
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<PAGE> 48
Agreement and the earliest of the Distribution Date (as defined below), the
Final Expiration Date (as defined below), and the date the Rights are redeemed.
Except as described below, each Right represents the right to purchase from the
Company one one-hundredth ( 1/100) of a share of Series A Junior Preferred
Stock, par value $1.00 per share (the "Preferred Shares"), at a price of $40.00
(the "Exercise Price"), subject to adjustment. The mechanics of such adjustment,
the timing of the exercise of the Rights, and the description, terms and
preferences of the Rights are set forth in the Rights Agreement (the "Rights
Agreement") between the Company and U.S. Trust Company of Texas, N.A., as Rights
Agent. A copy of a form of the Rights Agreement has been filed with the
Securities and Exchange Commission as an exhibit to the registration statement
of which this Prospectus is a part. This summary of the Rights Agreement and the
Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement.
The Rights will be evidenced by the Common Stock certificates and not by
separate certificates until the earlier of: (i) ten days following a public
announcement that a person or group of affiliated or associated persons, with
certain limited exceptions (an "Acquiring Person"), has acquired, or obtained
the right to acquire, beneficial ownership of capital stock of the Company
representing 15% or more of the voting power of the Company (the "Stock
Acquisition Date") or (ii) ten business days (or such later date as may be
determined by action of the Board of Directors upon approval by a majority of
the Continuing Directors (as defined below), prior to the time that any person
becomes an Acquiring Person) following the commencement of (or a public
announcement of an intention to make) a tender or exchange offer if, upon
consummation thereof, such person or group would be the beneficial owner of
capital stock of the Company representing 15% or more of the voting power of the
Company (such date being called the "Distribution Date").
Until the Distribution Date: (i) the Rights shall be transferred with, and
only with, the Common Stock and (ii) the transfer of any Common Stock
certificates shall also constitute the transfer of the Rights associated
therewith. Following the Distribution Date, separate certificates evidencing the
Rights (the "Right Certificates") will be mailed to the record holders of Common
Stock as of the close of business on the Distribution Date, and thereafter such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date, and will expire
upon the earliest of: (i) the close of business on the tenth anniversary of the
adoption of the Rights Agreement (the "Final Expiration Date"), (ii) the
redemption of the Rights by the Company as described below, (iii) the date on
which such Rights expire pursuant to the Rights Agreement or (iv) the exchange
of the Rights by the Company as described below.
A person generally will not become an Acquiring Person under the Rights
Agreement if such person is: (i) the Company, (ii) a subsidiary of the Company,
(iii) an employee benefit plan or employee stock plan of the Company or of a
subsidiary of the Company, (iv) Millers Mutual or an affiliate or associate of
Millers Mutual, (v) F. George Dunham, III, or any of the members of his family
or certain trusts, estates or other entities created for their benefit or
controlled by them, (vi) an "Exempt Person" (as defined in the Rights Agreement)
as designated by the Board of Directors or (vii) an Acquiring Person solely by
reason of (A) obtaining 15% or more of the voting power of the Company through
transactions approved by a majority of the Board of Directors and Continuing
Directors before such person or group became an Acquiring Person or (B) a
reduction in the number of shares of voting stock of the Company pursuant to a
transaction approved by a majority of the Board of Directors and Continuing
Directors.
Unless the Rights are earlier redeemed, in the event that a person or group
becomes the beneficial owner of capital stock of the Company representing 15% or
more of the voting power of the Company (other than pursuant to a tender or
exchange offer for all outstanding shares of Common Stock of the Company
approved by a majority of the Board of Directors and Continuing Directors), each
holder of Rights will thereafter have the right to exercise its Rights and to
receive, upon payment of the Exercise Price (as adjusted), for each of its
Rights, such number of shares of Common Stock of the Company (or in certain
circumstances, cash, property or other securities of the Company) as shall have
a value equal to twice the Exercise Price. Until a Right is exercised, the
holder thereof, as such, will have no rights as a shareholder of the Company,
including without limitation the right to vote or to receive dividends.
Notwithstanding anything to the contrary, however,
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<PAGE> 49
following the time that a person becomes an Acquiring Person, any Rights that
are beneficially owned by such Acquiring Person or by a transferee of such
Acquiring Person shall automatically become null and void.
The Exercise Price payable and the number of Preferred Shares, shares of
Common Stock or other securities or property issuable upon exercise of a Right,
and the number of Rights outstanding, are subject to adjustment from time to
time to prevent dilution. In addition, if at any time on or after the
Distribution Date the Company is merged into or consolidates with another person
and the Company does not survive such merger or consolidation or all or part of
the shares of Common Stock are in connection with such merger or consolidation
exchanged for securities of another person, or the Company or one or more of the
subsidiaries of the Company transfers to any other person 50% or more of the
assets or earning power of the Company and the subsidiaries, proper provision
will be made so that each holder of a Right will thereafter have the right to
receive, upon exercise at the then current Exercise Price of the Right, common
stock of the applicable issuer or the surviving company having a value equal to
twice the Exercise Price of the Right.
Upon the exercise of a Right, the Company will not be required to issue
fractional Preferred Shares (other than fractions in multiples of one
one-hundredth of a Preferred Share), and in lieu thereof may issue depositary
receipts evidencing fractions of such shares or cash based on the Fair Market
Value (as defined in the Rights Agreements) of Preferred Shares.
At any time after the date of the Rights Agreement until the earlier of ten
days after the Stock Acquisition Date or the Final Expiration Date, the Company
may, upon approval by a majority of the Board of Directors and Continuing
Directors, redeem the Rights in whole, but not in part, at a price of $0.01 per
Right (the "Redemption Price"), subject to adjustment. The Redemption Price may,
at the option of the Company, be paid in cash, shares of Preferred Stock or
shares of Common Stock. The Rights will thereupon terminate and the only right
of the holders of Rights will be to receive the Redemption Price.
At any time after a person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by any such person or
group of 50% or more of the voting power of the Company, the Board of Directors
(with the approval of a majority of the Continuing Directors) may exchange the
Rights (other than Rights owned by such person or group which have become void),
in whole or in part, at an exchange ratio of one share of Common Stock (or a
fraction of a share of Preferred Stock or other consideration having equivalent
value) per Right, subject to adjustment.
As long as the Rights are redeemable, the provisions of the Rights
Agreement may be amended by the Company without the approval of any holders of
the Rights. Any amendment adopted thereafter may not materially adversely affect
the interests of holders of the Rights.
For purposes of the Rights Agreement, a "Continuing Director" means any
member of the Board of Directors who is not an Acquiring Person or an affiliate
or associate of an Acquiring Person, or a representative or nominee of an
Acquiring Person or any such affiliate or associate and who either (i) was a
member of the Board of Directors on the date the Rights Agreement was adopted or
(ii) subsequently became a member of the Board of Directors and whose nomination
for election or election to the Board was recommended or approved by a majority
of the Continuing Directors then on the Board of Directors.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
other than pursuant to a tender offer or other transaction approved by the Board
of Directors. The Rights, however, provide the Board of Directors and the
Acquiring Person a ten-day period to negotiate such a merger or consolidation
before the Rights become exercisable. If an acceptable arrangement is reached
within this period, the Board of Directors may redeem all of the Rights.
PREFERRED STOCK. The Restated Articles permit the Company's Board of
Directors to issue Preferred Stock at any time without shareholder approval. See
"-- Preferred Stock" and "-- Certain Effects of Authorized but Unissued Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
47
<PAGE> 50
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of a substantial number of shares of Common Stock in the public
market could adversely affect trading prices prevailing from time to time. The
Selling Shareholder will hold 5,000,000 shares, representing 52.6% of the
outstanding shares of Common Stock after this offering (47.6% if the
Underwriters' over-allotment option is exercised in full), and a decision by the
Selling Shareholder to sell shares of Common Stock in the open market could
adversely affect the trading price of the Common Stock.
Upon completion of this offering, the Company will have outstanding
9,500,000 shares of Common Stock (9,875,000 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the shares sold in
this offering will be freely tradable without restriction under the Securities
Act, unless purchased by "affiliates" of the Company as that term is defined in
Rule 144 under the Securities Act ("Rule 144"), which is summarized below.
The remaining 5,000,000 shares (4,700,000 shares if the Underwriters'
over-allotment option is exercised in full) held by the Selling Shareholder will
be "restricted securities" as that term is defined in Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in the public market only if such sale
is registered under the Securities Act or if it qualifies for an exemption from
registration, such as the one provided by Rule 144. Sales of the Restricted
Shares in the open market, or the availability of such shares for sale, could
adversely affect the trading price of the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or an affiliate of the issuer would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) 1% of the number of shares of Common Stock then outstanding (approximately
95,000 shares immediately after this offering, or 98,750 shares if the
Underwriters' overallotment option is exercised in full) or (ii) the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and the availability of current public information about the
Company. Rule 144 generally becomes available 90 days after the issuer has been
subject to the information reporting requirements of the Exchange Act. Under
Rule 144(k), a person who is not deemed to have been an affiliate of the Company
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years following the later of the
date of the acquisition of such shares from the issuer or an affiliate of the
issuer, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering the offering and sale of the 2,250,000 shares of Common
Stock reserved for issuance under the Stock Option Plan, the 50,000 shares
reserved for issuance under the Director Plan and the 425,000 shares reserved
for issuance under the Stock Purchase Plan. Accordingly, shares of Common Stock
issued upon exercise of options granted under the Stock Option Plan or the
Director Plan or purchased with payroll deductions under the Stock Purchase Plan
will be available for sale in the open market, unless such shares are subject to
certain lock-up agreements. See "Underwriting."
48
<PAGE> 51
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, the
Underwriters named below, through their representatives, Raymond James &
Associates, Inc. and Southwest Securities, Inc. (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Shareholder the
following respective numbers of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Raymond James & Associates, Inc.............................
Southwest Securities, Inc...................................
---------
Total............................................. 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to certain conditions. The Underwriters are obligated
to take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are to
be purchased.
The Underwriters, through the Representatives, propose to offer part of the
shares of Common Stock directly to the public at the offering price set forth on
the cover page of this Prospectus and part of the shares to certain dealers at a
price that represents a concession not in excess of $ per share under
the initial public offering price. The Underwriters may allow, and such dealers
may re-allow, a concession not in excess of $ per share to certain
other dealers. The Representatives of the Underwriters have advised the Company
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company and the Selling Shareholder have granted the Underwriters an
option, exercisable not later than 30 days after the date of this Prospectus, to
purchase up to an aggregate of 675,000 additional shares of Common Stock, at the
initial public offering price, less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the number
of shares of Common Stock to be purchased by it shown in the above table bears
to the total shown, and the Company and the Selling Shareholder will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise their option only to cover over-allotments made in
connection with the sale of the shares of Common Stock offered hereby. If
purchased, the Underwriters will sell such additional shares on the same terms
as those on which the shares that the Underwriters have agreed to purchase from
the Company and the Selling Shareholder are being offered.
This offering of Common Stock is made for delivery when, as and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of this offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Until the distribution of Common Stock in this offering is completed, rules
of the Securities and Exchange Commission may limit the ability of the
Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the
49
<PAGE> 52
Underwriters create a short position in the Common Stock in connection with this
offering, i.e., if they sell more shares of Common Stock than are set forth on
the cover page of this Prospectus, the Representatives may reduce the short
position by purchasing Common Stock in the open market. The Representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. The Representatives may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives purchase shares of Common Stock in the open market to
reduce the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of this
offering. In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discouraged resales of any security. Neither the Company, the Selling
Shareholder nor any of the Underwriters makes any representation or predictions
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the Common Stock. In addition, neither the
Company, the Selling Shareholder nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Company, the Selling Shareholder and certain officers and directors of
the Company, which upon consummation of this offering will own or have the right
to acquire in the aggregate 5,514,831 shares of Common Stock, have agreed that
they will not, without the prior written consent of Raymond James & Associates,
Inc., sell, offer to sell, contract to sell or otherwise transfer or dispose of
any shares of Common Stock (other than the shares offered by the Selling
Shareholder in this offering), options, rights or warrants to acquire shares of
Common Stock, or securities exchangeable for or convertible into shares of
Common Stock, during the 180-day period commencing on the date of this
Prospectus, except that the Company may issue shares of Common Stock under the
Stock Purchase Plan and upon exercise of options outstanding under the Stock
Option Plan and the Director Plan and may grant additional options under the
Stock Option Plan and the Director Plan, provided that without the prior written
consent of Raymond James & Associates, Inc., such additional options shall not
be exercisable during such period. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation among the Company, the Selling Shareholder and the
Representatives. Among the factors to be considered in determining the initial
public offering price are prevailing market and economic conditions, revenues
and earnings of the Company, market valuations of other companies engaged in
activities similar to those of the Company, estimates of the business potential
and prospects of the Company, the present state of the Company's business
operations, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover page of
this Prospectus is subject to change as a result of market conditions and other
factors.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities, including liabilities under the Securities Act.
The Company has additionally agreed to pay to the Representatives, solely
by deduction from the proceeds of this offering, a financial advisory fee equal
to the lesser of (i) three-fourths of one percent (0.75%) of the gross proceeds
to the Company and the Selling Shareholder in this offering or (ii) $300,000.
Such financial advisory fee shall be paid by the Company and the Selling
Shareholder in proportion to the respective number of shares of Common Stock
being offered by them hereby, and relates to financial advisory services
provided by the Representatives to the Company and Selling Shareholder in
connection with this offering and related matters.
At the Company's request, the Underwriters have reserved up to 175,000
shares of Common Stock for sale to the Company's directors, officers, employees
and designees and have agreed to permit them to buy such shares at 96% of the
initial public offering price. The number of shares of Common Stock available
for sale to the general public will be reduced to the extent purchasers
designated by the Company purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public at the
initial public offering price.
50
<PAGE> 53
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the form of
Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Dallas,
Texas. Certain matters will be passed upon for the Underwriters by Thompson &
Knight, A Professional Corporation, Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company as of and for the six
months ended June 30, 1997, as of and for the year ended December 31, 1996 and
as of December 31, 1995 and for the period April 28, 1995 (date of inception)
through December 31, 1995 included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, and have been so included in
reliance upon the opinion of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of SDS and subsidiary as of March 11,
1997 and the period January 1, 1997 through March 11, 1997 and as of and for the
three years in the period ended December 31, 1996 included in this Prospectus
have been audited by Deloitte & Touche LLP, independent auditors, and have been
so included in reliance upon the opinion of such firm given upon their authority
as experts in accounting and auditing.
During 1996, the Company changed its independent accountants from Price
Waterhouse LLP ("Price Waterhouse") to Deloitte & Touche LLP. There were no
disagreements between the Company and Price Waterhouse on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure that if not resolved to the satisfaction of Price Waterhouse
would have caused such firm to make reference thereto in connection with its
reports on the financial statements of the Company. The Company's decision to
change to Deloitte & Touche LLP was approved by the Board of Directors of the
Company. In 1997, in connection with the SDS Acquisition, SDS changed its
independent accountants from KPMG Peat Marwick LLP ("KPMG") to Deloitte & Touche
LLP, the Company's independent accountants. There were no disagreements between
SDS and KPMG on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure that if not resolved to the
satisfaction of KPMG would have caused such firm to make reference thereto in
connection with its reports on the financial statements of SDS. SDS's decision
to change its independent accountants was approved by the Board of Directors of
the Company.
51
<PAGE> 54
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Exchange Act. The Company has filed with the Securities and Exchange
Commission (the "Commission"), a Registration Statement on Form S-1 under the
Securities Act (the "Registration Statement") with respect to the offering and
sale of Common Stock. This Prospectus does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's regional offices at 7 World
Trade Center, New York, New York 10048 and at 500 Madison Street, Chicago,
Illinois 60661, upon payment of certain fees prescribed by the Commission. The
Commission maintains an Internet world wide web site that contains reports,
proxy and information reports and other materials that are filed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System. The site
can be accessed at http://www.sec.gov.
The Company intends to distribute to the holders of Common Stock annual
reports containing consolidated financial statements audited by independent
accountants.
52
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Condensed Consolidated Financial Information...... F-2
Pro Forma Condensed Consolidated Financial Statements....... F-3
Notes to Pro Forma Condensed Consolidated Financial
Statements................................................ F-6
INSPIRE INSURANCE SOLUTIONS, INC. CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditors' Report................................ F-7
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-8
Consolidated Statements of Operations..................... F-9
Consolidated Statements of Shareholder's Equity........... F-10
Consolidated Statements of Cash Flows..................... F-11
Notes to Consolidated Financial Statements................ F-12
STRATEGIC DATA SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-23
Consolidated Financial Statements:
Consolidated Balance Sheets............................... F-24
Consolidated Statements of Operations..................... F-25
Consolidated Statements of Shareholders' Equity........... F-26
Consolidated Statements of Cash Flows..................... F-27
Notes to Consolidated Financial Statements................ F-28
</TABLE>
F-1
<PAGE> 56
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The accompanying unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1996 and for the six months ended
June 30, 1997 reflect: (i) the acquisition of Strategic Data Systems, Inc.
("SDS") using the purchase method of accounting as if the acquisition of SDS,
which occurred on March 12, 1997, had occurred on January 1, 1996 and (ii) the
results of operations of INSpire Insurance Solutions, Inc. (the "Company") as if
the Company had operated on an independent basis separate from The Millers
Mutual Fire Insurance Company ("Millers Mutual") since January 1, 1996.
The unaudited pro forma condensed consolidated statements of operations are
based on currently available information and do not purport to represent what
the Company's results of operations would have been if the events referred to
above had occurred on January 1, 1996, or to project the Company's results of
operations for any future periods.
The pro forma condensed consolidated statements of operations should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of INSpire," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of SDS," the Company's
Financial Statements and SDS's Consolidated Financial Statements.
F-2
<PAGE> 57
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
INSPIRE INSURANCE STRATEGIC DATA PRO FORMA
SOLUTIONS, INC. SYSTEMS, INC. COMBINED ADJUSTMENTS PRO FORMA(A)
----------------- -------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services........ $13,653 $ -- $ 13,653 $ -- $ 13,653
Software and software
services................. -- 18,239 18,239 -- 18,239
Other....................... -- 5,425 5,425 -- 5,425
------- ------- --------- ---------
Total revenues...... 13,653 23,664 37,317 -- 37,317
------- ------- --------- ---------
Operating expenses............ 14,430 22,629 37,059 1,068(b) 36,920
(2,920)(c)
559(d)
(887)(e)
1,200(f)
947(g)
(106)(h)
------- ------- --------- ---------
Operating income (loss)....... (777) 1,035 258 397
Interest expense.............. (2) (207) (209) (430)(i) (639)
Other income (expense), net... -- 319 319 319
------- ------- --------- ---------
Income (loss) from operations
before income taxes
(benefit)................... (779) 1,147 368 77
Income taxes (benefit)........ (264) 449 185 (256)(j) (71)
------- ------- --------- ---------
Net income (loss)............. $ (515) $ 698 $ 183 $ 148
======= ======= ========= =========
Net income (loss) per share... $ 0.02 $ 0.02
========= =========
Supplementary net income
(loss) per share............ $ 0.07
=========
Weighted average common and
common equivalent shares
outstanding................. 7,658,195 72,821(k) 7,731,016
</TABLE>
See accompanying notes.
F-3
<PAGE> 58
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
INSPIRE INSURANCE STRATEGIC DATA PRO FORMA
SOLUTIONS, INC. SYSTEMS, INC. COMBINED ADJUSTMENTS PRO FORMA(A)
----------------- -------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services....... $5,338 $ -- $ 5,338 $ -- $ 5,338
Software and software
services................ -- 9,299 9,299 -- 9,299
Other...................... -- 1,073 1,073 -- 1,073
------- ------- ---------- ----------
Total revenues..... 5,338 10,372 15,710 -- 15,710
------- ------- ---------- ----------
Operating expenses........... 5,752 9,861 15,613 438(b) 15,884
(1,110)(c)
360(d)
(438)(e)
600(f)
474(g)
(53)(h)
------- ------- ---------- ----------
Operating income (loss)...... (414) 511 97 (174)
Interest expense............. -- (101) (101) (215)(i) (316)
Other income (expense),
net........................ -- 120 120 120
------- ------- ---------- ----------
Income (loss) from operations
before income taxes
(benefit).................. (414) 530 116 (370)
Income taxes (benefit)....... (141) 233 92 (274)(j) (182)
------- ------- ---------- ----------
Net income (loss)............ $ (273) $ 297 $ 24 $ (188)
======= ======= ========== ==========
Net income (loss) per
share...................... $ 0.00 $ (0.02)
========== ==========
Supplementary net income
(loss) per share........... $ 0.00
==========
Weighted average common and
common equivalent shares
outstanding................ 7,658,195 72,821(k) 7,731,016
</TABLE>
See accompanying notes.
F-4
<PAGE> 59
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
INSPIRE INSURANCE STRATEGIC DATA PRO FORMA
SOLUTIONS, INC. SYSTEMS, INC. COMBINED ADJUSTMENTS PRO FORMA(A)
----------------- -------------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Outsourcing services....... $14,394 $ -- $ 14,394 $ -- $ 14,394
Software and software
services................ 7,562 4,840 12,402 -- 12,402
Other...................... 1,303 572 1,875 -- 1,875
------- ------- ---------- ----------
Total revenues..... 23,259 5,412 28,671 -- 28,671
------- ------- ---------- ----------
Operating expenses........... 27,668 5,049 32,717 700(b) 32,500
(1,110)(c)
(204)(e)
233(f)
184(g)
(20)(h)
------- ------- ---------- ----------
Operating income (loss)...... (4,409) 363 (4,046) (3,829)
Interest expense............. (212) (33) (245) (84)(i) (329)
Other income (expense),
net........................ 53 57 110 110
------- ------- ---------- ----------
Income (loss) from operations
before income taxes
(benefit).................. (4,568) 387 (4,181) (4,048)
Income taxes (benefit)....... (1,712) 156 (1,556) (75)(j) (1,631)
------- ------- ---------- ----------
Net income (loss)............ $(2,856) $ 231 $ (2,625) $ (2,417)
======= ======= ========== ==========
Net income (loss) per
share...................... $ (0.34) $ (0.31)
========== ==========
Supplementary net income
(loss) per share........... $ (0.30)
==========
Weighted average common and
common equivalent shares
outstanding................ 7,658,195 72,821(k) 7,731,016
</TABLE>
See accompanying notes.
F-5
<PAGE> 60
NOTES TO PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(a) See the Introduction to Pro Forma Condensed Consolidated Financial
Information.
(b) Represents compensation for finance, administrative, executive and marketing
employees to perform services performed by Millers Mutual pursuant to a
management agreement.
(c) Reflects the net reduction in the management fee charged to the Company by
Millers Mutual resulting from the recognition of additional compensation for
employees to perform services provided by Millers Mutual pursuant to a
management agreement.
(d) Represents software production expenses during the period that were
capitalized by SDS.
(e) Reflects the elimination of amortization of software production expenses
capitalized by SDS.
(f) Reflects the amortization of purchased software associated with the
acquisition of SDS.
(g) Represents the amortization of goodwill associated with the acquisition of
SDS.
(h) Represents previously recorded amortization of goodwill by SDS resulting
from the acquisition of Applied Quoting Systems, Inc.
(i) Represents the effect of interest expense associated with the debt incurred
in conjunction with the acquisition of SDS, offset by the elimination of
certain interest expense associated with mortgage debt not assumed in the
acquisition of SDS.
(j) Income tax (benefit) is calculated at an effective rate of 36% less the
deferred tax benefit associated with the amortization of purchased software
in the acquisition of SDS.
(k) Represents additional common stock equivalents relating to outstanding stock
options, calculated by applying the treasury stock method, resulting from
the difference in the fair value of the pre-IPO options and the assumed
initial public offering price of $10.00 per share.
F-6
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
Board of Directors
INSpire Insurance Solutions, Inc. and Subsidiary
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of INSpire
Insurance Solutions, Inc. and subsidiary (formerly Millers Integrated Claims
Resources, Inc. and MiliRisk, Inc.) as of December 31, 1995, 1996 and June 30,
1997 and the related consolidated statements of operations, shareholder's equity
and cash flows for the period April 28, 1995 (date of inception) through
December 31, 1995, the year ended December 31, 1996 and the six months ended
June 30, 1997. 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, 1995, 1996 and June 30, 1997 and the results
of their operations and their cash flows for the period April 28, 1995 (date of
inception) through December 31, 1995, the year ended December 31, 1996 and the
six months ended June 30, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 18, 1997
F-7
<PAGE> 62
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 21,868 $ 363,398 $ 451,022
Accounts receivable -- net........................... -- 1,168,148 6,416,323
Income taxes receivable.............................. 475,124 339,571 339,571
Deferred income taxes................................ -- -- 1,273,000
Prepaid expenses and other current assets............ -- 140,950 844,581
---------- ---------- -----------
Total current assets......................... 496,992 2,012,067 9,324,497
Accounts receivable, excluding current portion......... -- -- 207,601
Property and equipment, net............................ 2,320,055 3,219,892 6,277,833
Intangibles and other assets........................... -- -- 15,078,103
---------- ---------- -----------
TOTAL.................................................. $2,817,047 $5,231,959 $30,888,034
========== ========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Note payable......................................... $ -- $2,500,000 $ --
Accounts payable..................................... -- 1,066,013 954,243
Accrued payroll and compensation..................... -- -- 657,038
Other accrued expenses............................... -- -- 1,654,296
Customer deposits.................................... -- -- 474,880
Deferred compensation................................ -- -- 2,699,000
Income taxes payable................................. -- -- 1,065,638
Current portion of long-term debt.................... -- -- 1,562,500
Due to parent........................................ 1,569,108 995,706 2,833,053
---------- ---------- -----------
Total current liabilities.................... 1,569,108 4,561,719 11,900,648
Deferred compensation.................................. -- -- 1,609,388
Long-term debt......................................... -- -- 5,625,000
Deferred income taxes.................................. 126,500 64,000 2,195,000
Commitments and Contingencies (Note 12)................ -- -- --
SHAREHOLDER'S EQUITY:
Preferred stock, $1.00 par value; 1,000,000 shares
authorized, none issued and outstanding........... -- -- --
Common stock, $.01 par value; 1,000 shares
authorized, 100 shares issued and outstanding in
1995 and 1996; 14,000,000 shares authorized and
7,000,000 shares issued and outstanding at June
30, 1997.......................................... 1 1 70,000
Additional paid-in capital........................... 2,383,417 2,383,417 14,121,609
Accumulated deficit.................................. (1,261,979) (1,777,178) (4,633,611)
---------- ---------- -----------
Total shareholder's equity................... 1,121,439 606,240 9,557,998
---------- ---------- -----------
TOTAL.................................................. $2,817,047 $5,231,959 $30,888,034
========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 63
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD APRIL 28, SIX MONTHS
1995 THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1996 1997
------------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Outsourcing services.................... $ 3,907,108 $13,653,003 $5,337,755 $14,393,897
Software and software services.......... -- -- -- 7,561,879
Other................................... -- -- -- 1,303,439
----------- ----------- ---------- -----------
Total revenues.................. 3,907,108 13,653,003 5,337,755 23,259,215
----------- ----------- ---------- -----------
EXPENSES:
Cost of outsourcing services............ 4,884,641 10,543,077 4,202,355 10,098,207
Cost of software and software
services............................. -- -- -- 2,921,377
Cost of other revenues.................. -- -- -- 696,495
Selling, general and administrative..... -- -- -- 3,428,330
Research and development................ -- -- -- 679,600
Depreciation and amortization........... 33,070 786,768 349,635 1,695,416
Purchased research and development...... -- -- -- 3,000,000
Deferred compensation................... -- -- -- 3,949,000
Management fees to Parent............... 600,000 3,100,000 1,200,000 1,200,000
----------- ----------- ---------- -----------
Total expenses.................. 5,517,711 14,429,845 5,751,990 27,668,425
----------- ----------- ---------- -----------
OPERATING LOSS............................ (1,610,603) (776,842) (414,235) (4,409,210)
OTHER INCOME (EXPENSE):
Interest income......................... -- -- -- 74,537
Interest expense........................ -- (2,245) -- (212,044)
Other................................... -- -- -- (21,371)
----------- ----------- ---------- -----------
Total other income (expense).... -- (2,245) -- (158,878)
----------- ----------- ---------- -----------
LOSS BEFORE INCOME TAX BENEFIT............ (1,610,603) (779,087) (414,235) (4,568,088)
INCOME TAX BENEFIT........................ 348,624 263,888 140,840 1,711,655
----------- ----------- ---------- -----------
NET LOSS.................................. $(1,261,979) $ (515,199) $ (273,395) $(2,856,433)
----------- ----------- ---------- -----------
NET LOSS PER COMMON SHARE................. $ (.16) $ (.07) $ (.04) $ (.37)
=========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 64
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE PERIOD APRIL 28, 1995 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1995,
THE YEAR ENDED DECEMBER 31, 1996 AND THE
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Issuance of 100 shares of common stock at
inception.............................. $ 1 $ 999 $ -- $ 1,000
Parent's contribution of fixed assets.... -- 2,382,418 -- 2,382,418
Net loss................................. -- -- (1,261,979) (1,261,979)
------- ----------- ----------- -----------
Balance, December 31, 1995............... 1 2,383,417 (1,261,979) 1,121,439
Net loss................................. -- -- (515,199) (515,199)
------- ----------- ----------- -----------
Balance, December 31, 1996............... 1 2,383,417 (1,777,178) 606,240
Parent's contribution of fixed
assets................................. -- 1,308,191 -- 1,308,191
Parent's contribution of additional
paid-in capital........................ -- 10,500,000 -- 10,500,000
Stock dividend to parent of 64,900
shares, March 1997..................... 649 (649) -- --
Stock dividend to parent of 6,935,000
shares, June 1997...................... 69,350 (69,350) -- --
Net loss................................. -- -- (2,856,433) (2,856,433)
------- ----------- ----------- -----------
Balance, June 30, 1997................... $70,000 $14,121,609 $(4,633,611) $ 9,557,998
======= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 65
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD APRIL 28, ENDED
1995 THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996 1997
----------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss..................................... $(1,261,979) $ (515,199) $(273,395) $ (2,856,433)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............. 33,070 786,768 349,635 1,695,416
Deferred income taxes...................... 126,500 (62,500) (57,500) (2,785,000)
Purchased research and development......... -- -- -- 3,000,000
Loss on sales of property and equipment.... 8,348 12,639 -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... -- (1,168,148) (67,853) (281,026)
Income taxes receivable.................. (475,124) 135,553 (32,152) --
Prepaid expenses and other current
assets................................ -- (140,950) -- (442,267)
Other assets............................. -- -- -- 100,462
Accounts payable......................... -- 1,066,013 -- (1,291,495)
Accrued payroll and compensation......... -- -- -- (417,543)
Other accrued expenses................... -- -- -- 945,457
Customer deposits........................ -- -- -- (867,220)
Income taxes payable..................... -- -- -- 615,638
Deferred compensation.................... -- -- -- 3,980,753
Due to parent............................ 1,569,108 (573,402) 977,924 1,837,347
----------- ----------- --------- ------------
Net cash provided by (used in)
operating activities................ (77) (459,226) 896,659 3,234,089
----------- ----------- --------- ------------
INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment.................................. 23,039 67,494 -- --
Purchases of property and equipment.......... (2,094) (1,766,738) (456,560) (882,627)
Acquisition of SDS, net of cash acquired..... -- -- -- (17,118,849)
----------- ----------- --------- ------------
Net cash provided by (used in) investing
activities................................. 20,945 (1,699,244) (456,560) (18,001,476)
----------- ----------- --------- ------------
FINANCING ACTIVITIES:
Proceeds from borrowings..................... -- 2,500,000 77,220 7,500,000
Repayment of borrowings...................... -- -- -- (3,410,396)
Contribution from parent..................... -- -- -- 10,500,000
Issuance of common stock..................... 1,000 -- -- --
Bank overdrafts.............................. -- -- -- 265,407
----------- ----------- --------- ------------
Net cash provided by financing
activities.......................... 1,000 2,500,000 77,220 14,855,011
----------- ----------- --------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...... 21,868 341,530 517,319 87,624
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................... -- 21,868 21,868 363,398
----------- ----------- --------- ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD....................................... $ 21,868 $ 363,398 $ 539,187 $ 451,022
=========== =========== ========= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................ $ -- $ 2,245 $ -- $ 112,947
=========== =========== ========= ============
Income taxes refunded........................ $ -- $ 336,939 $ -- $ --
=========== =========== ========= ============
Noncash investing activities -- contribution
of fixed assets from parent................ $ 2,382,418 $ -- $ -- $ 1,308,191
=========== =========== ========= ============
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 66
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General -- INSpire Insurance Solutions, Inc. ("INSpire" or the "Company")
(formerly Millers Integrated Claims Resources, Inc. and MiliRisk, Inc.) is a
wholly-owned subsidiary of The Millers Mutual Fire Insurance Company ("Millers
Mutual") and was incorporated April 28, 1995. INSpire is a provider of policy
and claims administration outsourcing services to the property and casualty
("P&C") insurance industry. Through its wholly-owned subsidiary, Strategic Data
Systems, Inc. and subsidiary ("SDS"), which was acquired March 12, 1997, the
Company also develops and markets software and software services to the P&C
insurance industry. The Company sells its products directly to the customer. The
majority of sales are in North America.
Basis of Consolidation -- The accompanying consolidated financial
statements for the period ended June 30, 1997 include the accounts of INSpire
and, since March 12, 1997, SDS. All significant intercompany accounts and
transactions have been eliminated in consolidation.
SDS Acquisition -- On March 12, 1997, INSpire acquired all the outstanding
shares of common stock of SDS for an aggregate cash purchase price of $18.0
million, subject to adjustment as provided in the purchase agreement, and costs
and expenses of $325,000. The acquisition was funded by a $10.5 million capital
contribution from Millers Mutual along with borrowings under a revolving line of
credit and term loan from a bank.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their relative fair market values. As of the
acquisition date, assets acquired and liabilities assumed were as follows (in
thousands):
<TABLE>
<S> <C>
Purchase price.............................................. $ 18,325
Fair values of net assets acquired:
Software.................................................. 6,000
Purchased research and development........................ 3,000
Fair value of tangible assets acquired.................... 10,832
Liabilities assumed....................................... (10,786)
--------
9,046
--------
Goodwill.................................................... $ 9,279
========
</TABLE>
The amount assigned to purchased research and development was charged
against operating results at the time of acquisition.
The allocation of the purchase price is pending any additional adjustments
that may arise as a result of the finalization of the Company's ongoing
analysis.
Operating results of the acquired business are included in consolidated
results only from the date of acquisition. Unaudited pro forma data reflecting
results as if the acquisition had been effective at the beginning of 1996
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- --------------
<S> <C> <C>
Net revenues.......................................... $37,317 $28,671
Income (loss) from operations......................... 397 (3,829)
Net income (loss)..................................... 148 (2,417)
Net income (loss) per common share.................... .02 (.31)
</TABLE>
F-12
<PAGE> 67
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma results are unaudited and are based on historical results,
adjusted for the impact of certain acquisition-related adjustments, such as:
increased depreciation of property and equipment, the charge-off of purchase
price assigned to purchased research and development, the amortization of
goodwill, acquired software and other intangible assets and the related income
tax effects. The pro forma net earnings per common share were calculated using a
weighted average number of common shares outstanding and common equivalent
shares of 7,658,195 for 1996 and the six months ended June 30, 1997 after giving
effect to the common stock dividends paid during March and June 1997. Pro forma
results do not reflect any synergies that might be achieved from combined
operations and, therefore, in management's opinion, are not indicative of what
actual results would have been if the acquisition had occurred at the beginning
of 1996. In addition, they are not intended to be a projection of future
results.
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 related assets estimated useful lives, which
range from three to seven years. Leasehold expenses are amortized over the lease
term or the estimated useful life, whichever is less. Repairs and maintenance
are charged to operations as incurred.
Revenue Recognition -- Revenues from outsourcing services are recognized as
services are rendered. 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 the
Company 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. The Company recognizes the annual fee charged for maintenance of the
customer's system as revenue as hours are expended over the maintenance contract
period. Revenues from computer hardware and equipment sales are recognized when
the Company 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.
Income Taxes -- Millers Mutual and its subsidiaries, including INSpire,
file a consolidated federal income tax return. In accordance with federal income
tax regulations, all corporations included in a consolidated tax return are
jointly and severally liable for all tax liabilities. A tax sharing agreement
among Millers Mutual, the Company and the other subsidiaries of Millers Mutual
provides that taxes on income are charged to profitable subsidiaries as if they
were filing their own separate returns. Subsidiaries with losses are 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 receive the benefit of all tax credits. Intercompany tax balances
are settled annually.
Federal income taxes have been computed on a separate return basis in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires income taxes to be accounted for
under the liability method. Income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred income taxes related primarily to differences between the
basis of property and equipment due to depreciation differences and to the
application of the purchase method of accounting for financial statement
purposes but not for tax purposes, and nondeductible asset and liability
reserves for tax purposes. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Deferred tax assets are evaluated based on the guidelines for realization and
may be reduced by a valuation allowance.
Industry Concentration -- INSpire's revenues and accounts receivable are
derived primarily from the United States P&C insurance industry.
F-13
<PAGE> 68
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development -- All research and development costs incurred
prior to the point at which 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 five 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 amortization of the capitalized costs over the remaining life of the
projects can be recovered through undiscounted future operating cash flows.
Cash and Cash Equivalents -- For the purposes of reporting cash flows, cash
and cash equivalents includes investments readily convertible to cash with
remaining maturities at date of purchase of three months or less.
Intangibles and Other Assets -- Goodwill is amortized over a period of 10
years using the straight-line method. Acquired software is amortized over a
period of 5 years using the straight-line method.
Accounts Payable -- Bank overdrafts totalling $265,407 are included in
accounts payable at June 30, 1997.
Financial Instruments -- Under SFAS No. 107, "Disclosure About Fair Value
of Financial Instruments," the Company's financial instruments include cash and
cash equivalents, accounts receivable, accounts payable, amount due to parent
and long-term debt. The Company believes that the carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, amount due to parent
and long-term debt are a reasonable estimate of their fair value because of the
short-term maturities of such instruments or, in the case of long-term debt,
because of interest rates available to the Company for similar obligations.
Loss Per Share -- Loss per share of common stock of the Company (the
"Common Stock") is computed by dividing net loss by the weighted average number
of common shares outstanding, including common equivalent shares. The weighted
average number of common shares outstanding and common equivalent shares were
7,658,195 in 1995, 1996 and for the six months ended June 30, 1996 (unaudited)
and 1997 after giving effect to the Common Stock dividends paid in May and June
1997. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D, stock options granted during the twelve months prior to the date of
the initial filing of the Company's Form S-1 Registration Statement have been
included in the calculation of common equivalent shares using the treasury stock
method, as if they were outstanding for all periods presented. The fair value of
the Common Stock was estimated based on management's estimate of the Company's
fair market value after giving effect to the acquisition of SDS in March 1997.
In February 1997, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 specifies the computation,
presentation and disclosure requirements for loss per share. The impact on loss
per share computed using SFAS No. 128 is immaterial, in comparison with net loss
per share disclosed in the Consolidated Statements of Operations.
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 those amounts.
Recently Issued Accounting Pronouncements -- SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is
F-14
<PAGE> 69
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition to the carrying amount of the asset. Adoption of SFAS No. 121 during
1996 had no material effect on the Company's financial position or results of
operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components, as defined. SFAS No. 130 requires that all items that
must be recognized under accounting standards as components of comprehensive
income be reported in a financial statement displayed with the same prominence
as other financial statements. In addition, SFAS No. 130 requires that an
enterprise classify items of other comprehensive income by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of a balance sheet. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Management believes that comprehensive
income, as defined by SFAS No. 130, will not differ materially from net loss as
reported in the Consolidated Statements of Operations.
In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires public
enterprises to report certain financial and descriptive information about
operating segments, as defined, in annual financial statements and selected
information in condensed financial statements for interim periods issued to
shareholders, if practical. SFAS No. 131 is effective for financial statements
for periods beginning after December 15, 1997.
Interim Financial Statements (Unaudited) -- The interim financial
statements presented as of June 30, 1996 and for the six months then ended are
unaudited. With respect to the unaudited interim financial statements, the
Company is of the opinion that all material adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the Company's
interim results of operations and financial condition, have been included. The
results of operations for the six months ended June 30, 1996 should not be
regarded as necessarily indicative of the results of operations for any future
period.
2. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
----- ---------- -----------
<S> <C> <C> <C>
Accounts receivable -- trade..................... $ -- $1,137,512 $6,597,437
Other............................................ -- 30,636 30,700
----- ---------- ----------
-- 1,168,148 6,628,137
Allowance for doubtful accounts.................. -- -- (211,814)
----- ---------- ----------
-- 1,168,148 6,416,323
Noncurrent -- accounts receivable................ -- -- 207,601
----- ---------- ----------
$ -- $1,168,148 $6,623,924
===== ========== ==========
</TABLE>
No allowance for doubtful accounts was considered necessary by management
as of December 31, 1996.
F-15
<PAGE> 70
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Computer equipment........................... $2,169,948 $ 4,084,887 $11,549,496
Office equipment............................. 65,343 335,685 2,032,086
Automobiles.................................. 103,108 68,867 231,186
Leasehold improvements....................... -- 2,464 152,174
---------- ----------- -----------
2,338,399 4,491,903 13,964,942
Accumulated depreciation and amortization.... (18,344) (1,272,011) (7,687,109)
---------- ----------- -----------
$2,320,055 $ 3,219,892 $ 6,277,833
========== =========== ===========
</TABLE>
Depreciation and amortization expense was $33,070 and $786,768 for 1995 and
1996, respectively, and $349,635 and $1,039,786 for the unaudited six months
ended June 30, 1996 and the six months ended June 30, 1997, respectively.
4. RESEARCH AND DEVELOPMENT
Research and development costs were approximately $680,000 for the six
months ended June 30, 1997.
5. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets consist of the following at June 30, 1997:
<TABLE>
<S> <C>
Goodwill, net of accumulated amortization of $289,630....... $ 8,989,110
Acquired software, net of accumulated amortization of
$366,000.................................................. 5,634,000
Cash surrender value of life insurance...................... 369,898
Other....................................................... 85,095
-----------
$15,078,103
===========
</TABLE>
F-16
<PAGE> 71
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTE PAYABLE AND LONG-TERM DEBT
NOTE PAYABLE -- On December 11, 1996, INSpire entered into a note agreement
with a bank. The note bears interest at prime (8.25% at December 31, 1996) and
was repaid on February 1, 1997.
LONG-TERM DEBT -- A summary of long-term debt at June 30, 1997 is as
follows:
<TABLE>
<S> <C>
Bank term note, with interest at prime (8.5% at June 30,
1997) or the London Interbank Offering Rate ("LIBOR")
(7.44% at June 30, 1997), collateralized by all assets of
the Company, payable in quarterly principal installments
of $312,500 plus interest through September 30, 2000, with
final payment due March 12, 2001.......................... $4,687,500
Note payable to bank under a $4 million line of credit which
expires on March 12, 1999, with interest at prime or
LIBOR, collateralized by all assets of the Company.
Borrowings are limited based on a borrowing base
calculation. Interest is due and payable quarterly along
with commitment fees of 0.25% of the unused balance....... 2,500,000
----------
7,187,500
Less current maturities..................................... 1,562,500
----------
$5,625,000
==========
</TABLE>
INSpire's bank term note payable and line of credit agreement, which was
amended July 18, 1997, contains certain restrictive covenants. These covenants
require that the Company meet certain requirements such as maintenance of a
minimum net worth, and restrict additional borrowings, dividends or other
distributions without prior consent of the bank. At June 30, 1997, the Company
was in compliance with the covenants in the note payable and line of credit
agreement.
The following represents the approximate future annual maturities of the
Company's long-term debt obligations at June 30, 1997:
<TABLE>
<S> <C>
1998........................................................ $1,562,500
1999........................................................ 3,750,000
2000........................................................ 1,250,000
2001........................................................ 625,000
----------
$7,187,500
==========
</TABLE>
7. INCOME TAXES
Federal income tax benefit (expense) consists of the following components:
<TABLE>
<CAPTION>
PERIOD SIX MONTHS
APRIL 28, 1995 ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected tax benefit (expense)........ $ 475,124 $201,388 $ 83,340 $(1,073,345)
Deferred income tax benefit
(expense)........................... (126,500) 62,500 57,500 2,785,000
--------- -------- -------- -----------
$ 348,624 $263,888 $140,840 $ 1,711,655
========= ======== ======== ===========
</TABLE>
F-17
<PAGE> 72
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of expected income tax benefit computed by applying the
federal corporate tax rate of 34% to loss before income taxes to the actual
income taxes is as follows:
<TABLE>
<CAPTION>
PERIOD SIX MONTHS
APRIL 28, 1995 ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ------------------------
1995 1996 1996 1997
-------------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected federal income tax benefit.... $ 547,605 $264,889 $140,840 $1,553,150
State income taxes, net of federal
income tax benefit................... -- -- -- (108,000)
Difference in book and tax basis of
assets contributed by parent......... (219,356) -- -- --
Goodwill............................... -- -- -- 98,000
Other.................................. 20,375 (1,001) -- 168,505
--------- -------- -------- ----------
$ 348,624 $263,888 $140,840 $1,711,655
========= ======== ======== ==========
</TABLE>
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,
--------------------- JUNE 30,
1995 1996 1997
--------- -------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable........................ $ -- $ -- $ 90,000
Nondeductible accrued expenses............. -- -- 1,183,000
--------- -------- -----------
1,273,000
Noncurrent:
Net operating loss carryforwards........... 102,000 210,000 --
Nondeductible accrued expenses............. -- -- 447,000
--------- -------- -----------
Total deferred income tax assets...... 102,000 210,000 1,720,000
--------- -------- -----------
Deferred income tax liabilities -- noncurrent:
Property and equipment........................ 228,500 274,000 570,000
Acquired software............................. -- -- 2,072,000
--------- -------- -----------
Total deferred income tax
liabilities......................... 228,500 274,000 2,642,000
--------- -------- -----------
Net deferred income tax liabilities............. $(126,500) $(64,000) $ (922,000)
========= ======== ===========
Represented on the consolidated balance sheet
as:
Current deferred income tax assets............ $ -- $ -- $ 1,273,000
Noncurrent deferred income tax liabilities.... (126,500) (64,000) (2,195,000)
--------- -------- -----------
$(126,500) $(64,000) $ (922,000)
========= ======== ===========
</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
asset 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 which the
F-18
<PAGE> 73
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences.
8. RELATED PARTY TRANSACTIONS
Effective July 1, 1995, the Company entered into an agreement with Millers
Mutual whereby management and administrative services were provided by Millers
Mutual for a monthly fee of $100,000. Effective January 1, 1996, the agreement
was amended to provide for a monthly fee of $200,000 plus a fixed percentage of
INSpire's pretax income, to be determined annually. Total fees in 1995 and 1996
were $600,000 and $3,100,000, respectively. Fees of $1,200,000 were incurred for
each of the six months ended June 30, 1996 (unaudited) and 1997. INSpire, in
turn, provided claims services to Millers Mutual and The Millers Casualty
Insurance Company ("Millers Casualty"), an indirect 99.4% owned subsidiary of
Millers Mutual, for fees ranging from 7.5% to 9.5% of net earned premium by line
of business, as defined in the agreement, excluding the premiums written through
Sun Coast General Insurance Agency, Inc. ("Sun Coast") for Millers Mutual.
Effective December 1, 1996, the agreement was amended to provide that the fees
would be reduced to range from 7.5% to 8.5% of earned premium by line of
business, as defined. The Sun Coast business is processed for a fee of 7.0% of
earned premium. Total outsourcing fees of $3,376,168 and $7,557,261 were earned
in 1995 and 1996, under the terms of the Company's agreements with Millers
Mutual and Millers Casualty. Outsourcing fees of $3,711,630 and $3,161,877 were
earned for the unaudited six months ended June 30, 1996 and the six months ended
June 30, 1997, respectively, under the terms of those agreements. Software and
software services revenues of approximately $442,000 were recognized by INSpire
for services provided to Millers Mutual and Millers Casualty for the six months
ended June 30, 1997. Beginning May 1996, the Company incurred rental expenses,
under a month-to-month agreement with Millers Mutual, totalling $207,121 for
1996 and $49,405 and $157,716 for the unaudited six months ended June 30, 1996
and the six months ended June 30, 1997, respectively. Prior to May 1, 1996, the
Company incurred no rental expense for office space provided by Millers Mutual.
Effective January 1, 1997, INSpire began providing data processing services to
Millers Mutual and Millers Casualty for a fee of 6% of net written premiums
which totalled $2,716,320 for the six months ended June 30, 1997.
9. EMPLOYEE BENEFIT PLANS
Substantially all of INSpire's employees are covered by a defined benefit
pension plan (the "Pension Plan") sponsored by Millers Mutual that provides
retirement death and disability benefits for full-time employees completing at
least 1,000 hours of service. INSpire makes 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 are
determined by consulting actuaries based upon future periodic payments,
including lump-sum distributions that are attributable under the Pension Plan's
provisions to the service employees have rendered. Benefits are based upon the
average of the employee's highest five consecutive years of compensation during
the ten years of credited service immediately preceding the valuation date. The
actuarial present value of accumulated plan benefits is that amount that results
from applying actuarial assumptions to adjust the accumulated plan benefits to
reflect the time value of money (through discounts for interest) and the
probability of payment (by means of decrements such as for death, disability,
withdrawal, or retirement) between the valuation date and the expected date of
payment. Total expense associated with the Pension Plan was $100,000 during
1995. No expense was incurred relative to the Pension Plan during 1996 or the
six months ended June 30, 1997.
INSpire participates in a defined contribution profit sharing plan
sponsored by Millers Mutual that covers substantially all of its employees (the
"Profit Sharing Plan"). Employees are not required to satisfy any age or service
requirements to become eligible to participate in the Profit Sharing Plan.
INSpire also participates in an executive incentive compensation plan covering
officers sponsored by Millers Mutual. Contributions to these plans are
discretionary and are authorized annually by the Board of Directors.
Participants in the Profit
F-19
<PAGE> 74
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sharing Plan are permitted to contribute 1% to 12% (not to exceed $9,240 in 1996
and 1995) of their annual compensation on a tax deferred basis. Vesting of
participants' interest in the profit sharing plan's contributions is based upon
length of service. Participants with five or more years of service are fully
vested. Total expense associated with the Profit Sharing Plan was approximately
$30,000 in 1995. There were no contributions made by the Company to the Profit
Sharing Plan in 1996 or for the six months ended June 30, 1997.
10. STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Option Plan") in March
1997, which provides for the grant of incentive and nonqualified options to
purchase up to 2,250,000 shares of Common Stock subject to certain adjustments
as described in the Option Plan. Stock options are issuable only to eligible
directors, officers and employees of 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 market value of the Common Stock,
as determined by the Board of Directors, 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
market value of the common stock at the date of grant. Of the options granted,
33% are immediately exercisable at the date of grant, 33% become exercisable one
year from the date of grant and the remainder become exercisable two years from
the date of grant. The Board of Directors has approved the grant of certain
additional options effective as of the date of the prospectus for INSpire's
initial public offering. Of such options, except for one officer of the Company,
20% are immediately exercisable at the date of grant and an additional 20% will
become exercisable on each of the first four anniversaries of such date. Of the
options of the officer referred to above, 33% are immediately exercisable at the
date of grant, 33% become exercisable one year from the date of grant and the
remainder become exercisable two years from the date of grant. Options may be
exercised only if the optionholder remains continuously associated with the
Company from the date of grant to the date of exercise, subject to certain
conditions as specified in the Option Plan. An option granted under the Option
Plan cannot be exercised later than ten years from the date of the grant. 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.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model using a risk-free interest rate of 6.1%
and an expected life of two years. No volatility factors of the expected market
price of the Company's Common Stock have been involved because the Company was a
private entity when the options were granted.
The following summarizes the stock option activity under the Option Plan
for the six months ended June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options granted during the six months ended June 30,
1997................................................. 840,248 $1.30
========= =====
Options available for grant............................ 1,409,752
=========
Exercisable at end of period........................... 277,281
=========
</TABLE>
The weighted average fair value of options granted during the six months ended
June 30, 1997 was $4.85 per share.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), and related interpretations in
accounting for the Option Plan, and, accordingly, compensation expense of
approximately $3,949,000 was recognized for the six months ended June 30, 1997
since the stock options granted under the terms of the Plan were at an exercise
price that was less than the
F-20
<PAGE> 75
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair market value assigned to the options at the date of grant. Had
the Company implemented SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's compensation expense would have decreased by approximately
$126,000 and the Company's pro forma net loss and net loss per common share,
considering the effects of implementing SFAS No. 123, net of tax effects, would
have been approximately $2.94 million and $0.38, respectively.
11. TRANSACTIONS WITH MAJOR CUSTOMER
In addition to the outsourcing revenues derived from Millers Mutual and
Millers Casualty (see Note 8), one customer accounted for approximately 21% and
18% of revenues for the year ended December 31, 1996 and the six months ended
June 30, 1997, respectively.
12. 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 five
years. Rentals on operating leases (exclusive of real estate taxes, insurance
and other expenses payable under the leases) amounted to approximately
$1,620,000 for the six months ended June 30, 1997. The Company incurred no
significant rental expense in 1995 and 1996. These leases generally 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>
1997........................................................ $ 1,460,250
1998........................................................ 2,837,500
1999........................................................ 2,370,250
2000........................................................ 1,006,000
2001........................................................ 885,800
2002........................................................ 485,000
Thereafter.................................................. 1,162,700
-----------
Total............................................. $10,207,500
===========
</TABLE>
Employment Agreements -- The Company has employment agreements with certain
key officers that provide for minimum annual salaries and benefits aggregating
approximately $1,055,000 and an annual bonus based on the Company's operating
performance.
Other -- The Company is involved in various legal proceedings arising in
the normal course of business. Management believes the outcome of these matters
will not materially affect the consolidated financial position, results of
operations or cash flows of the Company.
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.
13. SUBSEQUENT EVENTS
In July 1997, in response to an unsolicited offer by the previous owner of
Applied Quoting Systems, Inc. ("AQS"), the Company signed a nonbinding letter of
intent to sell the stock of such subsidiary for $2.5 million. For the period
from March 12, 1997 through June 30, 1997, AQS had revenues of approximately
$1,415,000, net income of approximately $65,000 and income taxes of
approximately $43,000. The income per common share from the separate operations
of AQS had no significant impact on the computation of the net loss per share of
INSpire for the period ended June 30, 1997. Total assets and total liabilities
of AQS at June 30, 1997 were approximately $898,000 and $337,000, respectively.
F-21
<PAGE> 76
INSPIRE INSURANCE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In July 1997, the Board of Directors approved INSpire's termination of the
Company's participation in the Pension Plan described at Note 9. Management
believes that the effects of termination of the Company's involvement in the
Pension Plan will be immaterial to INSpire's financial position, results of
operations and cash flows.
F-22
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
Board of Directors
Strategic Data Systems, Inc.
We have audited the accompanying consolidated balance sheets of Strategic
Data Systems, Inc. and subsidiary (the "Company") as of December 31, 1995, 1996
and March 11, 1997 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996 and the period January 1, 1997 through March 11, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 Strategic Data Systems, Inc.
and subsidiary as of December 31, 1995, 1996 and March 11, 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 and the period January 1, 1997 through March 11,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 18, 1997
F-23
<PAGE> 78
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 528,468 $ 1,515,495 $ 939,762
Accounts receivable -- net........................ 3,608,403 4,750,708 4,755,376
Deferred income taxes............................. 273,000 180,000 343,000
Prepaid expenses and other current assets......... 181,712 166,739 262,217
----------- ----------- -----------
Total current assets...................... 4,591,583 6,612,942 6,300,355
----------- ----------- -----------
Property and equipment, net......................... 3,155,318 2,897,819 3,403,477
Accounts receivable, excluding current portion...... 397,671 367,091 313,355
Software -- net..................................... 2,935,140 2,606,888 2,398,017
Goodwill -- net..................................... 612,106 505,702 484,536
Other assets........................................ 362,012 474,927 491,316
----------- ----------- -----------
TOTAL............................................... $12,053,830 $13,465,369 $13,391,056
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 432,686 $ 883,648 $ 914,318
Accrued payroll and compensation.................. 1,069,600 1,002,342 1,033,025
Other accrued expenses............................ 204,257 245,102 187,916
Warranty reserve.................................. 100,292 100,592 197,269
Customer deposits................................. 1,263,419 1,993,242 1,342,100
Income taxes payable.............................. 260,754 78,293 493,096
Current portion of long-term debt................. 688,793 524,699 438,713
----------- ----------- -----------
Total current liabilities................. 4,019,801 4,827,918 4,606,437
----------- ----------- -----------
Long-term debt, excluding current portion........... 2,028,074 1,883,381 1,879,393
Deferred compensation............................... 216,498 311,758 327,635
Deferred income taxes............................... 1,252,000 1,057,000 961,000
Commitments and contingencies (Note 9).............. -- -- --
SHAREHOLDERS' EQUITY:
Common stock, $5.00 stated value; 150,000 shares
authorized; 142,450, 143,950 and 143,950 shares
issued and outstanding in 1995, 1996 and 1997,
respectively................................... 712,250 719,750 719,750
Additional paid-in-capital........................ 1,705,094 1,847,594 1,847,594
Retained earnings................................. 3,057,357 3,755,212 3,986,491
----------- ----------- -----------
5,474,701 6,322,556 6,553,835
Less treasury stock (26,936 shares, at cost)...... 937,244 937,244 937,244
----------- ----------- -----------
4,537,457 5,385,312 5,616,591
----------- ----------- -----------
TOTAL............................................... $12,053,830 $13,465,369 $13,391,056
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE> 79
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
YEAR ENDED DECEMBER 31, ENDED JANUARY 1, 1997
--------------------------------------- JUNE 30, THROUGH
1994 1995 1996 1996 MARCH 11, 1997
----------- ----------- ----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Software services................. $ 8,991,115 $ 8,677,073 $ 9,251,491 $5,197,143 $2,384,658
Software.......................... 4,312,881 9,068,431 8,987,395 4,101,793 2,455,628
Hardware sales and commissions.... 2,245,134 2,399,537 3,680,048 611,091 463,108
Other............................. 455,396 1,016,234 1,744,727 462,320 108,912
----------- ----------- ----------- ---------- ----------
Total revenues............ 16,004,526 21,161,275 23,663,661 10,372,347 5,412,306
----------- ----------- ----------- ---------- ----------
EXPENSES:
Salaries and compensation......... 11,810,524 13,088,072 14,505,432 6,889,904 3,476,165
Depreciation and amortization..... 2,157,093 1,878,973 1,826,826 924,322 411,266
Cost of hardware sold............. 1,862,169 1,978,836 2,698,673 477,564 383,450
Occupancy costs................... 1,374,230 1,379,332 1,565,833 733,890 405,663
Other............................. 1,830,598 1,666,854 2,032,098 835,762 372,223
----------- ----------- ----------- ---------- ----------
Total expenses............ 19,034,614 19,992,067 22,628,862 9,861,442 5,048,767
----------- ----------- ----------- ---------- ----------
OPERATING INCOME (LOSS)............. (3,030,088) 1,169,208 1,034,799 510,905 363,539
OTHER INCOME (EXPENSE):
Interest income................... 158,297 160,959 284,387 120,149 56,987
Interest expense.................. (292,491) (240,481) (207,029) (101,230) (33,272)
Gain (loss) on sale of property
and equipment.................. 1,520 (2,403) 34,698 25
----------- ----------- ----------- ---------- ----------
Total other income
(expense)............... (132,674) (81,925) 112,056 18,919 23,740
----------- ----------- ----------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT)......................... (3,162,762) 1,087,283 1,146,855 529,824 387,279
INCOME TAXES (BENEFIT).............. (1,253,000) 429,000 449,000 233,000 156,000
----------- ----------- ----------- ---------- ----------
NET INCOME (LOSS)................... $(1,909,762) $ 658,283 $ 697,855 $ 296,824 $ 231,279
=========== =========== =========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-25
<PAGE> 80
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
PERIOD JANUARY 1, 1997 THROUGH MARCH 11, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
------------------ PAID-IN RETAINED ------------------ SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------- -------- ---------- ----------- ------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 139,594 $697,970 $1,526,110 $ 4,308,836 26,936 $(937,244) $ 5,595,672
Net loss........................... (1,909,762) (1,909,762)
Issuance of common stock........... 2,856 14,280 178,984 -- -- -- 193,264
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1994........... 142,450 712,250 1,705,094 2,399,074 26,936 (937,244) 3,879,174
Net income......................... -- -- -- 658,283 -- -- 658,283
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1995........... 142,450 712,250 1,705,094 3,057,357 26,936 (937,244) 4,537,457
Net income......................... 697,855 -- -- 697,855
Issuance of common stock........... 1,500 7,500 142,500 -- -- -- 150,000
------- -------- ---------- ----------- ------ --------- -----------
Balance, December 31, 1996........... 143,950 719,750 1,847,594 3,755,212 26,936 (937,244) 5,385,312
Net income......................... 231,279 231,279
------- -------- ---------- ----------- ------ --------- -----------
Balance, March 11, 1997.............. 143,950 $719,750 $1,847,594 $ 3,986,491 26,936 $(937,244) $ 5,616,591
======= ======== ========== =========== ====== ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE> 81
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
YEAR ENDED DECEMBER 31, ENDED JANUARY 1, 1997
--------------------------------------- JUNE 30, THROUGH MARCH 11,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................ $(1,909,762) $ 658,283 $ 697,855 $ 296,824 $ 231,279
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 2,157,093 1,878,973 1,826,826 924,322 411,266
Gain (loss) on sales of property and
equipment................................ (1,520) 2,403 (34,701) -- (25)
Deferred income taxes...................... (563,957) 437,768 (102,000) -- (259,000)
Provision for uncollectible accounts
receivable............................... 277,250 235,900 2,000 66,000 21,484
Change in operating assets and liabilities:
Accounts receivable...................... (950,268) 632,474 (1,113,726) 137,306 (344,416)
Income taxes recoverable................. (357,709) 357,709 -- -- --
Prepaid expenses and other current
assets................................. (31,517) (2,818) 14,973 (21,157) (95,478)
Other assets............................. (82,333) (107,624) (112,916) 67,999 (16,389)
Accounts payable......................... (912,410) 16,811 450,962 (15,939) 30,670
Accrued payroll and compensation......... 952,909 116,691 (67,258) (28,365) 30,683
Other accrued expenses................... 204,283 (26) 40,845 (6,216) (57,186)
Warranty reserve......................... 103,270 (2,978) 300 (260,630) 468,677
Customer deposits........................ 2,441,214 (2,329,121) 729,823 (91,344) (651,142)
Income taxes payable..................... (237,120) 260,754 (182,461) (313,700) 414,803
Deferred compensation.................... 71,771 82,855 95,260 38,106 15,877
----------- ----------- ----------- --------- ----------
Net cash provided by operating
activities........................... 1,161,194 2,238,054 2,245,782 793,206 201,103
----------- ----------- ----------- --------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of property and
equipment.................................. 1,520 -- 41,750 -- --
Purchases of property and equipment.......... (853,089) (362,546) (582,868) (265,371) (686,862)
Development of software...................... (1,353,750) (671,000) (558,850) (360,000)
----------- ----------- ----------- --------- ----------
Net cash used in investing
activities........................... (2,205,319) (1,033,546) (1,099,968) (625,371) (686,862)
----------- ----------- ----------- --------- ----------
FINANCING ACTIVITIES:
Net borrowings (repayment) from line of
credit..................................... 480,000 (480,000) -- -- --
Proceeds from issuance of long-term debt..... 500,000 -- 409,817 -- --
Repayments of long-term debt................. (407,004) (410,409) (718,604) (312,925) (89,974)
Proceeds (repayments) from policy loan
against cash surrender value of life
insurance policy........................... 75,000 (75,000) -- -- --
Issuance of common stock..................... 193,264 -- 150,000 -- --
----------- ----------- ----------- --------- ----------
Net cash provided by (used in)
financing activities................. 841,260 (965,409) (158,787) (312,925) (89,974)
----------- ----------- ----------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (202,865) 239,099 987,027 (145,090) (575,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD....................................... 492,234 289,369 528,468 528,468 1,515,495
----------- ----------- ----------- --------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..... $ 289,369 $ 528,468 $ 1,515,495 $ 383,378 $ 939,762
=========== =========== =========== ========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................ $ 293,000 $ 240,000 $ 208,000 $ 97,200 $ 33,300
=========== =========== =========== ========= ==========
Income taxes paid (refunded)................. $ (94,000) $ (627,000) $ 734,000 $ 320,000 $ --
=========== =========== =========== ========= ==========
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE> 82
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations -- Strategic Data Systems, Inc. ("SDS") and its
wholly-owned subsidiary, Applied Quoting Systems, Inc., develop and market
software and software services to the property and casualty ("P&C") insurance
industry. SDS's software includes 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. SDS's software services include
installation, customization, conversion and maintenance of these systems to meet
customer specifications. SDS also sells computer hardware and related equipment
and manages data centers. SDS sells its products directly to the customer. The
majority of sales are in North America.
Principles of Consolidation -- The consolidated financial statements
include the financial statements of SDS and its wholly-owned subsidiary. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Revenue Recognition -- Initial installations of software systems generally
include a one-time licensing fee and a contract for the installation and
customization of the system to meet the customer's specifications, which SDS
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. SDS recognizes the annual fee charged for maintenance of the
customer's system as revenue as hours are expended over the maintenance contract
period. Revenues from computer hardware and equipment sales are recognized when
SDS 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 related
revenue activities are recognized in the period in which they are determined.
An annual fee is charged for maintenance of the customer's system and is
recognized as revenue as hours are expended over the maintenance contract
period. Losses, if any, are recognized in the period in which they are
determined.
Computer hardware and equipment sales are recognized when SDS receives
notification that the equipment has been shipped by the manufacturer to the
customer.
Depreciation -- Depreciation of property and equipment is computed using
the straight-line method over their estimated useful lives. The range of the
useful lives of the various classes of assets is 3 to 31.5 years. Leasehold
improvements are amortized over the lease term or the estimated useful life,
whichever is less.
Income Taxes -- Federal income taxes have been computed in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," which requires income taxes to be accounted for under the liability
method. Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus deferred
income taxes related primarily to differences between the basis of property and
equipment due to depreciation differences and to the application of the purchase
method of accounting for financial statement purposes but not for tax purposes,
and nondeductible asset and liability reserves for tax purposes. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets are evaluated based on
the guidelines for realization and may be reduced by a valuation allowance.
Research and Development -- 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 and reported at the lower of
unamortized cost or net realizable value. Capitalized costs are amortized over
the expected service life of the
F-28
<PAGE> 83
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
related software, generally five to seven years using the straight-line method.
The cost and related accumulated amortization of projects are written off as
they become fully amortized.
SDS assesses the recoverability of these costs by determining whether the
amortization of the capitalized costs over the remaining life of the projects
can be recovered through undiscounted future operating cash flows.
Cash and Cash Equivalents -- For the purposes of reporting cash flows, cash
and cash equivalents includes investments readily convertible to cash with
remaining maturities at date of purchase of three months or less.
Financial Instruments -- SDS's financial instruments under Statement of
Financial Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," include cash and cash equivalents, accounts receivable,
accounts payable and long-term debt. SDS believes that the carrying amounts of
cash and cash equivalents, accounts receivable, accounts payable and long-term
debt are a reasonable estimate of their fair value because of the short-term
maturities of such instruments or, in the case of long-term debt, because of
interest rates available to SDS for similar obligations on such long-term debt.
Goodwill -- Goodwill represents the excess of the cost over the estimated
fair value of the net assets acquired and is amortized using the straight-line
method over a period of ten years.
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 those estimates.
Recently Issued Accounting Pronouncements -- Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Impairment is
evaluated by comparing future cash flows (undiscounted and without interest
charges) expected to result from the use of the asset and its eventual
disposition to the carrying amount of the asset.
Interim Financial Statements (Unaudited) -- The interim financial
statements presented as of June 30, 1996 and for the six months then ended are
unaudited. With respect to the unaudited interim financial statements, SDS is of
the opinion that all material adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of SDS's interim results of
operations and financial condition, have been included. The results of
operations for the six months ended June 30, 1996 should not be regarded as
necessarily indicative of the results of operations for any future period.
2. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Accounts receivable -- trade................... $3,991,355 $4,961,126 $4,987,278
Allowance for doubtful accounts................ (382,952) (210,418) (231,902)
---------- ---------- ----------
3,608,403 4,750,708 4,755,376
Noncurrent -- accounts receivable.............. 397,671 367,091 313,355
---------- ---------- ----------
$4,006,074 $5,117,799 $5,068,731
========== ========== ==========
</TABLE>
F-29
<PAGE> 84
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Land........................................... $ 150,000 $ 150,000 $ 150,000
Land improvements.............................. 217,276 217,276 217,276
Building....................................... 1,502,574 1,502,574 1,502,576
Computer equipment............................. 4,794,462 5,251,033 5,412,021
Office equipment............................... 1,361,324 1,426,933 1,922,545
Automobiles.................................... 303,326 126,784 126,784
Leasehold improvements......................... 80,154 80,154 105,322
---------- ---------- ----------
8,409,116 8,754,754 9,436,524
Accumulated depreciation and amortization...... (5,253,798) (5,856,935) (6,033,047)
---------- ---------- ----------
$3,155,318 $2,897,819 $3,403,477
========== ========== ==========
</TABLE>
Depreciation and amortization expense was approximately $1,146,000,
$1,030,000 and $833,000 in 1994, 1995 and 1996, respectively, and $432,000 and
$152,000 respectively for the unaudited six months ended June 30, 1996 and the
period from January 1, 1997 through March 11, 1997.
4. RESEARCH AND DEVELOPMENT
The total amount amortized for the capitalized computer software was
approximately $905,000, $742,000 and $887,000 in 1994, 1995 and 1996,
respectively. In addition, the total amortization of capitalized software was
$439,000 and $209,000, respectively, for the unaudited six-month period ended
June 30, 1996 and the period January 1, 1997 through March 11, 1997.
Research and development costs, including amortization expense, were
approximately $4,587,000, $3,581,000 and $3,783,000 in 1994, 1995 and 1996,
respectively.
In addition, total research and development costs were approximately
$1,900,000 and $474,000, respectively, for the unaudited six months ended June
30, 1996 and the period January 1, 1997 through March 11, 1997.
Software -- net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Software costs.............................. $ 4,435,161 $ 4,994,011 $ 4,994,011
Accumulated amortization.................... (1,500,021) (2,387,123) (2,595,994)
----------- ----------- -----------
$ 2,935,140 $ 2,606,888 $ 2,398,017
=========== =========== ===========
</TABLE>
5. GOODWILL
Goodwill -- net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Goodwill....................................... $1,078,508 $1,078,507 $1,078,507
Accumulated amortization....................... (466,402) (572,805) (593,971)
---------- ---------- ----------
$ 612,106 $ 505,702 $ 484,536
========== ========== ==========
</TABLE>
F-30
<PAGE> 85
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 11,
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage note payable, interest at 7.37%, due
in equal monthly installments of principal
and interest of $17,000, with the final
payment due on January 20, 2001.............. $1,748,223 $1,672,670 $1,658,563
Computer note payable, interest at 6.75%, due
in equal monthly installments of principal
and interest of $23,931, with the final
payment due on December 27, 1996............. 278,054 -- --
Computer note payable, interest at 8.35%, due
in equal monthly installments of principal
and interest of $18,700, with the final
payment due on September 21, 1997............ 291,665 124,997 97,219
Treasury stock purchase note payable, interest
at 7.25%, due in equal monthly installments
of principal and interest of $4,978, with the
final payment due on December 27, 1998....... 166,156 111,639 103,049
Computer note payable with total availability
of $600,000, interest payable at prime plus
1.0%, due in monthly installments of
principal sufficient to amortize the
outstanding balance over a 36-month period,
and interest with the final payment due on
January 31, 1999............................. 143,289 437,127 397,628
Second mortgage note payable, interest at 7.0%,
due in equal annual installments of principal
and interest of $34,097 with the final
payment due on November 1, 1998.............. 89,480 61,647 61,647
---------- ---------- ----------
2,716,867 2,408,080 2,318,106
Less current maturities........................ 688,793 524,699 438,713
---------- ---------- ----------
$2,028,074 $1,883,381 $1,879,393
========== ========== ==========
</TABLE>
The mortgage note payable is collateralized by real estate and
substantially all other assets of SDS. In 1995, the final payment for the
mortgage note payable was extended from January 20, 1996 to January 20, 2001.
The computer notes payable are collateralized by the computer equipment of SDS.
The treasury stock purchase note payable is collateralized by the accounts
receivable of SDS. The second mortgage note is collateralized by a purchase
money mortgage lien pursuant to the terms of the note.
F-31
<PAGE> 86
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the approximate future annual maturities for SDS's
long-term debt obligations:
<TABLE>
<CAPTION>
MARCH 11,
1997
----------
<S> <C>
Year Ended March 11:
1997...................................................... $ 438,713
1998...................................................... 380,107
1999...................................................... 96,726
2000...................................................... 104,101
2001...................................................... 1,298,459
----------
$2,318,106
==========
</TABLE>
7. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
YEAR ENDED DECEMBER 31, ENDED JANUARY 1, 1997
---------------------------------- JUNE 30, THROUGH MARCH 11,
1994 1995 1996 1996 1997
----------- -------- --------- ----------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal......................... $ (689,000) $ (9,000) $ 504,000 $212,000 $ 330,000
State........................... -- -- 47,000 21,000 85,000
----------- -------- --------- -------- ---------
Total current........... (689,000) (9,000) 551,000 233,000 415,000
----------- -------- --------- -------- ---------
Deferred:
Federal......................... (407,000) 372,000 (132,000) (15,000) $(221,000)
State........................... (157,000) 66,000 30,000 15,000 (38,000)
----------- -------- --------- -------- ---------
Total deferred.......... (564,000) 438,000 (102,000) -- (259,000)
----------- -------- --------- -------- ---------
$(1,253,000) $429,000 $ 449,000 $233,000 $ 156,000
=========== ======== ========= ======== =========
</TABLE>
A reconciliation of expected income taxes computed by applying the federal
corporate tax rate of 34% to income (loss) before income taxes to actual income
taxes is as follows:
<TABLE>
<CAPTION>
PERIOD
SIX MONTHS JANUARY 1, 1997
YEAR ENDED DECEMBER 31, ENDED THROUGH
--------------------------------------- JUNE 30, MARCH 11,
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected federal income
taxes (benefit)........... $(1,075,000) $ 370,000 $ 390,000 $180,000 $132,000
State income taxes, net of
federal income tax
(benefit)................. (156,000) 45,000 53,000 32,000 18,000
Goodwill.................... 36,000 36,000 36,000 18,000 7,000
Research and development
credit.................... (80,000) (47,000) (63,000) (25,000) --
Other, net.................. 22,000 25,000 33,000 28,000 (1,000)
----------- ----------- ----------- -------- --------
$(1,253,000) $ 429,000 $ 449,000 $233,000 $156,000
=========== =========== =========== ======== ========
</TABLE>
F-32
<PAGE> 87
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
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,
-------------------------- MARCH 11,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred income tax assets:
Current:
Accounts receivable..................... $ 150,000 $ 81,000 $ 90,000
Nondeductible accrued expenses.......... 123,000 99,000 253,000
----------- ----------- ----------
273,000 180,000 343,000
----------- ----------- ----------
Noncurrent:
Deferred compensation................... 85,000 122,000 128,000
Research and development credit
carryforward.......................... 32,000 -- --
Net operating loss carryforwards........ 61,000 -- --
----------- ----------- ----------
178,000 122,000 128,000
----------- ----------- ----------
Total deferred income tax assets... 451,000 302,000 471,000
----------- ----------- ----------
Deferred income tax liabilities --noncurrent:
Property and equipment..................... 185,000 162,000 154,000
Software costs............................. 1,245,000 1,017,000 935,000
----------- ----------- ----------
Total deferred income tax
liabilities...................... 1,430,000 1,179,000 1,089,000
----------- ----------- ----------
Net deferred income tax liabilities.......... $ (979,000) $ (877,000) $ (618,000)
=========== =========== ==========
Represented on the consolidated balance sheet
as:
Current deferred income tax assets......... $ 273,000 $ 180,000 $ 343,000
Noncurrent deferred income tax
liabilities............................. (1,252,000) (1,057,000) (961,000)
----------- ----------- ----------
$ (979,000) $ (877,000) $ (618,000)
=========== =========== ==========
</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 which the deferred tax assets are deductible, management believes it is
more likely than not SDS will realize the benefits of these deductible
differences.
8. EMPLOYEE BENEFIT PLANS
SDS sponsors a Profit-Sharing Plan qualified under Section 401(k) of the
Internal Revenue Code of 1986 covering employees who meet minimum service
requirements and who elect to participate. Participants' contributions are
voluntary. SDS made contributions of $103,750, $135,000 and $200,000 to the Plan
in 1994, 1995 and 1996, respectively. Total expenses recognized for the
unaudited six months ended June 30, 1996 were approximately $105,000. In
addition, contributions of $70,000 were recognized for the period from January
1, 1997 through March 11, 1997.
SDS has a supplemental retirement agreement with a key employee providing
for payments over twenty years commencing upon the earlier of retirement,
termination or death. The agreement has a vesting arrangement 20% per year
pursuant to which the employee will become fully vested in 1997 or the earlier
of
F-33
<PAGE> 88
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
permanent disability, death or change in control of SDS, as defined. SDS is the
owner and beneficiary of insurance policies to provide a portion of the funding
of this agreement. The total expense related to the agreement was approximately
$72,000, $83,000, and $95,000 for 1994, 1995 and 1996, respectively. Total
expense related to the agreement for the unaudited six-month period ended June
30, 1996 and the period January 1, 1997 through March 11, 1997 was $38,000 and
$16,000, respectively.
SDS has an incentive compensation plan for certain key employees.
Participants in the plan may receive cash payments or stock contingent upon SDS
exceeding certain pretax earnings levels over a rolling four-year earnout period
as determined by the Board of Directors. If a participant terminates employment
during an earnout period, the participant will not be entitled to any
compensation under the plan. If a change in control, as defined, occurs during
an earnout period, the earnout period is deemed to be completed and all payments
earned become due. No provision was required for the years ended December 31,
1994, 1995 and 1996 and the unaudited six-month period ended June 30, 1996 and
the period January 1, 1997 through March 11, 1997.
In 1996, SDS paid a bonus to a senior executive in an amount sufficient to
fund his purchase from SDS of 1,500 shares of SDS common stock at a price per
share of $100, plus an amount equal to the federal income taxes incurred by such
executive as a result of such bonus. The purchase was made by the executive
pursuant to a purchase right granted to him by SDS in 1989, entitling him to
purchase at fair market value, as determined by the Board of Directors, up to
4,200 shares of SDS common stock upon the attainment of certain performance
goals or discretionary approval by the Board of Directors. As of December 31,
1996, no shares remained available for purchase pursuant to this arrangement.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases -- SDS maintains noncancellable operating leases on
various office facilities, vehicles and computers. These leases generally
contain optional renewal provisions for one or more periods. Rental expense was
approximately $429,000, $451,000 and $530,000 in 1994, 1995 and 1996,
respectively, and $246,000 and $142,000 for the unaudited six months ended June
30, 1996 and the period January 1, 1997 through March 11, 1997.
The future annual minimum lease payments are as follows:
<TABLE>
<CAPTION>
MARCH 11,
1997
-----------
<S> <C>
Year Ending December 31:
1997...................................................... $ 456,000
1998...................................................... 564,000
1999...................................................... 364,000
2000...................................................... 280,000
2001...................................................... 285,000
Thereafter................................................ 153,000
----------
$2,102,000
==========
</TABLE>
The future annual minimum rental revenues to be received under
noncancellable subleases (with initial or remaining lease terms in excess of one
year) as of December 31, 1996 were $67,000 for 1997 and $81,000 for 1998.
Other -- In February 1997, the Philadelphia Contributionship for the
Insurance of Houses from Loss by Fire ("PCIHLF") filed a lawsuit (Civil Action
No. 97-CV-1262) against SDS in the United States District Court for the Eastern
District of Pennsylvania. The suit alleges that certain software systems that
SDS sold to PCIHLF in 1995 did not meet PCIHLF's specifications. PCIHLF claims
damages in excess of $1.3 million. In connection with the acquisition of SDS by
INSpire Insurance Solutions, Inc. ("INSpire"), INSpire and the former SDS
shareholders placed $1.5 million of the SDS purchase price in an escrow account
in respect of
F-34
<PAGE> 89
STRATEGIC DATA SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
this claim. INSpire has no recourse against the former SDS shareholders to the
extent that the aggregate amount of any judgment, settlement and expenses
exceeds the amount of the escrowed funds. SDS filed a counterclaim against
PCIHLF for $550,000 for amounts due under its agreements with PCIHLF. There can
be no assurance with respect to the outcome of this lawsuit.
SDS participates in a self-insurance program 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. SDS accrues the estimated liabilities for the ultimate costs of both
reported claims and incurred but not reported claims.
10. SUBSEQUENT EVENTS
On February 18, 1997, SDS's shareholders executed a definitive agreement
with INSpire whereby INSpire agreed to acquire SDS for an aggregate purchase
price of approximately $18.0 million plus assumed indebtedness of approximately
$650,000, subject to satisfactory resolution of certain matters. In addition,
INSpire and the former shareholders of SDS placed into escrow $1.0 million of
the purchase price in respect of certain contingent liabilities and $1.5 million
of the purchase price in escrow in respect of the PCIHLF lawsuit described in
Note 9. The transaction was consummated March 12, 1997.
On March 12, 1997, an affiliate of certain officers of SDS purchased the
land and improvements comprising SDS's administrative home office for the
assumption of debt in the amount of $1.8 million. Total gain from the sale was
approximately $225,000.
In March 1997, SDS terminated its supplemental retirement agreement with a
key employee, described in Note 8. SDS entered into an employment agreement with
such employee pursuant to which SDS will pay to such employee $40,000 per year
during the twenty-year period commencing January 1, 1999 and ending December 31,
2018.
In March 1997, SDS terminated its incentive compensation plan for certain
key employees, described in Note 8.
F-35
<PAGE> 90
(This page intentionally left blank)
<PAGE> 91
(This page intentionally left blank)
<PAGE> 92
(This page intentionally left blank)
<PAGE> 93
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
SDS Acquisition....................... 12
Use of Proceeds....................... 13
Dividend Policy....................... 13
Dilution.............................. 14
Capitalization........................ 15
Selected Consolidated Financial Data
of INSpire.......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of INSpire............ 18
Selected Consolidated Financial Data
of SDS.............................. 23
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of SDS................ 24
Business.............................. 26
Management............................ 35
Principal and Selling Shareholders.... 40
Certain Transactions.................. 40
Description of Capital Stock.......... 43
Shares Eligible for Future Sale....... 48
Underwriting.......................... 49
Legal Matters......................... 51
Experts............................... 51
Available Information................. 52
Financial Statements.................. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
4,500,000 SHARES
[INSPIRE INSURANCE SOLUTIONS, INC. LOGO]
COMMON STOCK
----------------------------
P R O S P E C T U S
----------------------------
RAYMOND JAMES
& ASSOCIATES, INC.
SOUTHWEST SECURITIES, INC.
, 1997
======================================================
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions are set forth in the following table. Millers Mutual, as a selling
security holder, and the Company shall pay the estimated expenses of issuance
and distribution in proportion to the respective number of shares sold by them
in the offering. Each amount, except for the SEC and NASD fees, is estimated.
<TABLE>
<S> <C>
SEC registration fees....................................... $ 17,250
NASD filing fees............................................ $ 7,500
Nasdaq National Market System application and listing
fees...................................................... $ 50,000
Transfer agents' and registrar's fees and expenses.......... $ 15,000
Printing and engraving expenses............................. $ 175,000
Legal fees and expenses..................................... $ 200,000
Accounting fees and expenses................................ $ 200,000
Representatives' advisory fee............................... $ 300,000
Blue sky fees and expenses.................................. $ 7,500
Miscellaneous............................................... $ 27,750
----------
Total.................................................. $1,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company, a Texas corporation, is empowered by Article 2.02-1 of the
Texas Business Corporation Act (the "TBCA"), subject to the procedures and
limitations stated therein, to indemnify certain persons, including any person
who was, is or is threatened to be made a named defendant or respondent in a
threatened, pending, or completed action, suit or proceeding because the person
is or was a director or officer, against judgments, penalties (including excise
and similar taxes), fines, settlements and reasonable expenses (including court
costs and attorneys' fees) actually incurred by the person in connection with
the threatened, pending, or completed action, suit or proceeding. The Company is
required by Article 2.02-1 to indemnify a director or officer against reasonable
expenses (including court costs and attorneys' fees) incurred by him in
connection with a threatened, pending, or completed action, suit or proceeding
in which he is a named defendant or respondent because he is or was a director
or officer if he has been wholly successful, on the merits or otherwise, in the
defense of the action, suit or proceeding. Article 2.02-1 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under the corporation's
articles of incorporation or any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise. The Restated Articles of Incorporation
and Bylaws of the Company provide for indemnification by the Company of its
directors and officers to the fullest extent permitted by the TBCA. In addition,
the Company has, pursuant to Article 1302-7.06 of the Texas Miscellaneous
Corporation Laws Act, provided in its Restated Articles of Incorporation that,
to the fullest extent permitted by the Texas Miscellaneous Corporation Laws Act,
a director of the Company shall not be liable to the Company or its shareholders
for monetary damages for an act or omission in a director's capacity as director
of the Company.
Furthermore, the Company has entered into individual indemnification
agreements with each director of the Company that contractually obligate the
Company to provide to the directors indemnification for liabilities they may
incur in the performance of their duties and insurance or self-insurance in lieu
thereof. The form of such indemnification agreements with a schedule of director
signatories is filed as Exhibit 10.11 hereto.
The Underwriting Agreement among the Company, the Selling Shareholder and
the Underwriters provides for the indemnification by the Underwriters of the
Company, certain of its officers and any controlling person against any
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
II-1
<PAGE> 95
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception in April 1995, the Company issued and sold the
following unregistered securities:
(1) The Company initially issued 100 shares of Common Stock to Millers
Mutual in April 1995 in exchange for $1,000. This issuance was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
(2) The Company declared and paid a stock dividend of 64,900 shares of
Common Stock in March 1997. The Company also declared and paid a stock
dividend of 6,935,000 shares of Common Stock in June 1997. These issuances
were not a "sale" under the Securities Act.
(3) From March 12, 1997 through May 2, 1997, the Company granted
nonstatutory options to purchase an aggregate of 840,248 shares of Common
Stock to employees and officers of the Company under its 1997 Stock Option
Plan at an exercise price of $1.30 per share. These options vest over a
period of time following their respective dates of grant. These issuances
were exempt from registration under Section 4(2) of, and Rule 701
promulgated under, the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger, dated as of February 18, 1997,
among the Company, SDS, and the Management Shareholders with
a list identifying omitted schedules.
2.2* Articles and Plan of Merger of SDS into the Company.
2.3* Non-Binding Letter of Intent, dated as of July 1, 1997,
among AQS and Samuel J. Fleager.
3.1 Restated Articles of Incorporation of the Company and
Articles of Amendment No. 1 thereto.
3.2 Amended and Restated Bylaws of the Company.
4.1** Specimen Certificate for shares of Common Stock of the
Company.
4.2 Form of Rights Agreement, by and between the Company and
U.S. Trust Company of Texas, N.A., dated as of July 30,
1997.
5 Form of Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Benefits Administration Contract, dated as of July 1, 1997,
by and between the Company and Millers Mutual.
10.2 Amended Service Contract, dated as of July 1, 1997, by and
among the Company, Millers Mutual, and Millers Casualty.
10.3 Amended Information Services Contract, dated as of July 1,
1997, by and among the Company, Millers Mutual, and Millers
Casualty.
10.4* Form of Agreement to Lease Office Space, effective as of May
1, 1996, by and between the Company and Millers Mutual.
10.5 Form of Sublease Agreement, effective as of January 1, 1997,
by and between the Company and Millers Mutual.
10.6* Claims Life Cycle Services Agreement, effective as of August
15, 1996, by and among the Company, Blanch Wholesale
Insurance Services, Inc., and Blanch Insurance Services,
Inc.
10.7 Amendment No. 1 to Claims Life Cycle Services Agreement,
dated as of June 27, 1997.
</TABLE>
II-2
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.8* Policy Life Cycle Services Agreement, effective as of August
15, 1996, by and among the Company, Blanch Wholesale
Insurance Services, Inc., and Blanch Insurance Services,
Inc.
10.9* Form of Amendment No. 1 to Policy Life Cycle Services
Agreement, effective as of August 15, 1996.
10.10* Administrative Services Agreement, effective as of March 12,
1996, by and among HOW Insurance Company, Home Warranty
Corporation, and Home Owners Warranty Corporation, In
Receivership, and the Company.
10.11* Form of Indemnification Agreement with a schedule of
director signatories.
10.12* Employment Agreement, effective as of July 1, 1997, by and
between the Company and F. George Dunham, III.
10.13* Employment Agreement, dated and effective as of March 12,
1997, by and between SDS and Stuart H. Warrington.
10.14* Employment Agreement, dated and effective as of March 12,
1997, by and between SDS and Robert K. Agazzi.
10.15* Building Lease, dated March 12, 1997, between SDS and
Riverview Building, LLC.
10.16* Loan Agreement, between the Company and NationsBank of
Texas, N.A., dated March 12, 1997.
10.17* Security Agreement, dated March 12, 1997, between the
Company and NationsBank of Texas, N.A.
10.18* Security Agreement, dated March 12, 1997, between SDS and
NationsBank.
10.19* Security Agreement, dated March 12, 1997, between AQS and
NationsBank.
10.20* Pledge Agreement, dated March 12, 1997, between the Company
and NationsBank of Texas, N.A.
10.21* Pledge Agreement dated March 12, 1997, between SDS and
NationsBank.
10.22* Guaranty of SDS dated March 12, 1997.
10.23* Guaranty of AQS dated March 12, 1997.
10.24* Form of License Agreement.
10.25* Form of System Support Agreement.
10.26* Form of Implementation Support Agreement.
10.27* Form of Accelerated Enhancement Plan Agreement.
10.28 Amended and Restated 1997 Stock Option Plan.
10.29* Form of Stock Option Agreement.
10.30** Consolidated Federal Income Tax Allocation Agreement
effective January 1, 1994 by and between the Company and
Millers Mutual, as amended.
10.31* Form of Policy Life Cycle Services Agreement, effective as
of May 1, 1997, by and between the Company and Millers
Casualty.
10.32* Form of Claims Life Cycle Services Agreement, effective as
of June 1, 1997, by and between the Company and Millers
Casualty.
10.33* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Terry G. Gaines.
10.34* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Ronald O. Lynn.
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.35* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Jeffrey W. Robinson.
10.36 Director Stock Option Plan.
10.37 Form of Director Stock Option Agreement.
10.38 Employee Stock Purchase Plan.
10.39 Claims Administration Agreement, effective April 1, 1997, by
and between the Company and the Specialty Personal Lines
Division of Millers Mutual.
11 Statement regarding Computation of Per Share Earnings.
16* Letter regarding Change in Certifying Accountant.
21* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP regarding INSpire report.
23.2 Consent of Deloitte & Touche LLP regarding SDS report.
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
24* Power of Attorney (included on signature page of the
Registration Statement as initially filed).
27 Financial Data Schedule (included in SEC-filed copy only).
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not required,
are not applicable, or the information is included in the Financial Statements
or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to Item 14 herein, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
II-4
<PAGE> 98
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 99
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Fort Worth, State of Texas, on July 30, 1997.
INSPIRE INSURANCE SOLUTIONS, INC.
By: /s/ F. GEORGE DUNHAM, III
----------------------------------
F. George Dunham, III, President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated on July 30, 1997:
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ F. GEORGE DUNHAM, III President, Chief Executive Officer (principal
- ----------------------------------------------------- executive officer) and Director
F. George Dunham, III
/s/ TERRY G. GAINES* Chief Financial Officer (principal financial
- ----------------------------------------------------- officer and principal accounting officer)
Terry G. Gaines
/s/ HARRY E. BARTEL* Director
- -----------------------------------------------------
Harry E. Bartel
/s/ R. EARL COX, III* Director
- -----------------------------------------------------
R. Earl Cox, III
/s/ MITCH S. WYNNE* Director
- -----------------------------------------------------
Mitch S. Wynne
</TABLE>
*By: /s/ F. GEORGE DUNHAM, III
--------------------------------------
F. George Dunham, III,
Attorney-in-Fact
II-6
<PAGE> 100
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Merger, dated as of February 18, 1997,
among the Company, SDS, and the Management Shareholders with
a list identifying omitted schedules.
2.2* Articles and Plan of Merger of SDS into the Company.
2.3* Non-Binding Letter of Intent, dated as of July 1, 1997,
among AQS and Samuel J. Fleager.
3.1 Restated Articles of Incorporation of the Company and
Articles of Amendment No. 1 thereto.
3.2 Amended and Restated Bylaws of the Company.
4.1** Specimen Certificate for shares of Common Stock of the
Company.
4.2 Form of Rights Agreement, by and between the Company and
U.S. Trust Company of Texas, N.A., dated as of July 30,
1997.
5 Form of Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 Benefits Administration Contract, dated as of July 1, 1997,
by and between the Company and Millers Mutual.
10.2 Amended Service Contract, dated as of July 1, 1997, by and
among the Company, Millers Mutual, and Millers Casualty.
10.3 Amended Information Services Contract, dated as of July 1,
1997, by and among the Company, Millers Mutual, and Millers
Casualty.
10.4* Form of Agreement to Lease Office Space, effective as of May
1, 1996, by and between the Company and Millers Mutual.
10.5 Form of Sublease Agreement, effective as of January 1, 1997,
by and between the Company and Millers Mutual.
10.6* Claims Life Cycle Services Agreement, effective as of August
15, 1996, by and among the Company, Blanch Wholesale
Insurance Services, Inc., and Blanch Insurance Services,
Inc.
10.7 Amendment No. 1 to Claims Life Cycle Services Agreement,
dated as of June 27, 1997.
10.8* Policy Life Cycle Services Agreement, effective as of August
15, 1996, by and among the Company, Blanch Wholesale
Insurance Services, Inc., and Blanch Insurance Services,
Inc.
10.9* Form of Amendment No. 1 to Policy Life Cycle Services
Agreement, effective as of August 15, 1996.
10.10* Administrative Services Agreement, effective as of March 12,
1996, by and among HOW Insurance Company, Home Warranty
Corporation, and Home Owners Warranty Corporation, In
Receivership, and the Company.
10.11* Form of Indemnification Agreement with a schedule of
director signatories.
10.12* Employment Agreement, effective as of July 1, 1997, by and
between the Company and F. George Dunham, III.
10.13* Employment Agreement, dated and effective as of March 12,
1997, by and between SDS and Stuart H. Warrington.
10.14* Employment Agreement, dated and effective as of March 12,
1997, by and between SDS and Robert K. Agazzi.
10.15* Building Lease, dated March 12, 1997, between SDS and
Riverview Building, LLC.
10.16* Loan Agreement, between the Company and NationsBank of
Texas, N.A., dated March 12, 1997.
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
------- --------
<C> <S>
10.17* Security Agreement, dated March 12, 1997, between the
Company and NationsBank of Texas, N.A.
10.18* Security Agreement, dated March 12, 1997, between SDS and
NationsBank.
10.19* Security Agreement, dated March 12, 1997, between AQS and
NationsBank.
10.20* Pledge Agreement, dated March 12, 1997, between the Company
and NationsBank of Texas, N.A.
10.21* Pledge Agreement dated March 12, 1997, between SDS and
NationsBank.
10.22* Guaranty of SDS dated March 12, 1997.
10.23* Guaranty of AQS dated March 12, 1997.
10.24* Form of License Agreement.
10.25* Form of System Support Agreement.
10.26* Form of Implementation Support Agreement.
10.27* Form of Accelerated Enhancement Plan Agreement.
10.28 Amended and Restated 1997 Stock Option Plan.
10.29* Form of Stock Option Agreement.
10.30** Consolidated Federal Income Tax Allocation Agreement
effective January 1, 1994 by and between the Company and
Millers Mutual, as amended.
10.31* Form of Policy Life Cycle Services Agreement, effective as
of May 1, 1997, by and between the Company and Millers
Casualty.
10.32* Form of Claims Life Cycle Services Agreement, effective as
of June 1, 1997, by and between the Company and Millers
Casualty.
10.33* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Terry G. Gaines.
10.34* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Ronald O. Lynn.
10.35* Form of Employment Agreement, effective as of July 1, 1997,
by and between the Company and Jeffrey W. Robinson.
10.36 Director Stock Option Plan.
10.37 Form of Director Stock Option Agreement.
10.38 Employee Stock Purchase Plan.
10.39 Claims Administration Agreement, effective April 1, 1997, by
and between the Company and the Specialty Personal Lines
Division of Millers Mutual.
11 Statement regarding Computation of Per Share Earnings.
16* Letter regarding Change in Certifying Accountant.
21* Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP regarding INSpire report.
23.2 Consent of Deloitte & Touche LLP regarding SDS report.
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
24* Power of Attorney (included on signature page of the
Registration Statement as initially filed).
27 Financial Data Schedule (included in SEC-filed copy only).
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment
<PAGE> 1
EXHIBIT 1.1
4,500,000 SHARES*
INSPIRE INSURANCE SOLUTIONS, INC.
COMMON STOCK
____________________
UNDERWRITING AGREEMENT
St. Petersburg, Florida August ___, 1997
Raymond James & Associates, Inc.
Southwest Securities, Inc.
As Representative of the Several Underwriters
c/o Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, Florida 33716
Ladies and Gentlemen:
INSpire Insurance Solutions, Inc., a Texas corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell an aggregate of 2,500,000 shares of common stock, $.01 par value
per share (the "Common Stock"), of the Company, to the several Underwriters
named in Schedule I hereto (the "Underwriters"), and that certain shareholder
of the Company named in Schedule II hereto (the "Selling Shareholder")
proposes, subject to the terms and conditions stated herein, to sell to the
Underwriters an aggregate of 2,000,000 shares of the Common Stock (the
aggregate of such 4,500,000 shares to be sold by the Company and the Selling
Shareholder hereinafter referred to as the "Firm Shares"). In addition, the
Company and the Selling Shareholder have agreed to sell to the Underwriters,
upon the terms and conditions set forth herein, up to an additional 675,000
shares (the "Additional Shares") of the Common Stock to cover over-allotments
by the Underwriters, if any. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares."
The Company and the Selling Shareholder wish to confirm as follows
their agreement with you and the other several Underwriters, on whose behalf
you are acting, in connection with the several purchases of the Shares from the
Company and the Selling Shareholder.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the
- -----------------
* Plus an additional 675,000 shares subject to the Underwriters' over-
allotment option.
<PAGE> 2
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement on Form S-1 (File No. 333-31173), including a prospectus
subject to completion, relating to the Shares. Such registration statement, as
amended at the time when it becomes effective and as thereafter amended by
post-effective amendment, is referred to in this Agreement as the "Registration
Statement." The prospectus in the form included in the Registration Statement,
or, if the prospectus included in the Registration Statement omits information
in reliance upon Rule 430A under the Act and such information is included in a
prospectus filed with the Commission pursuant to Rule 424(b) under the Act or
as part of a post-effective amendment to the Registration Statement after the
Registration Statement becomes effective, the prospectus as so filed, is
referred to in this Agreement as the "Prospectus." The prospectus subject to
completion in the form included in the Registration Statement at the time of
the initial filing of such Registration Statement with the Commission and as
such prospectus is amended from time to time until the date of the Prospectus
is referred to in this Agreement as the "Prepricing Prospectus."
2. AGREEMENTS TO SELL AND PURCHASE. The Company and the Selling
Shareholder (in accordance with Schedule II hereof) hereby agree, severally and
not jointly, to sell the Firm Shares to the Underwriters and, upon the basis of
the representations, warranties and agreements of the Company and the Selling
Shareholder herein contained and subject to all the terms and conditions set
forth herein, each Underwriter agrees, severally and not jointly, to purchase
from the Company and the Selling Shareholder at a purchase price of $____ per
Share (the "purchase price per Share"), the aggregate number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such
number of Firm Shares as adjusted pursuant to Section 11 hereof).
The Company and the Selling Shareholder hereby also agree, severally
and not jointly, to sell to the Underwriters, and upon the basis of the
representations, warranties and agreements of the Company and the Selling
Shareholder herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right for 30 days from the date
of the Prospectus to purchase from the Company and the Selling Shareholder up
to an aggregate of 675,000 Additional Shares (in accordance with Schedule II
hereof) at the purchase price per Share for the Firm Shares. The Additional
Shares may be purchased solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase the number of Additional Shares (subject to such
adjustments as you may determine to avoid fractional shares) which bears the
same proportion to the total number of Additional Shares to be purchased by the
Underwriters as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number of Firm Shares as adjusted
pursuant to Section 11 hereof) bears to the total number of Firm Shares. Upon
any election by the Underwriters to purchase less than all the Additional
Shares, the aggregate number of Additional Shares to be purchased from the
Company and the aggregate number of Additional Shares to be purchased from the
Selling Shareholder by all the Underwriters shall be in the same
2
<PAGE> 3
proportion as the maximum number of Additional Shares that may be purchased
from the Company and the maximum number of Additional Shares that may be
purchased from the Selling Shareholder as set forth on Schedule II.
3. TERMS OF PUBLIC OFFERING. The Company and the Selling
Shareholder have been advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable and initially to offer the Shares upon the terms set
forth in the Prospectus.
The Underwriters will offer a portion of the Firm Shares to be
purchased from the Company hereunder, not to exceed 175,000 Firm Shares in the
aggregate (the "Reserved Shares"), to directors, officers, employees and
designees specified to you by the Company in writing not less than ___ business
days prior to the time the Registration Statement becomes effective. The
Reserved Shares will be offered to such persons at a price equal to 96% of the
per share price to public set forth on the cover page of the Prospectus. The
persons to whom the Reserved Shares are offered shall in all cases be subject
to applicable laws, rules and regulations and to your reasonable approval. The
number of Firm Shares to be offered to the public shall be reduced by the
number of Reserved Shares offered as described in this paragraph, and any
Reserved Shares not purchased pursuant to such offers shall be offered by the
Underwriters to the public in accordance with this Agreement.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of the Firm Shares and payment therefor shall be made at the
offices of Raymond James & Associates, Inc., 880 Carillon Parkway, St.
Petersburg, Florida, at 10:00 a.m., St. Petersburg, Florida time, on ,
1997 (the "Closing Date"). The place of closing for the Firm Shares and the
Closing Date may be varied by agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the offices of Raymond
James & Associates, Inc., 880 Carillon Parkway, St. Petersburg, Florida, at
10:00 a.m., St. Petersburg, Florida time, on such date or dates (the
"Additional Closing Date") (which may be the same as the Closing Date but shall
in no event be earlier than the Closing Date nor earlier than three nor later
than ten business days after the giving of the notice hereinafter referred to)
as shall be specified in a written notice from you on behalf of the
Underwriters to the Company and the Selling Shareholder of the Underwriters'
determination to purchase a number, specified in such notice, of Additional
Shares. Such notice may be given to the Company and the Selling Shareholder by
you at any time within 30 days after the date of the Prospectus. The place of
closing for the Additional Shares and the Additional Closing Date may be varied
by agreement among you and the Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 1:00 p.m., St. Petersburg, Florida time, not
later than the second full business day preceding
3
<PAGE> 4
the Closing Date or the Additional Closing Date, as the case may be. Such
certificates shall be made available to you in St. Petersburg, Florida for
inspection and packaging not later than 9:30 a.m., St. Petersburg, Florida
time, on the business day immediately preceding the Closing Date or the
Additional Closing Date, as the case may be. The certificates evidencing the
Firm Shares and any Additional Shares to be purchased hereunder shall be
delivered to you on the Closing Date or the Additional Closing Date, as the
case may be, against payment of the purchase price therefor by certified or
official bank check or checks payable in New York Clearing House (next day)
funds.
5. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees with the several Underwriters as follows:
a. The Company will use its best efforts to cause the
Registration Statement to become effective and will advise you
promptly and, if requested by you, will confirm such advice in writing
(i) when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (ii) if Rule 430A
under the Act is employed, when the Prospectus has been timely filed
pursuant to Rule 424(b) under the Act, (iii) of any request by the
Commission for amendments or supplements to the Registration
Statement, any Prepricing Prospectus or the Prospectus or for
additional information, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement
or of the suspension of qualification of the Shares for offering or
sale in any jurisdiction or the initiation of any proceeding for such
purposes and (v) within the period of time referred to in the first
sentence of Section 5(e) below, of any change in the Company's
condition (financial or other), business, properties, net worth,
results of operations, or prospects or of any event that comes to the
attention of the Company that makes any statement made in the
Registration Statement or the Prospectus (as then amended or
supplemented) untrue in any material respect or that requires the
making of any additions thereto or changes therein in order to make
the statements therein not misleading in any material respect, or of
the necessity to amend or supplement the Prospectus (as then amended
or supplemented) to comply with the Act or any other law. If at any
time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make
every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
b. The Company will furnish to you, without charge, two
signed duplicate originals of the Registration Statement as originally
filed with the Commission and of each amendment thereto, including
financial statements and all exhibits thereto, and will also furnish
to you, without charge, such number of conformed copies of the
Registration Statement as originally filed and of each amendment
thereto as you may reasonably request.
c. The Company will not file any amendment to the
Registration Statement or make any amendment or supplement to the
Prospectus of which you shall not previously have been advised (with a
reasonable opportunity to review such amendment or supplement) or to
which you have reasonably objected after being so advised.
4
<PAGE> 5
d. Prior to the execution and delivery of this
Agreement, the Company has delivered or will deliver to you, without
charge, in such quantities as you have requested or may hereafter
reasonably request, copies of each form of the Prepricing Prospectus.
The Company consents to the use, in accordance with the provisions of
the Act and with the securities or Blue Sky laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by
dealers, prior to the date of the Prospectus, of each Prepricing
Prospectus so furnished by the Company.
e. As soon after the execution and delivery of this
Agreement as is practicable and thereafter from time to time for such
period as in the reasonable opinion of counsel for the Underwriters a
prospectus is required by the Act to be delivered in connection with
sales by any Underwriter or a dealer, and for so long a period as you
may reasonably request for the distribution of the Shares, the Company
will deliver to each Underwriter, without charge, as many copies of
the Prospectus (and of any amendment or supplement thereto) as they
may reasonably request. The Company consents to the use of the
Prospectus (and of any amendment or supplement thereto) in accordance
with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by all dealers to whom Shares may be sold,
both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the
Act to be delivered in connection with sales by any Underwriter or
dealer. If at any time during the nine-month period referred to in
Section 10(a)(3) of the Act any event shall occur that in the judgment
of the Company or in the opinion of counsel for the Underwriters is
required to be set forth in the Prospectus (as then amended or
supplemented) or should be set forth therein in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the
Company will forthwith prepare and, subject to Sections 5(a) and 5(c)
hereof, file with the Commission and use its best efforts to cause to
become effective as promptly as possible an appropriate supplement or
amendment thereto, and will furnish to each Underwriter who has
previously requested Prospectuses, without charge, a reasonable number
of copies thereof.
f. The Company will cooperate with you and counsel for
the Underwriters in connection with the registration or qualification
of the Shares for offering and sale by the several Underwriters and by
dealers under the securities or Blue Sky laws of such jurisdictions as
you may reasonably designate and will file such consents to service of
process or other documents as may be reasonably necessary in order to
effect such registration or qualification; provided that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action
which would subject it to service of process in suits, other than
those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
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<PAGE> 6
g. The Company will make generally available to its
security holders a consolidated earnings statement (in form complying
with the Provisions of Rule 158), which need not be audited, covering
a twelve- month period commencing after the effective date of the
Registration Statement and ending not later than 15 months thereafter,
as soon as practicable after the end of such period, which
consolidated earnings statement shall satisfy the provisions of
Section 11(a) of the Act.
h. During the period ending five years from the date
hereof, the Company will furnish to you and, upon your request, to
each of the other Underwriters, (i) as soon as available, a copy of
each proxy statement, quarterly or annual report or other report of
the Company mailed to shareholders or filed with the Commission, the
NASD or any securities exchange and (ii) from time to time such other
information concerning the Company as you may reasonably request.
i. If this Agreement shall terminate or shall be
terminated after execution pursuant to any provision hereof (except
pursuant to a termination under Section 11 hereof) or if this
Agreement shall be terminated by the Underwriters because of any
inability, failure or refusal on the part of the Company or the
Selling Shareholder to perform any agreement herein or to comply with
any of the terms or provisions hereof, the Company agrees to reimburse
you and the other Underwriters for all out-of-pocket expenses
(including travel expenses and fees and expenses of counsel for the
Underwriters but excluding wages and salaries paid by you) reasonably
incurred by you in connection herewith.
j. The Company will apply the net proceeds from the sale
of the Shares to be sold by it hereunder for the purposes set forth
under "Use of Proceeds" in the Prospectus.
k. If Rule 430A under the Act is employed, the Company
will timely file the Prospectus pursuant to Rule 424(b) under the Act.
l. For a period of 180 days after commencement of the
public offering of the Shares by the Underwriters, without the prior
written consent of Raymond James & Associates, Inc., the Company will
not directly or indirectly issue, sell, offer to sell, contract to
sell or otherwise dispose of or transfer any shares of Common Stock or
rights to purchase shares of Common Stock, except to the Underwriters
pursuant to this Agreement; provided, however, that the Company may
(i) issue to participants in its Employee Stock Purchase Plan, as
currently in effect, shares of Common Stock pursuant to the terms of
such Employee Stock Purchase Plan, (ii) issue to participants in its
Director Stock Option Plan, as currently in effect, shares of Common
Stock upon the exercise of currently outstanding options that are or
that become exercisable during such 180-day period and may grant
additional options under the 1997 Stock Option Plan and (iii) issue to
participants in its Amended and Restated 1997 Stock Option Plan, as
currently in effect, shares of Common Stock upon the exercise of
currently outstanding options that are or that become exercisable
during such 180-day period and may grant
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<PAGE> 7
additional options under the 1997 Stock Option Plan, provided that
without the prior written consent of Raymond James & Associates, Inc.,
such additional options shall not be exercisable during such 180-day
period.
m. Prior to the Closing Date or the Additional Closing
Date, as the case may be, the Company will furnish to you, as promptly
as possible, copies of any unaudited interim consolidated financial
statements of the Company and its subsidiaries for any quarterly
period subsequent to the periods covered by the financial statements
appearing in the Prospectus.
n. The Company will comply with all provisions of any
undertakings contained in the Registration Statement.
o. The Company will not at any time, directly or
indirectly take any action designed, or which might reasonably be
expected to cause or result in, or which will constitute,
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
p. The Company will use its best efforts to qualify or
register its Common Stock for sale in non- issuer transactions under
(or obtain exemptions from the application of) the Blue Sky laws of
each state where necessary to permit market making transactions and
secondary trading, and will comply with such Blue Sky laws and will
continue such qualifications, registrations and exemptions in effect
for a period of five years after the date hereof.
q. The Company will timely file with the National
Association of Securities Dealers Automated Quotation National Market
System ("Nasdaq/NMS") all documents and notices required by the
Nasdaq/NMS of companies that have issued securities that are traded in
the over-the-counter market and quotations for which are reported by
the Nasdaq/NMS.
r. The Company will file with the Commission such
reports on Form SR as may be required pursuant to Rule 463 under the
Act.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each Underwriter on the date hereof, and shall be
deemed to represent and warrant to each Underwriter on the Closing Date and the
Additional Closing Date, that:
a. Each Prepricing Prospectus included as part of the
Registration Statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 424(a) under the Act,
complied when so filed in all material respects with the provisions of
the Act, except that this representation and warranty does not apply
to statements in or omissions from such Prepricing Prospectus (or any
amendment or supplement thereto) made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any
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<PAGE> 8
Underwriter through you expressly for use therein. The Commission has
not issued any order preventing or suspending the use of any
Prepricing Prospectus.
b. The Registration Statement, in the form in which it
becomes effective and also in such form as it may be when any
post-effective amendment thereto shall become effective, and the
Prospectus, and any supplement or amendment thereto when filed with
the Commission under Rule 424(b) under the Act, will comply in all
material respects with the provisions of the Act and will not at any
such times contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, except that this
representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus (or any
amendment or supplement thereto) made in reliance upon and in
conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you
expressly for use therein.
c. The capitalization of the Company is and will be as
set forth in the Prospectus as of the date set forth therein. All the
outstanding shares of Common Stock of the Company have been, and as of
the Closing Date will be, duly authorized and validly issued, are
fully paid and nonassessable and are free of any preemptive or similar
rights; the Shares to be issued and sold to the Underwriters by the
Company hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance
with the terms hereof, will be validly issued, fully paid and
nonassessable and free of any preemptive or similar rights; the
capital stock of the Company conforms to the description thereof in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto); and the delivery of certificates for the Shares
pursuant to the terms of this Agreement and payment for the Shares
will pass valid title to the Shares, free and clear of any claim,
encumbrance or defect in title to the several Underwriters purchasing
the Shares in good faith and without notice of any lien, claim or
encumbrance. The certificates for the Shares are in valid and
sufficient form.
d. The Company is a corporation duly organized and
validly existing in good standing under the laws of the State of Texas
with full power and authority to own, lease and operate its properties
and to conduct its business as presently conducted and as described in
the Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place
where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure
to so register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net worth,
results of operations or prospects of the Company and the Subsidiaries
(as hereinafter defined) taken as a whole.
e. Except for the subsidiaries listed in Exhibit 21 to
the Registration Statement, the Company does not own a material
interest in or control, directly or
8
<PAGE> 9
indirectly, any other corporation, partnership, joint venture,
association, trust or other business organization. Each of the
subsidiaries described on Exhibit 21 to the Registration Statement
(collectively, the "Subsidiaries") is a corporation duly organized and
validly existing under the laws of the state of its incorporation set
forth on such Exhibit 21 with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
presently conducted and as described in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), and is duly
registered and qualified to conduct its business and is in good
standing in each other jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration
or qualification, except where the failure to so register or qualify
does not have a material adverse effect on the condition (financial or
other), business, properties, net worth, results of operations or
prospects of the Company and the Subsidiaries taken as a whole. All
of the outstanding shares of capital stock of each of the Subsidiaries
has been duly authorized and validly issued, are fully paid and
nonassessable, and are owned by the Company directly or indirectly
through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance.
f. There are no legal or governmental proceedings
pending or, to the best knowledge of the Company, threatened, against
the Company or any of the Subsidiaries, or to which the Company or any
of the Subsidiaries, or to which any of their respective properties,
is subject, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto)
but are not described as required. Except as described in the
Prospectus, there is no action, suit, inquiry, proceeding, or
investigation by or before any court or governmental or other
regulatory or administrative agency or commission pending or, to the
best knowledge of the Company, threatened, against or involving the
Company or any Subsidiary, which might individually or in the
aggregate prevent or adversely affect the transactions contemplated by
this Agreement or result in a material adverse change in the condition
(financial or otherwise), properties, business, net worth, results of
operations or prospects of the Company or any of its Subsidiaries, nor
is there any basis for any such action, suit, inquiry, proceeding, or
investigation. There are no agreements, contracts, indentures, leases
or other instruments that are required to be described in the
Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act. All
such contracts to which the Company or any Subsidiary is a party have
been duly authorized, executed and delivered by the Company or such
Subsidiary, constitute valid and binding agreements of the Company or
such Subsidiary and are enforceable against the Company or such
Subsidiary in accordance with the terms thereof, and neither the
Company nor any Subsidiary, nor to the best of the Company's
knowledge, any other party, is in breach of or default under any of
such contracts.
g. Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or bylaws,
or other organizational documents, or of any law, ordinance,
administrative or governmental rule or regulation applicable to
9
<PAGE> 10
the Company or any of the Subsidiaries or of any decree of any court
or governmental agency or body having jurisdiction over the Company or
any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in (i)
any bond, debenture, note or any other evidence of indebtedness, or
(ii) any material agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by which
any of them or any of their respective properties may be bound; and
there does not exist any state of facts which constitutes an event of
default on the part of the Company or any Subsidiary as defined in
such documents or which, with notice or lapse of time or both, would
constitute such an event of default.
h. The execution and delivery of this Agreement and the
performance by the Company of its obligations under this Agreement
have been duly and validly authorized by the Company, and this
Agreement has been duly executed and delivered by the Company and
constitutes the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms.
i. Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company
nor the consummation by the Company of the transactions contemplated
hereby (i) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official
(except such as may be required for the registration of the Shares
under the Act and compliance with the securities or Blue Sky laws of
various jurisdictions, all of which will be, or have been, effected in
accordance with this Agreement) or conflicts with or will conflict
with or constitutes or will constitute a breach of, or a default
under, the certificate or articles of incorporation or bylaws, or
other organizational documents, of the Company or any of the
Subsidiaries or (ii) conflicts or will conflict with or constitutes a
breach of, or a default under, any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their respective properties
may be bound, or violates any statute, law, regulation or filing or
judgment, injunction, order or decree applicable to the Company or any
of the Subsidiaries or any of their respective properties, or results
in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of the Subsidiaries
pursuant to the terms of any agreement or instrument to which any of
them is a party or by which any of them may be bound or to which any
of the property or assets of any of them is subject.
j. Except as described in the Prospectus, the Company
does not have outstanding and at the Closing Date (and the Additional
Closing Date, if applicable) will not have outstanding any options to
purchase, or any warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue
or sell, any shares of Common Stock or any such options, warrants or
convertible securities or obligations. No holder of securities of the
Company has rights to the registration of
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<PAGE> 11
any securities of the Company because of the filing of the
Registration Statement that have not been satisfied or heretofore
waived in writing.
k. Deloitte & Touche LLP, the certified public
accountants who have certified the financial statements filed as part
of the Registration Statement and the Prospectus (and any amendment or
supplement thereto), are independent public accountants as required by
the Act.
l. The financial statements, together with related
schedules and notes, included in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly
the consolidated financial position, results of operations and changes
in financial position of the Company and the Subsidiaries on the basis
stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and
related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the
other financial and statistical information and data set forth in the
Registration Statement and Prospectus (and any amendment or supplement
thereto) is accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the
Company. No other financial statements or schedules are required to
be included in the Registration Statement.
m. Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to
the respective dates as of which such information is given in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto), (i) the Company and its Subsidiaries have not
incurred any material liabilities or obligations, indirect, direct or
contingent, or other transaction which is not in the ordinary course
of business or which could result in a material reduction in the
future earnings of the Company and its Subsidiaries; (ii) the Company
and its Subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire,
flood, windstorm, accident or other calamity, whether or not covered
by insurance; (iii) the Company has not paid or declared any dividends
or other distributions with respect to its capital stock and the
Company and its Subsidiaries are not in default in the payment of
principal or interest on any outstanding debt obligations; (iv) there
has not been any change in the capital stock (other than upon the sale
of the Shares hereunder) and upon the exercise of options and warrants
described in the Prospectus or indebtedness material to the Company
and its Subsidiaries (other than in the ordinary course of business);
and (v) there has not been any material adverse change, or any
development involving or which may reasonably be expected to involve a
potential future material adverse change, in the condition (financial
or otherwise), business, properties, net worth, results of operations
or prospects of the Company and its Subsidiaries.
n. The Company and each of the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free
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<PAGE> 12
and clear of all liens, claims, security interests or other
encumbrances except (i) such as are described in the financial
statements included in, or elsewhere in, the Prospectus or (ii) such
as are not materially burdensome and do not interfere in any material
respect with the use of the property or the conduct of the business of
the Company and the Subsidiaries taken as a whole. The property (real
and personal) held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable
leases with only such exceptions as in the aggregate are not
materially burdensome and do not interfere in any material respect
with the conduct of the business of the Company and the Subsidiaries
taken as a whole.
o. The Company has not distributed and will not
distribute any offering material in connection with the offering and
sale of the Shares other than the Prepricing Prospectus, the
Prospectus, or other offering material, if any, as permitted by the
Act and the rules and regulations enacted thereunder (the "Rules and
Regulations").
p. The Company has not taken, directly or indirectly,
any action which is designed, or which might reasonably be expected to
cause or result in or constitute, under the Act or otherwise,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.
q. The Company is not an "investment company," an
"affiliated person" of, or "promoter" or "principal underwriter" for
an investment company within the meaning of the Investment Company Act
of 1940, as amended.
r. The Company and each of the Subsidiaries have all
permits, licenses, franchises, approvals, consents and authorizations
of governmental or regulatory authorities (hereinafter "permit" or
"permits") as are necessary to own their respective properties and to
conduct their respective businesses in the manner described in the
Prospectus, subject to such qualifications as may be set forth in the
Prospectus, except where the failure to have obtained any such permit
has not and will not have a material adverse effect upon the condition
(financial or other), properties, business, net worth, results of
operations or prospects of the Company and the Subsidiaries taken as a
whole; the Company and each of the Subsidiaries have fulfilled and
performed all of their material obligations with respect to each such
permit and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination of any such
permit or result in any other material impairment of the rights of the
holder of any such permit, subject in each case to such qualification
as may be set forth in the Prospectus; and, except as described in the
Prospectus, such permits contain no restrictions that are materially
burdensome to the Company or any of the Subsidiaries.
s. The Company and the Subsidiaries have complied and
will comply in all material respects with wage and hour determinations
issued by the U.S. Department of Labor under the Service Contract Act
of 1965 and the Fair Labor Standards Act in paying its employees'
salaries, fringe benefits, and other compensation for the performance
of work or other duties in connection with contracts with the U.S.
12
<PAGE> 13
government. The Company and the Subsidiaries have complied and will
comply in all material respects with the terms of all certifications
and representations made to the U.S. government in connection with the
submission of any bid or proposal or any contract. The Company and
the Subsidiaries have complied and will comply in all material
respects with their obligations under their agreements and contracts
with the U.S. government and agencies thereof.
t. The Company and the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorizations; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
u. Neither the Company nor any Subsidiary has, directly
or indirectly, at any time during the past five years (i) made any
unlawful contribution to any candidate for political office, or failed
to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal, state or foreign governmental official, or
other person charged with similar public or quasi-public duties, other
than payments required or permitted by the laws of the United States
or any jurisdiction thereof or applicable foreign jurisdictions.
v. The Company and the Subsidiaries have obtained all
material permits, licenses and other authorizations, if any, which are
required under federal, state, local and foreign statutes, ordinances
and other laws relating to pollution or protection of the environment
("Environmental Laws"). The Company and the Subsidiaries are in
material compliance with all terms and conditions of all required
permits, licenses and authorizations, and are also in material
compliance with all other limitations, restrictions, conditions,
standards, prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws. There is no pending
or, to the best knowledge of the Company, threatened civil or criminal
litigation, notice of violation, or administrative proceeding relating
in any way to the Environmental Laws involving the Company or the
Subsidiaries. There have not been and there are not any past, present
or foreseeable future events, conditions, circumstances, activities,
practices, incidents, actions or plans relating to the Company or the
Subsidiaries that may interfere with or prevent continued compliance
with, or that may give rise to any common law or legal liability, or
otherwise form the basis of any claim, action, demand, suit,
proceeding, hearing, study or investigation under the Environmental
Laws, except where the same does not have a material adverse effect on
the condition (financial or other), business, properties, net worth,
results of operations or prospects of the Company and the Subsidiaries
taken as a whole.
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<PAGE> 14
w. The Company and the Subsidiaries own and have full
right, title and interest in and to, or have valid licenses to use,
all the patents, trade names, trademarks service marks and copyrights
necessary for the present and currently planned conduct of the
business of the Company or the Subsidiaries, and, except as described
in the Prospectus, neither the Company nor any Subsidiary has created
any lien or encumbrance on, or granted any right or license with
respect to, any such patent, trade name, trademark, service mark or
copyright. There is no claim pending against the Company or any
Subsidiary with respect to any patent, trade name, trademark, service
mark or copyright, and neither the Company nor any Subsidiary has
received notice that any patent, trade name, trademark, service mark
or copyright that it uses or has used in the conduct of its business
infringes upon or conflicts with the rights of any third party. To
the best knowledge of the Company, there is no infringement on the
intellectual property rights of the Company or the Subsidiaries by
others, and none of the activities engaged in by the Company or any
Subsidiary infringes or conflicts with the intellectual property
rights of others, in a manner that could adversely affect the
condition (financial or other), business, properties, net worth,
results of operations or prospects of the Company and the
Subsidiaries, taken as a whole.
x. All offers and sales of the Company's and its
Subsidiaries' capital stock prior to the date hereof were made in
compliance with the Act and all other applicable state and federal
laws or regulations.
y. The Shares have been duly authorized for trading on
the Nasdaq/NMS subject to notice of issuance with respect to the
Shares being offered by the Company.
z. All federal, state and local tax returns required to
be filed by or on behalf of the Company or any Subsidiary with respect
to all periods ended prior to the date of this Agreement have been
filed (or are the subject of valid extension) with the appropriate
federal, state and local authorities and all such tax returns, as
filed, are accurate in all material respects. All federal, state and
local taxes (including estimated tax payments) required to be shown on
all such tax returns or claimed to be due from or with respect to the
business of the Company or any Subsidiary have been paid or reflected
as a liability on the financial statements of the Company and the
Subsidiaries for appropriate periods, except for those taxes or claims
therefor which are being contested by the Company in good faith and
for which appropriate reserves are reflected in the Company's
financial statements. All deficiencies asserted as a result of any
federal, state or local tax audits have been paid or finally settled
and no issue has been raised in any such audit which, by application
of the same or similar principles, reasonably could be expected to
result in a proposed deficiency for any other period not so audited.
No state of facts exists or has existed which would constitute grounds
for the assessment of any tax liability with respect to the periods
which have not been audited by appropriate federal, state or local
authorities. There are no outstanding agreements or waivers extending
the statutory period of limitation applicable to any federal, state or
local tax return for any period. On the Closing Date, and Additional
Closing Date, if any, all stock transfer and other taxes which are
required to be paid in connection with
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<PAGE> 15
the sale of the shares to be sold by the Company to the Underwriters
will have been fully paid by the Company and all laws imposing such
taxes will have been complied with.
aa. Except as set forth in the Prospectus, there are no
transactions with affiliates, as defined in Rule 405 promulgated under
the Act, which are required by the Act and the applicable rules and
regulations thereunder to be disclosed in the Registration Statement.
ab. The Company has procured the written agreement of the
Selling Shareholder, and each officer and director of the Company who
owns shares of Common Stock or options to acquire shares of Common
Stock of the Company as set forth in the Prospectus not to sell, offer
to sell or contract to sell, or otherwise dispose of or transfer,
directly or indirectly, any shares of Common Stock owned or
controlled, or hereafter acquired, by such persons, or any rights to
purchase any of such shares of Common Stock, for a period of 180 days
after the commencement of the public offering of the Shares by the
Underwriters without the prior written consent of Raymond James &
Associates, Inc.
ac. Neither the Company nor any of its Subsidiaries (i)
conduct business or have affiliates which conduct business in or with
Cuba, (ii) plan to commence doing business in or with Cuba after the
effective date of the Registration Statement or (iii) are required by
Florida law to report a material change in information previously
reported to the State of Florida regarding business conducted in or
with Cuba.
ad. Neither the sale of the Shares nor any action taken
by the Company or the Selling Shareholder in connection therewith
violates any provision of state insurance laws or regulations.
ae. No officer, director, nominee for director or
shareholder of the Company has any direct or indirect affiliation or
association with any member of the National Association of Securities
Dealers, Inc. (the "NASD").
7. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER.
The Selling Shareholder hereby represents and warrants to each Underwriter on
the date hereof (except as otherwise set forth herein), and shall be deemed to
represent and warrant to each Underwriter on the Closing Date and the
Additional Closing Date, that:
a. All consents, approvals, authorizations and orders
necessary for the execution and delivery by the Selling Shareholder of
this Agreement and the Power of Attorney (the "Power of Attorney")
referred to in the last paragraph of this Section 7, and for the sale
and delivery of the Shares to be sold by the Selling Shareholder
hereunder, have been obtained; and the Selling Shareholder has full
right, power and authority to enter into this Agreement and the Power
of Attorney, and to sell, assign, transfer and deliver the Shares to
be sold by the Selling Shareholder hereunder.
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<PAGE> 16
b. This Agreement and the Power of Attorney have been
duly authorized, executed and delivered by the Selling Shareholder and
this Agreement and the Power of Attorney constitute the valid and
binding agreements of the Selling Shareholder enforceable against the
Selling Shareholder in accordance with their respective terms, except
to the extent that the enforceability of the indemnification and
contribution provisions of Section 9 hereof may be limited by
securities laws or by public policy considerations as expressed in
such laws as construed by courts of competent jurisdiction, and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization or other laws of general application relating to or
affecting enforcement of creditors' rights generally or the
availability of equitable remedies, regardless of whether such
enforcement is considered in a proceeding in equity or at law; the
performance of this Agreement and the Power of Attorney and the
consummation of the transactions contemplated herein and therein will
not result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any statute, indenture, mortgage,
deed of trust, voting trust agreement, note agreement, lease or other
agreement or instrument to which the Selling Shareholder is a party or
by which the Selling Shareholder or its properties are bound, or under
any order, rule or regulation of any court or governmental agency or
body applicable to the Selling Shareholder or the business or property
of the Selling Shareholder.
c. The Selling Shareholder has, and immediately prior to
the Closing Date (and the Additional Closing Date, if any) the Selling
Shareholder will have, good and valid title to the Shares to be sold
by the Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities, shareholder agreements, voting trusts or
claims of any nature whatsoever, and, upon delivery of such Shares and
payment therefor pursuant hereto, good and valid title to such Shares,
free and clear of all liens, encumbrances, equities, shareholder
agreements, voting trusts or claims of any nature whatsoever (other
than those arising by or through the Underwriters), will pass to the
several Underwriters.
d. The Selling Shareholder will not, for a period of 180
days after the commencement of the public offering of the Shares by
the Underwriters, directly or indirectly, sell, offer to sell,
contract to sell or otherwise dispose of or transfer any shares of
Common Stock or rights to purchase shares of Common Stock otherwise
than hereunder or with the prior written consent of Raymond James &
Associates, Inc.
e. The Selling Shareholder has not taken, and will not
take, directly or indirectly, any action designed to or which has
constituted nor which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares or otherwise.
f. No consent, approval, authorization or order of, or
any filing or declaration with, any court or governmental agency or
body is required for the consummation by the Selling Shareholder of
the transactions on its part contemplated herein or in the Power of
Attorney, except such as have been obtained under the Act and such as
may be required under state securities or Blue Sky laws or the by-laws
and rules
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<PAGE> 17
of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares to be sold by the Selling Shareholder.
g. The Selling Shareholder is familiar with the
Registration Statement, the Prepricing Prospectus and the Prospectus
and has no knowledge of any material fact or condition not set forth
in the Registration Statement, the Prepricing Prospectus or the
Prospectus which has adversely affected, or may adversely affect, the
condition (financial or otherwise), business, properties, net worth,
results of operations or prospects of the Company, and the sale of the
Shares proposed to be sold by the Selling Shareholder is not prompted
by any such knowledge.
h. All information with respect to the Selling
Shareholder contained in the Registration Statement, the Prepricing
Prospectus and the Prospectus (as amended or supplemented, if the
Company shall have filed with the Commission any amendment or
supplement thereto) complied and will comply in all material respects
with all applicable provisions of the Act, contains and will contain
all statements required to be stated therein in accordance with the
Act, and does not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading.
i. To the best knowledge of the Selling Shareholder, the
representations and warranties of the Company contained in Section 6
hereof are true and correct.
j. Other than as permitted by the Act and the Rules and
Regulations, the Selling Shareholder has not distributed and will not
distribute any Prepricing Prospectus, the Prospectus or any other
offering material in connection with the offering and sale of the
Shares.
k. On the Closing Date, and on the Additional Closing
Date, if any, all stock transfer and other taxes (other than income
taxes) which are required to be paid in connection with the sale and
transfer of the Shares to be sold by the Selling Shareholder to the
several Underwriters hereunder will have been fully paid for by the
Selling Shareholder and all laws imposing such taxes will have been
fully complied with.
l. Neither the sale of the Shares nor any action taken
by the Selling Shareholder in connection therewith violates any state
insurance laws or regulations.
In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982 with respect to the transactions herein contemplated, the Selling
Shareholder agrees to deliver to you at least two days prior to the Closing a
properly completed and executed United States Treasury Department Form W-9 (or
other applicable form or statement specified by Treasury Department regulations
in lieu thereof).
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<PAGE> 18
The Selling Shareholder represents and warrants that it has duly
executed and delivered a Power of Attorney, in the form heretofore furnished to
you, appointing Joy J. Keller and Frank G. Dunham, Jr. as the Selling
Shareholder's attorneys-in-fact (the "Attorneys-in-Fact") with authority to
execute and deliver this Agreement on behalf of the Selling Shareholder, to
determine the purchase price to be paid by the Underwriters to the Selling
Shareholder as provided in Section 2 hereof, to authorize the delivery of the
Shares to be sold by the Selling Shareholder hereunder or otherwise to act on
behalf of the Selling Shareholder in connection with the transactions
contemplated by this Agreement. Prior to the date of this Agreement, the
Selling Shareholder has delivered to the Attorneys-in-Fact certificates in
negotiable form representing all the Firm Shares and Additional Shares to be
sold by the Selling Shareholder hereunder, to be held by the Attorneys-in-Fact
until such time as the Attorneys-in-Fact shall deliver such Shares to the
Underwriters in accordance with this Agreement and the Power of Attorney or, if
this Agreement is terminated prior to such delivery, shall return such Shares
to the Selling Shareholder. The Selling Shareholder specifically agrees that
the Shares represented by the certificates held in custody for the Selling
Shareholder under the Power of Attorney are subject to the interest of the
Underwriters hereunder, and that the arrangements made by the Selling
Shareholder for the custody, and the appointment by the Selling Shareholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
The Selling Shareholder specifically agrees that the obligations of the Selling
Shareholder hereunder shall not be terminated by operation of law, whether by
the dissolution or change of control of the Selling Shareholder or by the
occurrence of any other event. If the Selling Shareholder should be dissolved,
or if any other such event should occur before the delivery of the Shares
hereunder, certificates representing the Shares shall be delivered by or on
behalf of the Selling Shareholder in accordance with the terms and conditions
of this Agreement and the Power of Attorney, and actions taken by the
Attorneys-in-Fact pursuant to the Power of Attorney shall be as valid as if
such dissolution or other event had not occurred, regardless of whether or not
the Attorneys-in-Fact, or either of them, shall have received notice of
termination, dissolution or other event.
8. EXPENSES. Whether or not the transactions contemplated hereby
are consummated or this Agreement becomes effective or is terminated, the
Company and the Selling Shareholder, jointly and severally, shall be
responsible for and shall pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's and Selling Shareholder's counsel
and accountants in connection with the registration of the Shares under the Act
and all other expenses in connection with the preparation, printing and filing
of the Registration Statement and the Prospectus and amendments and supplements
thereto and the mailing and delivering of copies thereof and of any Prepricing
Prospectus to the Underwriters and dealers; (ii) the printing and delivery
(including, without limitation, postage, air freight charges and charges for
counting and packaging) of such copies of the Registration Statement, the
Prospectus, each Prepricing Prospectus, the Blue Sky memoranda, the Power of
Attorney, the Agreement Among Underwriters, this Agreement, the Selected
Dealers Agreement and all amendments or supplements to any of them as may be
reasonably requested for use in connection with the offering and sale of the
Shares; (iii) all reasonable expenses in connection with the qualification of
the Shares for offering and sale under state securities laws or Blue Sky laws,
including the reasonable fees of the counsel for the Underwriters in connection
therewith;
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<PAGE> 19
(iv) the filing fees incident to securing any required review by the NASD of
the terms of the sale of the Shares and the reasonable fees and disbursements
of the Underwriters' counsel relating thereto; (v) the cost of preparing stock
certificates; (vi) the costs and charges of any transfer agent or registrar;
(vii) the cost of the tax stamps, if any, in connection with the issuance and
delivery of the Shares to the respective Underwriters; (viii) all other fees,
costs and expenses referred to in Item 13 of the Registration Statement; and
(ix) all other costs and expenses incident to the performance of the
obligations of the Company and the Selling Shareholder hereunder which are not
otherwise specifically provided for in this Section. Notwithstanding the
foregoing, in the event that the proposed offering is terminated for the
reasons set forth in Section 5(i) hereof, the Company agrees to reimburse the
Underwriters as provided in Section 5(i).
The Company and the Selling Shareholder further agree that, in
addition to the expenses payable by them under this Agreement, they shall pay
to Raymond James & Associates, Inc. and Southwest Securities, Inc., solely by
deduction from the proceeds of the public offering of the Shares contemplated
hereby, a financial advisory fee equal, in the aggregate, to the lesser of (i)
three-fourths of one percent (0.75%) of the total gross proceeds to the Company
and the Selling Shareholder resulting from such offering or (ii) $300,000. For
such purpose, "gross proceeds" means the product obtained by multiplying the
aggregate number of Shares sold by the Company and the Selling Shareholder in
the offering (including any over-allotment shares) by the price at which such
Shares are sold to the public, without deduction or offset of underwriting
discounts or commissions or any fees, costs or expenses. Such financial
advisory fee shall be paid by the Company and the Selling Shareholder in
proportion to the respective number of Shares to be sold by them under this
Agreement, as set forth on Schedule II.
9. INDEMNIFICATION AND CONTRIBUTION. The Company and the Selling
Shareholder jointly and severally agree to indemnify and hold harmless you and
each other Underwriter, the directors, officers, employees and agents of each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or
in the Registration Statement or the Prospectus or in any amendment or
supplement thereto, or arising out of or based upon any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expense arise out of or are based upon an untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity with the
information furnished in writing to the Company by or on behalf of any
Underwriter through you expressly for use in connection therewith, or arising
out of or based upon any inaccuracy in the representations and warranties of
the Company or the Selling Shareholder contained herein or any failure of the
Company or the Selling Shareholder to perform their respective obligations
hereunder or under law; provided, however, that with respect to any untrue
statement or omission made in any Prepricing Prospectus, the indemnity
agreement contained in this subsection shall not inure to the benefit of any
Underwriter (or to the benefit of any person
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<PAGE> 20
controlling such Underwriter) from whom the person asserting any such losses,
claims, damages or liabilities purchased the shares of Stock concerned if both
(A) a copy of the Prospectus was not sent or given to such person at or prior
to the written confirmation of the sale of such shares of Stock to such person
as required by the Act, and (B) the untrue statement or omission in the
Prepricing Prospectus was corrected in the Prospectus. Notwithstanding
anything in this Section 9, in no event shall the Seller Shareholder's
obligation under the preceding sentence exceed the total net proceeds from the
offering received by the Selling Shareholder (it being agreed that the Company
shall bear the balance.)
In addition to their other obligations under this Section 9, the
Company and the Selling Shareholder jointly and severally agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, any inaccuracy in the representations and warranties of the Company
or the Selling Shareholder herein or failure to perform its obligations
hereunder, all as described in this Section 9, it will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
or the Selling Shareholder's obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any
such interim reimbursement payment is so held to have been improper, each
Underwriter shall promptly return it to the Company or the Selling Shareholder,
as the case may be, together with interest, compounded daily determined on the
basis of the base lending rate announced from time to time by Chase Manhattan
Bank, N.A. (the "Prime Rate"). Any such interim reimbursement payments which
are not made to the Underwriters within 30 days of a request for reimbursement
shall bear interest at the Prime Rate from the date of such request.
If any action or claim shall be brought against any Underwriter or any
person controlling any Underwriter in respect of which indemnity may be sought
against the Company or the Selling Shareholder, such Underwriter or such
controlling person shall promptly notify in writing the party(s) against whom
indemnification is being sought (the "indemnifying party" or "indemnifying
parties"), and such indemnifying party(s) shall assume the defense thereof,
including the employment of counsel reasonably acceptable to such Underwriter
or such controlling person and payment of all fees and expenses. Such
Underwriter or any such controlling person shall have the right to employ
separate counsel (but the Company and the Selling Shareholder shall not be
liable for the fees and expenses of more than one counsel) in any such action
and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the indemnifying party(s) has (have) agreed in writing to pay such
fees and expenses, (ii) the indemnifying party(s) has (have) failed to assume
the defense and employ counsel reasonably acceptable to the Underwriter or such
controlling person or (iii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying party(s) and such Underwriter or such controlling person shall
have been advised by its counsel that one or more legal defenses may be
available to the Underwriter
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<PAGE> 21
which may not be available to the Company, or that representation of such
indemnified party and any indemnifying party(s) by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or
not such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party(s) shall not have the right to assume the defense of such action on
behalf of such Underwriter or such controlling person (notwithstanding its
(their) obligation to bear the fees and expenses of such counsel)). The
indemnifying party(s) shall not be liable for any settlement of any such action
effected without its (their) written consent, but if settled with such written
consent, or if there be a final judgment for the plaintiff in any such action,
the indemnifying party(s) agree(s) to indemnify and hold harmless any
Underwriter and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment, but in
the case of a judgment only to the extent stated in the immediately preceding
paragraph.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act and the
Selling Shareholder, to the same extent as the foregoing indemnity from the
Company and the Selling Shareholder to each Underwriter, but only with respect
to information furnished in writing by or on behalf of such Underwriter through
you expressly for use in the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto. If any action
or claim shall be brought or asserted against the Company, any of its
directors, any such officers, or any such controlling person or the Selling
Shareholder based on the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Underwriter pursuant to this
paragraph, such Underwriter shall have the rights and duties given to the
Company and the Selling Shareholder by the preceding paragraph (except that if
the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
such Underwriter's expense), and the Company, its directors, any such officers,
and any such controlling persons and the Selling Shareholder shall have the
rights and duties given to the Underwriters by the immediately preceding
paragraph.
If the indemnification provided for in this Section 9 is unavailable
or insufficient for any reason whatsoever to an indemnified party under the
first or fourth paragraph hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then an indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company and the Selling
Shareholder on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause (i) above
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above but also
the relative fault of the Company and the Selling Shareholder on the one hand
and the Underwriters on the other hand in connection with the
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<PAGE> 22
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company and the Selling Shareholder
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus; provided that, in the event that the Underwriters shall have
purchased any Additional Shares hereunder, any determination of the relative
benefits received by the Company and the Selling Shareholder or the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Selling Shareholder, and the
underwriting discounts and commissions received by the Underwriters, from the
sale of such Additional Shares, in each case computed on the basis of the
respective amounts set forth in the notes to the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Shareholder on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and the Selling
Shareholder on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company, the Selling Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by a pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities and expenses referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 9 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule I hereto (or such numbers of
Firm Shares increased as set forth in Section 11 hereof) and not joint.
Notwithstanding the second and fifth paragraphs of this Section 9, any
losses, claims, damages, liabilities or expenses for which an indemnified party
is entitled to indemnification or contribution under this Section 9 shall be
paid by the indemnifying party to the indemnified party as such losses, claims,
damages, liabilities or expenses are incurred. The indemnity, contribution and
reimbursement agreements contained in Section 9 and the representations and
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warranties of the Company and the Selling Shareholder, respectively, set forth
in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or any person controlling the Company or the Selling Shareholder, (ii)
acceptance of any Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company or the Selling Shareholder, shall be
entitled to the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 9.
It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in the second and fifth paragraphs
of this Section 9, including the amounts of any requested reimbursement
payments and the method of determining such amounts, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced
by service of a written demand for arbitration or written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the
party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Such an arbitration would be limited to the
operation of the interim reimbursement provisions contained in the second and
fifth paragraphs of this Section 9, and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse expenses which is
created by the provisions of the second and fifth paragraphs of this Section 9.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
a. The Registration Statement shall have become
effective not later than 12:00 noon, New York City time, on the date
hereof, or at such later date and time as shall be consented to in
writing by you, and all filings required by Rules 424(b) and 430A
under the Act shall have been timely made.
b. You shall be reasonably satisfied that since the
respective dates as of which information is given in the Registration
Statement and Prospectus, (i) there shall not have been any change in
the capital stock (other than pursuant to the exercise of outstanding
options disclosed in the Prospectus) of the Company or any of its
Subsidiaries or any material change in the indebtedness (other than in
the ordinary course of business) of the Company or any of its
Subsidiaries, (ii) except as set forth or contemplated by the
Registration Statement or the Prospectus, no material verbal or
written agreement or other transaction shall have been entered into by
the Company or any of its Subsidiaries, which is not in the ordinary
course of business or which could reasonably be expected to result in
a material reduction in the future earnings of the Company and its
Subsidiaries, (iii) no loss or damage (whether or not insured) to the
property of the Company or any of its Subsidiaries shall have been
sustained which materially and
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adversely affects the condition (financial or other), business,
properties, net worth, results of operations or prospects of the
Company and its Subsidiaries, (iv) no legal or governmental action,
suit or proceeding affecting the Company or any of its Subsidiaries
which is material to the Company and its Subsidiaries or which affects
or could reasonably be expected to affect the transactions
contemplated by this Agreement shall have been instituted or
threatened, and (v) there shall not have been any material change in
the condition (financial or other), business, management, properties,
net worth, results or operations or prospects of the Company and its
Subsidiaries which makes it impractical or inadvisable in your
judgment to proceed with the public offering or purchase the Shares as
contemplated hereby.
c. You shall have received on the Closing Date (and the
Additional Closing Date, if any) an opinion of Akin, Gump, Strauss,
Hauer & Feld, L.L.P., as counsel for the Company, dated the Closing
Date, satisfactory to you and your counsel, to the effect that:
(i) The Company is a corporation duly
incorporated and validly existing under the laws of the State
of Texas, with full corporate power and authority to own,
lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto), and is duly
registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature
of its properties or the conduct of its business requires such
registration or qualification, except where the failure to so
register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net
worth or results of operation of the Company and the
Subsidiaries taken as a whole.
(ii) Each of the Subsidiaries is a corporation
validly existing under the laws of the jurisdiction of its
organization, with full corporate power and authority to own,
lease and operate its properties and to conduct its business
as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto); and is duly
registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature
of its properties or the conduct of its business requires such
registration or qualification, except where the failure to so
register or qualify does not have a material adverse effect on
the condition (financial or other), business, properties, net
worth or results of operation of the Company and the
Subsidiaries taken as a whole; and all of the outstanding
shares of capital stock of each of the Subsidiaries have been
duly authorized and validly issued, and are fully paid and
nonassessable, and are owned by the Company directly, or
indirectly through one of the other Subsidiaries, free and
clear of any perfected security interest, or to the best
knowledge of such counsel after reasonable inquiry, any other
security interest, lien, adverse claim, equity or other
encumbrance.
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(iii) The authorized capital stock of the Company
conforms in all respects to the description thereof contained
in the Prospectus under the caption "Description of Capital
Stock."
(iv) All shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued
and sold by the Company hereunder have been duly authorized
and validly issued, are fully paid and nonassessable and are
free of any preemptive or, to the knowledge of such counsel,
similar rights that entitle or will entitle any person to
acquire any Shares or other shares of capital stock of the
Company upon the issuance of the Shares by the Company.
(v) All offers and sales of the Company's capital
stock were made in compliance with the registration provisions
of the Act and the registration provisions of all other
applicable state and federal laws or regulations.
(vi) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly
authorized and, when issued and delivered to the Underwriters
against payment therefor in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable and free
of any preemptive or, to the knowledge of such counsel,
similar rights that entitle or will entitle any person to
acquire any Shares or other shares of capital stock of the
Company upon the issuance of the Shares by the Company.
(vii) The form of certificates for the Shares
conforms in all material respects to the requirements of the
applicable corporate laws of the State of Texas.
(viii) The Registration Statement has become
effective under the Act and, to the knowledge of such counsel,
no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
are pending before or contemplated by the Commission.
(ix) The Company has all requisite corporate power
and authority to enter into this Agreement and to issue, sell
and deliver the Shares to be sold by it to the Underwriters as
provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and is a valid, legal
and binding agreement of the Company enforceable against the
Company in accordance with its terms, except to the extent
that the enforceability of the indemnification and
contribution provisions of Section 9 hereof may be limited by
securities laws or by public policy considerations as
expressed in such laws as construed by courts of competent
jurisdiction and except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of
general application relating to or affecting enforcement of
creditors' rights generally or the availability of equitable
remedies, regardless of whether such enforcement is considered
in a proceeding in equity or at law.
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(x) Neither the Company nor any of the
Subsidiaries is in violation of its certificate or articles of
incorporation or bylaws, or to the knowledge of such counsel,
is in default in the performance of any material obligation,
agreement or condition contained in (i) any bond, indenture,
note or other evidence of indebtedness or (ii) any other
agreement material to the Company and the Subsidiaries taken
as a whole, except as has been disclosed in the Prospectus.
(xi) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this
Agreement, compliance by the Company with all provisions
hereof nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or
constitutes or will constitute a breach of, or a default
under, the articles of incorporation or bylaws, of the Company
or any of the Subsidiaries or any agreement, indenture, lease
or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of
their respective properties is bound that is known to such
counsel after reasonable inquiry or will result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of the
Subsidiaries, nor will any such action result in any violation
of any existing law, regulation, ruling (assuming compliance
with all applicable state securities and Blue Sky laws),
judgment, injunction, order or decree known to such counsel
after reasonable inquiry, applicable to the Company, the
Subsidiaries or any of their respective properties.
(xii) No consent, approval, authorization or other
order of, or registration or filing with, any court,
regulatory body, administrative agency or other governmental
body, agency or official is required on the part of the
Company (except such as have been obtained under the Act or
such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares or
under NASD rules and regulations) for the valid issuance and
sale of the Shares to the Underwriters under this Agreement.
(xiii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the
financial statements and the notes thereto and the schedules
and other financial and statistical data included therein, as
to which such counsel need not express any opinion) comply as
to form in all material respects with the requirements of the
Act.
(xiv) To the knowledge of such counsel, (A) there
are no legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries, or to which
the Company or any of the Subsidiaries, or any of their
property, is subject, that are required to be described in the
Registration Statement or Prospectus (or any amendment or
supplement thereto) that are not described as required
therein, and (B) there are no agreements, contracts,
indentures, leases or other instruments that are required to
be described in the Registration Statement or the Prospectus
or to be filed as an exhibit to the
26
<PAGE> 27
Registration Statement that are not described or filed as
required, as the case may be.
(xv) To the knowledge of such counsel, neither the
Company nor any of the Subsidiaries is in violation of any
law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental
agency or body having jurisdiction over the Company or any of
the Subsidiaries except where such violation does not and will
not have a material adverse effect on the condition (financial
or other), business, properties, net worth or results of
operation of the Company and the Subsidiaries taken as a
whole.
(xvi) To the knowledge of such counsel, the Company
and each of the Subsidiaries have such permits, licenses,
franchises, approvals, consents and authorizations of
governmental or regulatory authorities ("permits"), as are
necessary to own their properties and to conduct their
business in the manner described in the Prospectus, subject to
such qualifications as may be set forth in the Prospectus; the
Company and each of the Subsidiaries have fulfilled and
performed all of their material obligations with respect to
such permits and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination
thereof or result in any other material impairment of the
rights of the holder of any such permit, subject in each case
to such qualification as may be set forth in the Prospectus;
and, except as described in the Prospectus, such permits
contain no restrictions that are materially burdensome to the
Company or any of the Subsidiaries.
(xvii) The property described in the Prospectus as
held under lease by the Company or its Subsidiaries is held
under valid, subsisting and enforceable leases, with only such
exceptions as in the aggregate are not material and do not
interfere in any material respect with the conduct of the
business of the Company and the Subsidiaries taken as a whole.
(xviii) Such counsel has reviewed all agreements,
contracts, indentures, leases or other documents or
instruments referred to in the Registration Statement and the
Prospectus (other than routine contracts entered into by the
Company or any Subsidiary for the purchase of materials or the
sale of products, entered into in the normal course of
business) and such agreements, contracts, indentures, leases
or other documents or instruments are fairly summarized or
disclosed therein, and filed as exhibits thereto as required,
and such counsel does not know of any agreements, contracts,
indentures, leases or other documents or instruments required
to be so summarized or disclosed or filed which have not been
so summarized or disclosed or filed.
(xix) Such counsel has no reason to believe that
the descriptions in the Prospectus of statutes, regulations or
legal or governmental proceedings, insofar
27
<PAGE> 28
as they purport to summarize certain of the provisions
thereof, are not accurate or fail to present fairly the
information required to be presented.
(xx) The Company is not an "investment company" or
an "affiliated person" of, or "promoter" or "principal
underwriter" for, an "investment company," as such terms are
defined in the Investment Company Act of 1940, as amended.
In rendering such opinion, counsel may rely, to the extent
they deem such reliance proper, upon an opinion or opinions, each
dated the Closing Date, of other counsel as to matters governed by the
laws of jurisdictions other than the United States or the State of
Texas provided that (1) each such local counsel is acceptable to you
and your counsel, (2) counsel shall state in their opinion that they
believe that they and you are justified in relying thereon, and (3)
such reliance is expressly authorized by each opinion so relied upon
and a copy of each such opinion is delivered to you and is in form and
substance satisfactory to you. In rendering such opinion, counsel may
rely, to the extent they deem such reliance proper, as to matters of
fact upon certificates of officers of the Company and of government
officials. Copies of all such certificates shall be furnished to you
and your counsel on the Closing Date.
In rendering such opinion, in each case where such opinion is
qualified by "the knowledge of such counsel" or "known to such
counsel" or similar expressions, such counsel shall be deemed to have
undertaken such investigation and made such inquiries at they consider
necessary and appropriate under the circumstances and may rely as to
matters of fact upon certificates of executive and other officers and
employees of the Company or its Subsidiaries as you and such counsel
shall deem are appropriate and such other procedures as you and such
counsel shall mutually agree; provided, however, in each such case,
such counsel shall state that it has no knowledge contrary to the
information contained in such certificates or developed by such
procedures and knows of no reason why you should not reasonably rely
upon the information contained in such certificates or developed by
such procedures.
Although such counsel is not assuming responsibility for the
accuracy or completeness of the statements contained in the
Registration Statement and the Prospectus or any amendments thereto,
in addition to the opinion set forth above, such counsel shall state
that during the course of their participation in the preparation of
the Registration Statement and the Prospectus and the amendments
thereto, nothing has come to the attention of such counsel which has
caused it to believe that the Registration Statement and the
Prospectus or any amendment thereto (except for the financial
statements and other financial and statistical information contained
therein or omitted therefrom as to which no opinion need be
expressed), at the date thereof, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that the Registration Statement and the Prospectus as of
the date of the opinion (except as aforesaid), contains an untrue
statement of a material fact or omits to state a material fact
necessary to make the
28
<PAGE> 29
statements therein, in light of the circumstances under which they
were made, not misleading.
d. You shall have received on the Closing Date (and the
Additional Closing Date, if any) the opinion of Akin, Gump, Strauss,
Hauer & Feld, as counsel for the Selling Shareholder, dated the
Closing Date (and the Additional Closing Date, if any) in form and
substance satisfactory to you, to the effect that:
(i) This Agreement and the Power of Attorney have
been duly authorized, executed and delivered by or on behalf
of the Selling Shareholder and constitute valid and binding
agreements of the Selling Shareholder enforceable in
accordance with their respective terms, except to the extent
that the enforceability of the indemnification and
contribution provisions of Section 9 hereof may be limited by
securities laws or by public policy considerations as
expressed in such laws as construed by courts of competent
jurisdiction and except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other laws of
general application relating to or affecting enforcement of
creditors' rights generally or the availability of equitable
remedies, regardless of whether such enforcement is considered
in a proceeding in equity or at law; and the performance of
this Agreement and the Power of Attorney and the consummation
of the transactions herein and therein contemplated will not
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, voting trust agreement,
note agreement, lease or other agreement or instrument of
which such counsel is aware and to which the Selling
Shareholder is a party or by which the Selling Shareholder or
its properties are bound, or any order, rule or regulation,
known to such counsel of any court or governmental agency or
body applicable to the Selling Shareholder or the business or
property of the Selling Shareholder.
(ii) No consent, approval, authorization or order
has been or is required for the consummation of the
transactions contemplated by this Agreement and the Power of
Attorney in connection with the Shares to be sold by the
Selling Shareholder hereunder, except consents, approvals,
authorizations or orders that have been duly obtained and are
in full force and effect, such as have been obtained under the
Act and such as may be required under state securities or Blue
Sky laws or NASD rules and regulations in connection with the
purchase and distribution of such Shares by the Underwriters.
(iii) Immediately prior to the Closing Date (and
immediately prior to the Additional Closing Date, if
applicable), the Selling Shareholder has good and valid title
to the Shares to be sold by the Selling Shareholder under this
Agreement, free and clear of all liens, encumbrances, equities
or claims, and full right, power and authority to sell,
assign, transfer and deliver the Shares to be sold by the
Selling Shareholder hereunder.
29
<PAGE> 30
(iv) Good and valid title to such Shares, free and
clear of all liens, encumbrances, equities or claims (other
than those arising by or through the Underwriters) has been
transferred to each of the several Underwriters.
In rendering such opinion, such counsel may rely upon a
certificate of the Selling Shareholder as to matters of fact (i) with
respect to ownership of and liens, encumbrances, equities or claims on
the Shares sold by the Selling Shareholder, and (ii) with respect to
any agreements, mortgages, deeds of trust, voting trusts, notes,
leases or other instruments, provided that such counsel shall state
that they believe that both you and they are justified in relying upon
such certificates.
e. You shall have received on the Closing Date (and the
Additional Closing Date, if any) an opinion of Thompson & Knight, a
Professional Corporation, as counsel for the Underwriters, dated the
Closing Date with respect to the issuance and sale of the Firm Shares,
the Registration Statement and other related matters as you may
reasonably request, and the Company and its counsel shall have
furnished to your counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
f. You shall have received letters addressed to you and
dated the date hereof and the Closing Date from Deloitte & Touche LLP,
independent certified public accountants, substantially in the forms
heretofore approved by you.
g. (i) No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings
for that purpose shall be pending or, to the knowledge of the Company,
shall be threatened or contemplated by the Commission at or prior to
the Closing Date; (ii) no order suspending the effectiveness of the
Registration Statement or the qualification or registration of the
Shares under the securities or Blue Sky laws of any jurisdiction shall
be in effect and no proceeding for such purpose shall be pending or,
to the knowledge of the Company, threatened or contemplated by the
Commission or the authorities of any jurisdiction; (iii) any request
for additional information on the part of the staff of the Commission
or any such authorities shall have been complied with to the
satisfaction of the staff of the Commission or such authorities; (iv)
after the date hereof no amendment or supplement to the Registration
Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to you and you did not object thereto in
good faith; and (v) all of the representations and warranties of the
Company contained in this Agreement shall be true and correct in all
respects on and as of the date hereof and on and as of the Closing
Date as if made on and as of the Closing Date, and you shall have
received a certificate, dated the Closing Date and signed by the chief
executive officer and the chief financial officer of the Company (or
such other officers as are acceptable to you) to the effect set forth
in this Section 10(g) and in Sections 10(b) and 10(h) hereof.
30
<PAGE> 31
h. The Company shall not have failed in any respect at
or prior to the Closing Date to have performed or complied with any of
its agreements herein contained and required to be performed or
complied with by it hereunder at or prior the Closing Date.
i. You shall have received a certificate, dated on and
as of the Closing Date, by or on behalf of the Selling Shareholder to
the effect that as of the Closing Date the Selling Shareholder's
representations and warranties in this Agreement are true and correct
as if made on and as of such Closing Date, and that the Selling
Shareholder has performed all its obligations and satisfied all the
conditions on its part to be performed or satisfied at or prior to the
Closing Date.
j. The Company and the Selling Shareholder shall have
furnished or caused to have been furnished to you such further
certificates and documents as you shall have reasonably requested.
k. At or prior to the Closing Date, you shall have
received the written commitment of each of the Company's officers and
directors and certain of their affiliates and the Selling Shareholder
not to sell, offer to sell, contract to sell, or otherwise dispose of
or transfer any shares of Common Stock or rights to purchase any
shares of Common Stock, directly or indirectly, except to the
Underwriters pursuant to this Agreement, for a period of 180 days
after commencement of the public offering of the Shares by the
Underwriters without the prior written consent of Raymond James &
Associates, Inc.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of the Additional
Closing Date of the conditions set forth in this Section 10, except that, if
the Additional Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (j) shall be dated
as of the Additional Closing Date and the opinions called for by paragraphs (c)
and (d) shall be revised to reflect the sale of Additional Shares.
If any of the conditions hereinabove provided for in this Section 10
shall not have been satisfied when and as required by this Agreement, this
Agreement may be terminated by you by notifying the Company of such termination
in writing or by telegram at or prior to such Closing Date, but you shall be
entitled to waive any of such conditions.
11. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective upon the later of (a) the execution and delivery hereof by the
parties hereto, and (b) release of notification of the effectiveness of the
Registration Statement by the Commission; provided, however, that the
provisions of Sections 8 and 9 shall at all times be effective.
31
<PAGE> 32
If any one or more of the Underwriters shall fail or refuse to
purchase Firm Shares which it or they have agreed to purchase hereunder, and
the aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than
one-tenth of the aggregate number of the Firm Shares, each non-defaulting
Underwriter shall be obligated, severally, in the proportion which the number
of Firm Shares set forth opposite its name in Schedule I hereto bears to the
aggregate number of Firm Shares set forth opposite the names of all
non-defaulting Underwriters or in such other proportion as you may specify in
the Agreement Among Underwriters, to purchase the Firm Shares which such
defaulting Underwriter or Underwriters agreed, but failed or refused to
purchase. If any Underwriter or Underwriters shall fail or refuse to purchase
Firm Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares
and arrangements satisfactory to you, the Company and the Selling Shareholder
for the purchase of such Firm Shares are not made within 48 hours after such
default, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Shareholder. In any
such case which does not result in termination of this Agreement, either you or
the Company and the Selling Shareholder shall have the right to postpone the
Closing Date, but in no event for longer than seven (7) days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any such default of any such Underwriter under this Agreement.
12. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or the Selling Shareholder by notice to the Company
and the Selling Shareholder, if prior to the Closing Date or the Additional
Closing Date (if different from the Closing Date and then only as to the
Additional Shares), as the case may be, in your sole judgment, (i) trading in
the Company's Common Stock shall have been suspended by the Commission or the
Nasdaq/NMS, (ii) trading in securities generally on the New York Stock
Exchange, American Stock Exchange or Nasdaq/NMS shall have been suspended or
materially limited, or minimum or maximum prices shall have been generally
established on such exchange or market, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by any such exchange or market or
by order of the Commission or any court or other governmental authority, (iii)
a general moratorium on commercial banking activities shall have been declared
by either federal or New York State authorities or (iv) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in political, financial or economic
conditions or other material event the effect of which on the financial markets
of the United States is such as to make it, in your judgment, impracticable or
inadvisable to market the Shares or to enforce contracts for the sale of the
Shares. Notice of such cancellation shall be promptly given to the Company and
its counsel by telegraph, telecopy or telephone and shall be subsequently
confirmed by letter.
13. INFORMATION FURNISHED BY THE UNDERWRITERS. The Company
acknowledges that the statements set forth in footnote (4) on the cover page of
the Prospectus and in the third
32
<PAGE> 33
paragraph under the caption "Underwriting" in any Prepricing Prospectus and in
the Prospectus, constitute the only information furnished by or on behalf of
the Underwriters through you or on your behalf as such information is referred
to in Sections 6(a), 6(b) and 9 hereof.
14. MISCELLANEOUS. Except as otherwise provided in Sections 5 and
12 hereof, notice given pursuant to any of the provisions of this Agreement
shall be in writing and shall be delivered (i) if to the Company or the Selling
Shareholder, to the office of the Company at 300 Burnett Street, Fort Worth,
Texas 76102-2799, Attention: F. George Dunham, III (with a copy to Akin, Gump,
Strauss, Hauer & Feld, L.L.P., 1700 Pacific Avenue, Suite 4100, Dallas, Texas
75201-4618, Attention: Terry M. Schpok, P.C.), or (ii) if to you, as
Representatives of the Underwriters, to Raymond James & Associates, Inc., 880
Carillon Parkway, St. Petersburg, Florida 33716, Attention: Charles W. Uhrig
(with copy to Thompson & Knight, a Professional Corporation, 1700 Pacific
Avenue, Suite 3300, Dallas, Texas 75201-4693, Attention: Fred W. Fulton).
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 9 hereof, the Selling Shareholder
and its respective successors and assigns, to the extent provided herein, and
no other person shall acquire or have any right under or by virtue of this
Agreement. Neither of the terms "successor" and "successors and assigns" as
used in this Agreement shall include a purchaser from you of any of the Shares
in his status as such purchaser.
15. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Florida
without reference to choice of law principles thereunder.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
Subject to Section 11, this Agreement shall be effective when, but
only when, at least one counterpart hereof shall have been executed on behalf
of each party hereto.
The Company, the Selling Shareholder and the Underwriters each hereby
irrevocably waive any right they may have to a trial by jury in respect to any
claim based upon or arising out of this Agreement or the transactions
contemplated hereby.
33
<PAGE> 34
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholder and the several Underwriters.
Very truly yours,
INSPIRE INSURANCE SOLUTIONS, INC.
By:
----------------------------------
Name: F. George Dunham, III
Title: President and
Chief Executive Officer
Selling Shareholder:
THE MILLERS MUTUAL FIRE INSURANCE COMPANY
By:
----------------------------------
Name: Joy J. Keller
Title: Attorney-in-Fact,
as Attorney-in-Fact acting on behalf of
the Selling Shareholder named in
Schedule II to this Agreement.
CONFIRMED as of the date first above mentioned,
on behalf of itself and the other several
Underwriters named in Schedule I hereto.
RAYMOND JAMES & ASSOCIATES, INC.
By:
---------------------------------
Name: Charles W. Uhrig
Title: Managing Director
34
<PAGE> 35
SCHEDULE I
<TABLE>
<CAPTION>
Number
of Firm
Name Shares
- ---- ----------
<S> <C>
Raymond James & Associates, Inc. . . . . . . . . . . . . . . .
Southwest Securities, Inc. . . . . . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000
=========
</TABLE>
35
<PAGE> 36
SCHEDULE II
<TABLE>
<CAPTION>
Shares Firm Shares Additional Shares Total
- ------ ----------- ----------------- -----
<S> <C> <C> <C>
Company 2,500,000 375,000 2,875,000
- -------
Selling Shareholder
- -------------------
The Millers Mutual
Fire Insurance
Company 2,000,000 300,000 2,300,000
--------- ------- ---------
TOTAL: 4,500,000 675,000 5,175,000
========= ======= =========
</TABLE>
36
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT TO THE
RESTATED ARTICLES OF INCORPORATION
OF
INSPIRE INSURANCE SOLUTIONS, INC.
INSpire Insurance Solutions, Inc. (the "Corporation"), pursuant to the
provisions of Article 4.04 of the Texas Business Corporation Act, hereby adopts
the following Articles of Amendment to its Restated Articles of Incorporation:
ARTICLE ONE
The name of the Corporation is INSpire Insurance Solutions, Inc.
ARTICLE TWO
ARTICLE FOUR is amended to read in its entirety as follows:
The aggregate number of shares which the Corporation shall
have authority to issue is 51,000,000 shares of capital stock, of
which, (1) 50,000,000 shares shall be Common Stock, having a par value
of $0.01 per share; and (2) 1,000,000 shares shall be Preferred Stock,
having a par value of $1.00 per share. The holders of Common Stock
shall be entitled to one vote for each share held in any shareholder
vote in which any such shareholder is entitled to participate.
The Board of Directors may determine the powers, designations,
preferences and relative, participating, optional or other special
rights, including voting rights, and the qualifications, limitations,
or restrictions thereof, of each class of capital stock and of each
series within any such class and may increase or decrease the number
of shares within each such class or series; provided, however, that
the Board of Directors may not decrease the number of shares within a
class or series to less than the number of shares within such class or
series that are then issued and may not increase the number of shares
within a series above the total number of authorized shares of the
applicable class for which the powers, designations, preferences and
rights have not otherwise been set forth herein.
The Board of Directors, on behalf of the Corporation, may
create and issue, whether or not in connection with the issuance and
sale of any of the Corporation's shares or other securities, (1)
rights or options entitling the holders thereof to purchase
1
<PAGE> 2
or receive from the Corporation any of its shares of any class,
classes or series or other securities and (2) indebtedness convertible
into any of its shares of any class, classes or series or other
securities. Such rights, options or indebtedness shall be evidenced
in such manner as the Board of Directors shall in their sole
discretion approve and, shall set forth (a) in the case of rights or
options, the terms upon which, the time or times within which, and the
consideration, if any, for which, such shares may be purchased or
received from the corporation upon the exercise of any such right or
option, or (b) in the case of convertible indebtedness, the terms and
conditions upon which, the time or times within which, and the
conversion ratio or ratios at which, such indebtedness may be
converted into such shares. Nothing in these Restated Articles of
Incorporation shall be deemed to limit the Board of Directors'
authority to determine, in its sole discretion, the terms and
conditions of the rights, options, or convertible indebtedness
issuable pursuant to this Article Four, or to require the terms and
conditions thereof to be set forth in the Corporation's articles of
incorporation.
ARTICLE ELEVEN is amended to read in its entirety as follows:
The Bylaws of the Corporation may be amended or repealed by
the affirmative vote of either
(A) the holders of at least two-thirds of the
outstanding shares of capital stock entitled to vote thereon,
or
(B) the majority of the directors present at any
meeting of the Board of Directors at which a quorum is
present.
ARTICLE THIRTEEN is amended to read in its entirety as follows:
All actions of the shareholders which may be taken at an
annual or special meeting of shareholders may be taken without a
meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the action so taken shall be signed
by the holder or holders of all the shares entitled to vote with
respect to the action that is the subject of the consent.
ARTICLE FOURTEEN is deleted in its entirety.
ARTICLE THREE
Each such amendment made by these Articles of Amendment has been
effected in conformity with the provisions of the Texas Business Corporation
Act, and the Corporation's Restated Articles of Incorporation and each such
amendment made by these Articles of Amendment was duly adopted by the
shareholders of the Corporation on the 30th day of July 1997.
2
<PAGE> 3
ARTICLE FOUR
The number of shares of capital stock outstanding and entitled to vote
on the adoption of the foregoing amendments was 7,000,000.
ARTICLE FIVE
Shareholders holding all 7,000,000 of the outstanding shares of
capital stock of the Corporation, have signed a consent in writing pursuant to
Article 9.10(A) of the Texas Business Corporation Act adopting the foregoing
amendments.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment on behalf of the Corporation this 30th day of July 1997.
By: /s/ F. GEORGE DUNHAM, III
--------------------------------------------
F. George Dunham, III
President and Chief Executive Officer
3
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
INSPIRE INSURANCE SOLUTIONS, INC.
a Texas corporation
(the "Company")
(Adopted effective as of July 30, 1997)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I. OFFICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Registered Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Additional Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. SHAREHOLDERS MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.4. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5. Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5.1. Voting Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5.2. Votes Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5.3. Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5.4. Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.6. Consents in Lieu of Meeting . . . . . . . . . . . . . . . . . . . . . . . . 3
III. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1. General Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2. Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.3. Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4. Vacancies and Newly-Created Directorships . . . . . . . . . . . . . . . . . 3
3.4.1. Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.4.2. Newly-Created Directorships . . . . . . . . . . . . . . . . . . . . 3
3.4.3. Election by Shareholders . . . . . . . . . . . . . . . . . . . . . . 4
3.5. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.6. Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
IV. BOARD MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.1. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.2. Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.3. Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4.4. Quorum, Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.5. Consent In Lieu of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . 5
V. COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.1. Establishment; Standing Committees . . . . . . . . . . . . . . . . . . . . . 5
5.1.1. Finance Committee . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>
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<TABLE>
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5.1.2. Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.1.3. Compensation Committee . . . . . . . . . . . . . . . . . . . . . . . 6
5.2. Available Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3. Alternate Members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.4. Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
VI. OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1. Elected Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.1.1. Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.2. President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.3. Vice Presidents . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.4. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.5. Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.6. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1.7. Assistant Treasurers . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1.8. Divisional Officers . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2. Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.3. Appointed Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.4. Multiple Officeholders, Shareholder and Director Officers . . . . . . . . . 8
6.5. Compensation, Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.6. Additional Powers and Duties . . . . . . . . . . . . . . . . . . . . . . . . 9
6.7. Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
VII. SHARE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.1. Entitlement to Certificates . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2. Multiple Classes of Stock; Preemptive Rights . . . . . . . . . . . . . . . . 9
7.3. Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.4. Issuance and Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.5. Lost Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.6. Transfer of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.7. Registered Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 11
VIII. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
8.2. Mandatory Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 12
8.3. Prohibited Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 12
8.4. Termination of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 12
8.5. Judgments, Expenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . 12
8.6. Determination of Indemnification . . . . . . . . . . . . . . . . . . . . . 13
8.7. Determination of Reasonableness of Expenses . . . . . . . . . . . . . . . 13
8.8. Indemnification Against Reasonable Expenses . . . . . . . . . . . . . . . 13
8.9. Payments in Advance of Disposition . . . . . . . . . . . . . . . . . . . . 13
8.10. Written Undertaking . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<TABLE>
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8.11. Consistency with Articles of Incorporation . . . . . . . . . . . . . . . . 14
8.12. Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.13. Officers, Employees and Agents . . . . . . . . . . . . . . . . . . . . . . 14
8.14. Other Capacities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.15. Further Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.16. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.17. Report To Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.18. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.19. Change in Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 15
IX. INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS . . . . . . . . . . . . . . . . . 16
9.1. Validity; Disclosure; Approval . . . . . . . . . . . . . . . . . . . . . . 16
9.2. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
X. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.1. Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
10.2. Fixing Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.3. Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10.4. Attendance via Communications Equipment . . . . . . . . . . . . . . . . . 18
10.5. Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.6. Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.7. Reports to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.8. Contracts and Negotiable Instruments . . . . . . . . . . . . . . . . . . . 18
10.9. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.10. Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10.11. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.12. Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.13. Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
10.14. Proxies in Respect of Securities of Other Corporations . . . . . . . . . 19
10.15. Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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BYLAWS
ARTICLE I.
OFFICES
Section 1.1. Registered Office. The registered office of the
Company within the State of Texas shall be located at either (i) the principal
place of business of the Company in the State of Texas or (ii) the office of
the corporation or individual acting as the Company's registered agent in
Texas.
Section 1.2. Additional Offices. The Company may, in addition to
its registered office in the State of Texas, have such other offices and places
of business, both within and without the State of Texas, as the Board of
Directors of the Company (the "Board") may from time to time determine or as
the business and affairs of the Company may require.
ARTICLE II.
SHAREHOLDERS MEETINGS
Section 2.1. Annual Meetings. Annual meetings of shareholders
shall be held at a place and time on any weekday which is not a holiday and
which is not more than 120 days after the end of the fiscal year of the Company
as shall be designated by the Board and stated in the notice of the meeting, at
which the shareholders shall elect the directors of the Company and transact
such other business as may properly be brought before the meeting.
Section 2.2. Special Meetings. Special meetings of the
shareholders, for any purpose or purposes, unless otherwise prescribed by law
or by the articles of incorporation, (i) may be called by the chairman of the
board or the president and (ii) shall be called by the president or secretary
at the request in writing of a majority of the Board or shareholders owning
capital stock of the Company representing at least ten percent (10%) of the
votes of all capital stock of the Company entitled to vote thereat. Such
request of the Board or the shareholders shall state the purpose or purposes of
the proposed meeting.
Section 2.3. Notices. Written or printed notice of each
shareholders' meeting stating the place, date and hour of the meeting shall be
given to each shareholder of record entitled to vote thereat by or at the
direction of the president, the secretary or the officer or person calling such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting. If said notice is for a shareholders' meeting other than an
annual meeting, it shall in addition state the purpose or purposes for which
said meeting is called, and the business transacted at such meeting shall be
limited to the matters so stated in said notice and any matters reasonably
related thereto. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail addressed to each shareholder at his
address as it appears on the stock transfer books of the Company, with postage
thereon prepaid.
<PAGE> 6
Section 2.4. Quorum. The presence at a shareholders' meeting of
the holders, present in person or represented by proxy, of capital stock of the
Company representing a majority of the votes of all capital stock of the
Company entitled to vote thereat shall constitute a quorum at such meeting for
the transaction of business except as otherwise provided by law, the articles
of incorporation or these Bylaws. If a quorum shall not be present or
represented at any meeting of the shareholders, a majority of the shareholders
entitled to vote thereat and present in person or represented by proxy shall
have the power to adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At any such reconvened meeting at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for
the reconvened meeting, a notice of said reconvened meeting shall be given to
each shareholder entitled to vote at said meeting. The shareholders present at
a duly convened meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Section 2.5. Voting of Shares.
Section 2.5.1. Voting Lists. The officer or agent who has
charge of the stock transfer books of the Company shall prepare, at least ten
(10) days before every meeting of shareholders, a complete list of the
shareholders entitled to vote thereat arranged in alphabetical order and
showing the address and the number of shares registered in the name of each
shareholder. Such list shall be open to the examination of any such
shareholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held and at the registered office of the Company.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any shareholder who is
present. The original stock transfer books shall be prima facie evidence as to
who are the shareholders entitled to examine such list or transfer books or to
vote at any meeting of shareholders. Failure to comply with the requirements
of this section shall not affect the validity of any action taken at said
meeting.
Section 2.5.2. Votes Per Share. Unless otherwise provided by
law or in the articles of incorporation, each shareholder shall be entitled to
one vote, in person or by proxy, on each matter submitted to a vote at a
meeting of the shareholders, for each share of capital stock held by such
shareholder.
Section 2.5.3. Proxies. Every shareholder entitled to vote
at a meeting or to express consent or dissent without a meeting or a
shareholder's duly authorized attorney-in-fact may authorize another person or
persons to act for him by proxy. Each proxy shall be in writing, executed by
the shareholder group, the proxy or by his duly authorized attorney. No proxy
shall be voted on or after eleven (11) months from its date, unless the proxy
provides for a longer period. Each proxy shall be revocable unless expressly
provided therein to be irrevocable and unless otherwise made irrevocable by
law.
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<PAGE> 7
Section 2.5.4. Required Vote. When a quorum is present at
any meeting, the vote of the holders of capital stock of the Company
representing a majority of the votes of all capital stock of the Company
entitled to vote thereat and present in person or represented by proxy shall
decide any question brought before such meeting, unless the question is one
upon which, by express provision of law or the articles of incorporation or
these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
Section 2.6. Consents in Lieu of Meeting. Unless otherwise
restricted by the Articles of Incorporation or these Bylaws, any action
required to be or which may be taken at any meeting of shareholders may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by all of the
holders of shares entitled to vote with respect to the subject matter thereof.
Such signed consent shall have the same force and effect as a unanimous vote of
shareholders and shall be filed with the minutes of proceedings of the
shareholders.
ARTICLE III.
DIRECTORS
Section 3.1. General Powers. The business and affairs of the
Company shall be managed by or under the direction of the Board, which may
exercise all such powers of the Company and do all such lawful acts and things
as are not by law, the articles of incorporation or these Bylaws directed or
required to be exercised or done by the shareholders. Directors need not be
shareholders or residents of the State of Texas.
Section 3.2. Number. The number of directors constituting the
Board shall be fixed from time to time by resolution of the Board, but shall
not be more than nine nor less than two. Until otherwise fixed by resolution
of the Board, the number of directors shall be the number stated in the
articles of incorporation.
Section 3.3. Election. The directors shall be divided into three
classes as nearly equal in number as possible and one class of directors shall
be elected by plurality vote at each annual meeting of shareholders to hold
office for a three-year term. Each director, including a director elected to
fill a vacancy, shall hold office until the expiration of the term for which
elected and until a successor has been elected and qualified. No decrease in
the number of directors shall have the effect of shortening the term of any
incumbent director.
Section 3.4. Vacancies and Newly-Created Directorships.
Section 3.4.1. Vacancies. Any vacancy occurring in the Board
may be filled in accordance with subsection 3.4.3 or may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum of the Board. A director elected to fill a vacancy shall be elected for
the unexpired term of his predecessor in office.
Section 3.4.2. Newly-Created Directorships. A directorship
to be filled by reason of an increase in the number of directors may be filled
in accordance with
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subsection 3.4.3 or may be filled by the Board for a term of office continuing
only until the next election of one or more directors by the shareholders;
provided that the Board may not fill more than two such directorships during
the period between any two successive annual meetings of shareholders.
Section 3.4.3. Election by Shareholders. Any vacancy
occurring in the Board or any directorship to be filled by reason of an
increase in the number of directors may be filled by election at an annual or
special meeting of shareholders called for that purpose.
Section 3.5. Removal. Unless otherwise restricted by law, the
articles of incorporation or these Bylaws, any director or the entire Board may
be removed for cause by a majority vote of the shares then entitled to vote at
an election of directors, if notice of the intention to act upon such matter
shall have been given in the notice calling such meeting.
Section 3.6. Compensation. Unless otherwise restricted by the
articles of incorporation or these Bylaws, the Board shall have the authority
to fix the compensation of directors. The directors may be reimbursed for
their expenses, if any, of attendance at each meeting of the Board and may be
paid either a fixed sum for attendance at each meeting of the Board or a stated
salary as director. No such payment shall preclude any director from serving
the Company in any other capacity and receiving compensation therefor. Members
of committees of the Board may be allowed like compensation for attending
committee meetings.
ARTICLE IV.
BOARD MEETINGS
Section 4.1. Annual Meetings. The Board shall meet as soon as
practicable after the adjournment of each annual shareholders' meeting at the
place of such shareholders' meeting. No notice to the directors shall be
necessary to legally convene this meeting, provided a quorum is present.
Section 4.2. Regular Meetings. Regularly scheduled, periodic
meetings of the Board may be held without notice at such times and places as
shall from time to time be determined by resolution of the Board and
communicated to all directors.
Section 4.3. Special Meetings. Special meetings of the Board (i)
may be called by the chairman of the board or president and (ii) shall be
called by the president or secretary on the written request of two directors or
the sole director, as the case may be. Notice of each special meeting of the
Board shall be given, either personally or as hereinafter provided, to each
director at least (i) twenty-four (24) hours before the meeting if such notice
is delivered personally or by means of telephone, telegram, telex or facsimile
transmission delivery; (ii) two days before the meeting if such notice is
delivered by a recognized express delivery service; and (iii) three days before
the meeting if such notice is delivered through the United States mail. Any
and all business may be transacted at a special meeting which may be transacted
at a regular meeting of the Board. Except as may be otherwise expressly
provided by law, the articles of incorporation or these Bylaws, neither the
business to be transacted at,
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<PAGE> 9
nor the purpose of, any special meeting need be specified in the notice or
waiver of notice of such meeting.
Section 4.4. Quorum, Required Vote. A majority of the directors
shall constitute a quorum for the transaction of business at any meeting of the
Board, and the act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board, except as may be
otherwise specifically provided by law, the articles of incorporation or these
Bylaws. If a quorum shall not be present at any meeting, a majority of the
directors present may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present.
Section 4.5. Consent In Lieu of Meeting. Unless otherwise
restricted by the articles of incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board or any committee
thereof may be taken without a meeting, if a consent in writing, setting forth
the action so taken, is signed by all the members of the Board or committee, as
the case may be. Such signed consent shall have the same force and effect as a
unanimous vote at a meeting and shall be filed with the minutes of proceedings
of the Board or committee.
ARTICLE V.
COMMITTEES OF DIRECTORS
Section 5.1. Establishment; Standing Committees. The Board may by
resolution establish, name or dissolve one or more committees, each committee
to consist of one or more of the directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board when required.
Section 5.1.1. Finance Committee. The Finance Committee shall, from
time to time, meet to review the Company's consolidated operating and financial
affairs, both with respect to the Company and all of its subsidiaries, and to
report its findings and recommendations to the Board for final action. The
Finance Committee shall not be empowered to approve any corporate action, of
whatever kind or nature, and the recommendations of the Finance Committee shall
not be binding on the Board, except when, pursuant to the provisions of Section
5.2 of these Bylaws, such power and authority have been specifically delegated
to such committee by the Board of resolution. In addition to the foregoing,
the specific duties of the Finance Committee shall be determined by the Board
by resolution.
Section 5.1.2. Audit Committee. The Audit Committee shall, from time
to time, but no less than two times per year, meet to review and monitor the
financial and cost accounting practices and procedures of the Company, and to
report its findings and recommendations to the Board for final action. The
Audit Committee shall not be empowered to approve any corporate action, of
whatever kind or nature, and the recommendations of the Audit Committee shall
not be binding on the Board, except when, pursuant to the provisions of Section
5.2 of these Bylaws, such power and authority have been specifically delegated
to such
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committee by the Board by resolution. In addition to the foregoing, the
specific duties of the Audit Committee shall be determined by the Board by
resolution.
Section 5.1.3. Compensation Committee. The Compensation Committee
shall, from time to time, meet to review the various compensation plans,
policies and practices of the Company, and to report its findings and
recommendations to the Board for final action. The Compensation Committee
shall not be empowered to approve any corporate action, of whatever kind or
nature, and the recommendations of the Compensation Committee shall not be
binding on the Board, except when, pursuant to the provisions of Section 5.2 of
these Bylaws, such power and authority have been specifically delegated to such
committee by the Board by resolution. In addition to the foregoing, the
specific duties of the Compensation Committee shall be determined by the Board
by resolution.
Section 5.2. Available Powers. Any committee established pursuant
to Section 5.1 of these Bylaws, including the Finance Committee, the Audit
Committee and the Compensation Committee, but only to the extent provided in
the resolution of the Board establishing such committee or otherwise delegating
specific power and authority to such committee and as limited by law, the
articles of incorporation and these Bylaws, shall have and may exercise all the
powers and authority of the Board in the management of the business and affairs
of the Company, and may authorize the seal of the Company to be affixed to all
papers which may require it.
Section 5.3. Alternate Members. The Board may designate one or
more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of such committee.
Section 5.4. Procedures. Time, place and notice, if any, of
meetings of a committee shall be determined by the members of such committee.
At meetings of a committee, a majority of the number of members designated by
the Board shall constitute a quorum for the transaction of business. The act
of a majority of the members present at any meeting at which a quorum is
present shall be the act of the committee, except as otherwise specifically
provided by law, the articles of incorporation or these Bylaws. If a quorum is
not present at a meeting of a committee, the members present may adjourn the
meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present.
ARTICLE VI.
OFFICERS
Section 6.1. Elected Officers. The Board shall elect a president
and a secretary (collectively, the "Required Officers") having the respective
duties enumerated below and may elect such other officers having the titles and
duties set forth below which are not reserved for the Required Officers or such
other titles and duties as the Board may by resolution from time to time
establish:
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Section 6.1.1. Chairman of the Board. The chairman of the
board, or in his absence, the president, shall preside when present at all
meetings of the shareholders and the Board. The chairman of the board shall
advise and counsel the president and other officers and shall exercise such
powers and perform such duties as shall be assigned to or required of him from
time to time by the Board or these Bylaws. The chairman of the board may
execute bonds, mortgages and other contracts requiring a seal under the seal of
the Company, except where required by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the Board to some other officer or agent of the Company. The chairman of
the board may delegate all or any of his powers or duties to the president, if
and to the extent deemed by the chairman of the board to be desirable or
appropriate.
Section 6.1.2. President. The president shall be the chief
executive officer of the Company, shall have general and active management of
the business and affairs of the Company and shall see that all orders and
resolutions of the Board are carried into effect. In the absence of the
chairman of the board or in the event of his inability or refusal to act, the
president shall perform the duties and exercise the powers of the chairman of
the board.
Section 6.1.3. Vice Presidents. In the absence of the
president or in the event of his inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated by the Board, or in the absence of any
designation, then in the order of their election or appointment) shall perform
the duties of the president, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the president. The vice presidents
shall perform such other duties and have such other powers as the Board may
from time to time prescribe.
Section 6.1.4. Secretary. The secretary shall attend all
meetings of the shareholders, the Board and (as required) committees of the
Board and shall record all the proceedings of such meetings in minute books to
be kept for that purpose. He shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the Board and shall
perform such other duties as may be prescribed by the Board or the president.
He shall have custody of the corporate seal of the Company and he, or an
assistant secretary, shall have authority to affix the same to any instrument
requiring it, and when so affixed, it may be attested by his signature or by
the signature of such assistant secretary. The Board may give general
authority to any other officer to affix the seal of the Company and to attest
the affixing thereof by his signature.
Section 6.1.5. Assistant Secretaries. The assistant
secretary, or if there be more than one, the assistant secretaries in the order
determined by the Board (or if there be no such determination, then in the
order of their election or appointment) shall, in the absence of the secretary
or in the event of his inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties and
have such other powers as the Board may from time to time prescribe.
Section 6.1.6. Treasurer. Unless the Board by resolution
otherwise provides, the treasurer shall be the chief accounting and financial
officer of the Company. The Treasurer shall have the custody of the corporate
funds and securities, shall keep full and
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accurate accounts of receipts and disbursements in books belonging to the
Company and shall deposit all moneys and other valuable effects in the name and
to the credit of the Company in such depositories as may be designated by the
Board. He shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
president and the Board, at its regular meetings, or when the Board so
requires, an account of all his transactions as treasurer and of the financial
condition of the Company.
Section 6.1.7. Assistant Treasurers. The assistant
treasurer, or if there shall be more than one, the assistant treasurers in the
order determined by the Board (or if there be no such determination, then in
the order of their election or appointment) shall, in the absence of the
treasurer or in the event of his inability or refusal to act, perform the
duties and exercise the powers of the treasurer and shall perform such other
duties and have such other powers as the Board may from time to time prescribe.
Section 6.1.8. Divisional Officers. Each division of the
Company, if any, may have a president, secretary, treasurer or controller and
one or more vice presidents, assistant secretaries, assistant treasurers and
other assistant officers. Any number of such offices may be held by the same
person. Such divisional officers will be appointed by, report to and serve at
the pleasure of the Board and such other officers that the Board may place in
authority over them. The officers of each division shall have such authority
with respect to the business and affairs of that division as may be granted
from time to time by the Board, and in the regular course of business of such
division may sign contracts and other documents in the name of the division
where so authorized; provided that in no case and under no circumstances shall
an officer of one division have authority to bind any other division of the
Company except as necessary in the pursuit of the normal and usual business of
the division of which he is an officer.
Section 6.2. Election. All elected officers shall serve until
their successors are duly elected and qualified or until their earlier death,
disqualification, retirement, resignation or removal from office.
Section 6.3. Appointed Officers. The Board may also appoint or
delegate the power to appoint such other officers, assistant officers and
agents, and may also remove such officers and agents or delegate the power to
remove same, as it shall from time to time deem necessary, and the titles and
duties of such appointed officers may be as described in Section 6.1 for
elected officers; provided that the officers and any officer possessing
authority over or responsibility for any functions of the Board shall be
elected officers.
Section 6.4. Multiple Officeholders, Shareholder and Director
Officers. Any number of offices may be held by the same person, unless the
articles of incorporation or these Bylaws otherwise provide. Officers need not
be shareholders or residents of the State of Texas. Officers, such as the
chairman of the board, possessing authority over or responsibility for any
function of the Board must be directors.
Section 6.5. Compensation, Vacancies. The compensation of elected
officers shall be set by the Board. The Board shall also fill any vacancy in
an elected office. The
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compensation of appointed officers and the filling of vacancies in appointed
offices may be delegated by the Board to the same extent as permitted by these
Bylaws for the initial filling of such offices.
Section 6.6. Additional Powers and Duties. In addition to the
foregoing especially enumerated powers and duties, the several elected and
appointed officers of the Company shall perform such other duties and exercise
such further powers as may be provided by law, the articles of incorporation or
these Bylaws or as the Board may from time to time determine or as may be
assigned to them by any competent committee or superior officer.
Section 6.7. Removal. Any officer or agent or member of a
committee elected or appointed by the Board may be removed by the Board
whenever in its judgment the best interest of the Company will be served
thereby, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed. Election or appointment of an officer or agent
or member of a committee shall not of itself create contract rights.
ARTICLE VII.
SHARE CERTIFICATES
Section 7.1. Entitlement to Certificates. Every holder of the
capital stock of the Company, unless and to the extent the Board by resolution
provides that any or all classes or series of stock shall be uncertificated,
shall be entitled to have a certificate, in such form as is approved by the
Board and conforms with applicable law, certifying the number of shares owned
by him. Each certificate representing shares shall state upon the face
thereof:
(1) that the corporation is organized under the laws of the State
of Texas;
(2) the name of the person to whom issued;
(3) the number and class of shares and the designation of the
series, if any, which such certificate represents; and
(4) the par value of each share represented by such certificate,
or a statement that the shares are without par value.
Section 7.2. Multiple Classes of Stock; Preemptive Rights. In the
event the Company shall be authorized to issue shares of more than one class,
each certificate representing shares issued by the Company (1) shall
conspicuously set forth on the face or back of the certificate a full statement
of (a) all of the designations, preferences, limitations and relative rights of
the shares of each class authorized to be issued and, (b) if the Company is
authorized to issue shares of any preferred or special class in series, the
variations in the relative rights and preferences of the shares of each such
series to the extent they have been fixed and determined and the authority of
the Board to fix and determine the relative rights and preferences of
subsequent series; or (2) shall conspicuously state on the face or back of the
certificate that (a) such a statement is set forth in the articles of
incorporation on file in the
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office of the Secretary of State of the State of Texas and (b) the Company will
furnish a copy of such statement to the record holder of the certificate
without charge on written request to the Company at its principal place of
business or registered office. In the event the Company has by its articles of
incorporation limited or denied the preemptive right of shareholders to acquire
unissued or treasury shares of the Company, each certificate representing
shares issued by the Company (1) shall conspicuously set forth on the face or
back of the certificate a full statement of the limitation or denial of
preemptive rights contained in the articles of incorporation, or (2) shall
conspicuously state on the face or back of the certificate that (a) such a
statement is set forth in the articles of incorporation on file in the office
of the Secretary of State of the State of Texas and (b) the Company will
furnish a copy of such statement to the record holder of the certificate
without charge on request to the Company at its principal place of business or
registered office.
Section 7.3. Signatures. Each certificate representing capital
stock of the Company shall be signed by or in the name of the Company by (1)
the chairman of the board, the president or a vice president; and (2) the
treasurer, an assistant treasurer, the secretary or an assistant secretary of
the Company. The signatures of the officers of the Company may be facsimiles.
In case any officer who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to hold such office before such
certificate is issued, it may be issued by the Company with the same effect as
if he held such office on the date of issue.
Section 7.4. Issuance and Payment. Subject to any provision of
the Constitution of the State of Texas to the contrary, the Board may authorize
shares to be issued for consideration consisting of any tangible or intangible
benefit to the Company, including, cash, promissory notes, services performed,
contracts for services to be performed, or other securities of the Company.
Shares may not be issued until the full amount of the consideration, fixed as
provided by law, has been paid. When such consideration shall have been paid
to the Company or to a corporation of which all the outstanding shares of each
class are owned by the Company, the shares shall be deemed to have been issued
and the subscriber or shareholder entitled to receive such issue shall be a
shareholder with respect to such shares, and the shares shall be considered
fully paid and non-assessable. In the absence of fraud in the transaction, the
judgment of the Board or the shareholders, as the case may be, as to the value
of the consideration received for shares shall be conclusive.
Section 7.5. Lost Certificates. The Board may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Company alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Company a bond in such sum as it may direct as indemnity
against any claim that may be made against the Company with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 7.6. Transfer of Stock. Upon surrender to the Company or
its transfer agent, if any, of a certificate for shares duly endorsed or
accompanied by proper evidence of
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succession, assignation or authority to transfer and of the payment of all
taxes applicable to the transfer of said shares, the Company shall be obligated
to issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction upon its books; provided, however, that
the Company shall not be so obligated unless such transfer was made in
compliance with applicable state and federal securities laws.
Section 7.7. Registered Shareholders. The Company shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends, vote and be held liable for calls
and assessments and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any person other
than such registered owner, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
ARTICLE VIII.
INDEMNIFICATION
Section 8.1. Definitions. For purposes of this Article VIII:
(1) "Corporation" includes any domestic or foreign predecessor
entity of the Company in a merger, consolidation, or other
transaction in which the liabilities of the predecessor are
transferred to the Company by operation of law and in any
other transaction in which the Company assumes the liabilities
of the predecessor but does not specifically exclude
liabilities that are the subject matter of this article;
(2) "Director" means any person who is or was a director of the
Company and any person who, while a director of the Company,
is or was serving at the request of the Company as a director,
officer, partner, venturer, proprietor, trustee, employee,
agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan or other enterprise;
(3) "Expenses" include court costs and attorneys' fees;
(4) "Official capacity" means
(i) when used with respect to a Director, the office of
Director in the Company, but does not include service
for any other foreign or domestic corporation or any
partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise;
(ii) when used with respect to a person other than a
Director, the elective or appointive office in the
Company held by the officer or the employment or
agency relationship undertaken by the employee or
agent on behalf of the Company, but does not include
service for any other foreign or
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domestic corporation or any partnership, joint
venture, sole proprietorship, trust, employee benefit
plan, or other enterprise; and
(5) "Proceeding" means any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action,
suit, or proceeding, and any inquiry or investigation that could
lead to such an action, suit, or proceeding.
Section 8.2. Mandatory Indemnification. The Company shall indemnify
a person who was, is, or is threatened to be made a named defendant or
respondent in a proceeding because the person is or was a Director only if it
is determined in accordance with Section 8.6 of this Article VIII that the
person:
(1) conducted himself in good faith;
(2) reasonably believed:
(i) in the case of conduct in his official capacity as a
Director of the Company, that his conduct was in the
Company's best interests; and
(ii) in all other cases, that his conduct was at least not
opposed to the Company's best interests; and
(3) in the case of any criminal proceeding, had no reasonable cause
to believe his conduct was unlawful.
Section 8.3. Prohibited Indemnification. Except to the extent
permitted by Section 8.5 of this Article VIII, a Director may not be
indemnified under Section 8.2 of this Article VIII in respect of a proceeding:
(1) in which the person is found liable on the basis that personal
benefit was improperly received by him, whether or not the
benefit resulted from an action taken in the person's official
capacity; or
(2) in which the person is found liable to the Company.
Section 8.4. Termination of Proceedings. The termination of a
proceeding by judgment, order, settlement, or conviction, or on a plea of nolo
contendere or its equivalent is not of itself determinative that the person did
not meet the requirements set forth in Section 8.2 of this Article VIII. A
person shall be deemed to have been found liable in respect of any claim, issue
or matter only after the person shall have been so adjudged by a court of
competent jurisdiction after exhaustion of all appeals therefrom.
Section 8.5. Judgments, Expenses, etc. A person may be indemnified
under Section 8.2 of this Article VIII against judgments, penalties (including
excise and similar taxes), fines, settlements, and reasonable expenses actually
incurred by the person in connection with the proceeding; but if the person is
found liable to the Company or is found
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liable on the basis that personal benefit was improperly received by the
person, the indemnification (1) is limited to reasonable expenses actually
incurred by the person in connection with the proceeding and (2) shall not be
made in respect of any proceeding in which the person shall have been found
liable for willful or intentional misconduct in the performance of his duty to
the Company.
Section 8.6. Determination of Indemnification. A determination of
indemnification under Section 8.2 of this Article VIII must be made:
(1) by a majority vote of a quorum consisting of directors who at the time
of the vote are not named defendants or respondents in the proceeding;
(2) if such a quorum cannot be obtained, by a majority vote of a committee
of the Board, designated to act in the matter by a majority vote of all
directors, consisting solely of two or more directors who at the time
of the vote are not named defendants or respondents in the proceeding;
(3) by special legal counsel selected by the Board or a committee thereof by
vote as set forth in subsection (1) or (2) of this Section 8.6, or, if
such a quorum cannot be obtained and such a committee cannot be
established, by a majority vote of all Directors; or
(4) by the shareholders of the Company in a vote that excludes the shares
held by Directors who are named defendants or respondents in the
proceeding.
Section 8.7. Determination of Reasonableness of Expenses.
Determination as to reasonableness of expenses must be made in the same manner
as the determination that indemnification is permissible, except that if the
determination that indemnification is permissible is made by special legal
counsel, determination as to reasonableness of expenses must be made in the
manner specified by subsection (3) of Section 8.6 of this Article VIII for the
selection of special legal counsel.
Section 8.8. Indemnification Against Reasonable Expenses. The
Company shall indemnify a Director against reasonable expenses incurred by him
in connection with a proceeding in which he is a named defendant or respondent
because he is or was a Director if he has been wholly successful, on the merits
or otherwise, in the defense of the proceeding.
Section 8.9. Payments in Advance of Disposition. Reasonable
expenses incurred by a Director who was, is, or is threatened to be made a
named defendant or respondent in a proceeding shall be paid or reimbursed by
the Company, in advance of the final disposition of the proceeding and without
any of the determinations specified in Sections 8.6 and 8.7 of this Article
VIII, after the Company receives a written affirmation by the Director of his
good faith belief that he has met the standard of conduct necessary for
indemnification under this Article VIII and a written undertaking by or on
behalf of the Director to repay the amount paid or reimbursed if it is
ultimately determined that he has not met those requirements.
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Section 8.10. Written Undertaking. The written undertaking required
by Section 8.9 of this Article VIII must be an unlimited general obligation of
the Director but need not be secured. It may be accepted without reference to
financial ability to make repayment.
Section 8.11. Consistency with Articles of Incorporation. Any
provision for the Company to indemnify or to advance expenses to a Director who
was, is, or is threatened to be made a named defendant or respondent in a
proceeding, whether contained in the articles of incorporation, these Bylaws, a
resolution of shareholders or Directors, an agreement, or otherwise, except in
accordance with Section 8.16 of this Article VIII, is valid only to the extent
it is consistent with this Article VIII as limited by the articles of
incorporation, if such a limitation exists.
Section 8.12. Other Expenses. Notwithstanding any other provision of
this Article VIII, the Company may pay or reimburse expenses incurred by a
Director in connection with his appearance as a witness or other participation
in a proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Section 8.13. Officers, Employees and Agents. An officer, employee
or agent of the Company shall be indemnified as, and to the same extent,
provided by Section 8.8 of this Article VIII for a Director and is entitled to
seek indemnification under such section to the same extent as a Director. The
Company shall advance expenses to an officer and may advance expenses to an
employee or agent of the Company to the same extent that it shall advance
expenses to Directors under this Article VIII.
Section 8.14. Other Capacities. A corporation may indemnify and
advance expenses to persons who are not or were not officers, employees, or
agents of the Company, but who are or were serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise to the same extent that it shall indemnify and
advance expenses to Directors under this Article VIII.
Section 8.15. Further Indemnification. The Company may indemnify and
advance expenses to an officer, employee, agent, or person identified in
Section 8.14 of this Article VIII and who is not a Director to such further
extent, consistent with law, as may be provided by the articles of
incorporation, these Bylaws, general or specific action of the Board, or
contract or as permitted or required by common law.
Section 8.16. Insurance. The Company may purchase and maintain
insurance or another arrangement on behalf of any person who is or was a
Director, officer, employee, or agent of the Company or who is or was serving
at the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent, or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise, against any liability
asserted against him and incurred by him in such a capacity or arising out of
his status as such a person, whether or not the Company would have the power to
indemnify him against that liability under this Article VIII. If the insurance
or other arrangement is with a person or entity that is not
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regularly engaged in the business of providing insurance coverage, the
insurance or arrangement may provide for payment of a liability with respect to
which the Company would not have the power to indemnify the person only if
including coverage for the additional liability has been approved by the
shareholders of the Company. Without limiting the power of the Company to
procure or maintain any kind of insurance or other arrangement, the Company
may, for the benefit of persons indemnified by the Company, (1) create a trust
fund; (2) establish any form of self-insurance; (3) secure its indemnity
obligation by grant of a security interest or other lien on the assets of the
Company; or (4) establish a letter of credit, guaranty, or surety arrangement.
The insurance or other arrangement may be procured, maintained, or established
within the Company or with any insurer or other person deemed appropriate by
the Board regardless of whether all or part of the stock or other securities of
the insurer or other person are owned in whole or part by the Company. In the
absence of fraud, the judgment of the Board as to the terms and conditions of
the insurance or other arrangement and the identity of the insurer or other
person participating in an arrangement shall be conclusive and the insurance or
arrangement shall not be voidable and shall not subject the Directors approving
the insurance or arrangement to liability, on any ground, regardless of whether
Directors participating in the approval are beneficiaries of the insurance or
arrangement.
Section 8.17. Report To Shareholders. Any indemnification of or
advance of expenses to a Director in accordance with this Article VIII shall be
reported in writing to the shareholders with or before the notice or waiver of
notice of the next shareholders' meeting or with or before the next submission
to shareholders of a consent to action without a meeting pursuant to Section A,
Article 9.10, of the Texas Business Corporation Act and, in any case, within
the 12-month period immediately following the date of the indemnification or
advance.
Section 8.18. Employee Benefit Plans. For purposes of this Article
VIII, the Company is deemed to have requested a Director to serve in capacity
in connection with an employee benefit plan whenever the performance by him of
his duties to the Company also imposes duties on or otherwise involves services
by him to the plan or participants or beneficiaries of the plan. Excise taxes
assessed on a Director with respect to an employee benefit plan pursuant to
applicable law are deemed fines. Action taken or omitted by him with respect
to an employee benefit plan in the performance of his duties for a purpose
reasonably believed by him to be in the interest of the participants and
beneficiaries of the plan is deemed to be for a purpose which is not opposed to
the best interests of the Company.
Section 8.19. Change in Governing Law. In the event of any amendment
or addition to Article 2.02-1 of the Texas Business Corporation Act or the
addition of any other section to such law which shall limit indemnification
rights thereunder, the Company shall, to the extent permitted by the Texas
Business Corporation Act, indemnify to the fullest extent authorized or
permitted hereunder, any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (including
an action by or in the right of the Company), by reason of the fact that he is
or was a Director, officer, employee or agent of the Company or is or was
serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other
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enterprise, against all judgments, penalties (including excise and similar
taxes), fines, settlements and reasonable expenses (including attorneys' fees
and court costs) actually and reasonably incurred by him in connection with
such action, suit or proceeding.
ARTICLE IX.
INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS
Section 9.1. Validity; Disclosure; Approval. No contract or
transaction between the Company and one or more of its directors or officers,
or between the Company and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers or have a financial interest, shall be void or voidable
solely for this reason, solely because the director or officer is present at or
participates in the meeting of the Board or committee thereof which authorizes
the contract or transaction, or solely because his or their votes are counted
for such purpose, if:
(1) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the
Board or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(2) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction
is specifically approved in good faith by vote of the shareholders; or
(3) the contract or transaction is fair as to the Company
as of the time it is authorized, approved, or ratified by the Board, a
committee thereof, or the shareholders.
Section 9.2. Quorum. Common or interested directors may be counted
in determining the presence of a quorum at a meeting of the Board or by a
committee which authorizes the contract or transaction.
Section 9.3. Nonexclusive. This Article IX shall not be construed
to invalidate any contract or transaction which would be valid in the absence
of this Article IX.
ARTICLE X.
MISCELLANEOUS
Section 10.1. Place of Meetings. All shareholders, directors and
committee meetings shall be held at such place or places, within or without the
State of Texas, as shall be designated from time to time by the Board or such
committee and stated in the notices thereof.
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If no such place is so designated, said meetings shall be held at the principal
business office of the Company.
Section 10.2. Fixing Record Dates.
(a) In order that the Company may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, to receive payment of any dividend or other
distribution or allotment of any rights, to exercise any rights in respect of
any change, conversion or exchange of stock or to effect any other lawful
action, or to make a determination of shareholders for any other proper purpose
(other than determining shareholders entitled to consent to action by
shareholders proposed to be taken without a meeting of shareholders), the Board
may fix, in advance, a record date for any such determination of shareholders,
which shall not be more than sixty (60) nor less than ten (10) days prior to
the date on which the particular action requiring such determination of
shareholders is to be taken. In the absence of any action by the Board, the
date on which a notice of meeting is given, or the date the Board adopts the
resolution declaring a dividend or other distribution or allotment or approving
any change, conversion or exchange, as the case may be, shall be the record
date. A record date validly fixed for any meeting of shareholders and the
determination of shareholders entitled to vote at such meeting shall be valid
for any adjournment of said meeting except where such determination has been
made through the closing of stock transfer books and the stated period of
closing has expired.
(b) In order that the Company may determine the
stockholders entitled to consent to corporate action in writing without a
meeting, the Board may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
Board, and which date shall not be more than ten (10) days after the date upon
which the resolution fixing the record date is adopted by the Board. If no
record date has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing without a
meeting, when no prior action by the Board is otherwise required, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Company by delivery to its registered
office in the State of Texas, its principal place of business, or an officer or
agent of the Company having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the Company's
registered office shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board and prior
action by the Board is required, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board adopts the resolution
taking such prior action.
Section 10.3. Waiver of Notice. Whenever any notice is required to be
given under law, the articles of incorporation or these Bylaws, a written
waiver of such notice, signed before or after the date of such meeting by the
person or persons entitled to said notice, shall be deemed equivalent to such
required notice. All such waivers shall be filed with the corporate records.
Attendance at a meeting shall constitute a waiver of notice of such meeting,
except where a person attends for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
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Section 10.4. Attendance via Communications Equipment. Unless
otherwise restricted by law, the articles of incorporation or these Bylaws,
members of the Board, members of any committee thereof or the shareholders may
hold a meeting by means of conference telephone or other communications
equipment by means of which all persons participating in the meeting can
effectively communicate with each other. Such participation in a meeting shall
constitute presence in person at the meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 10.5. Dividends. Dividends on the capital stock of the
Company, paid in cash, property, or securities of the Company, or any
combination thereof, and as may be limited by applicable law and applicable
provisions of the articles of incorporation (if any), may be declared by the
Board at any regular or special meeting.
Section 10.6. Reserves. Before payment of any dividend, there may be
set aside out of any funds of the Company available for dividends such sum or
sums as the Board from time to time, in its absolute discretion, thinks proper
as a reserve or reserves to meet contingencies, for equalizing dividends, for
repairing or maintaining any property of the Company, or for such other purpose
as the Board shall determine to be in the best interest of the Company; and the
Board may modify or abolish any such reserve in the manner in which it was
created.
Section 10.7. Reports to Shareholders. The Board shall present at
each annual meeting of shareholders, and at any special meeting of shareholders
when called for by vote of the shareholders, a statement of the business and
condition of the Company.
Section 10.8. Contracts and Negotiable Instruments. Except as
otherwise provided by law or these Bylaws, any contract or other instrument
relative to the business of the Company may be executed and delivered in the
name of the Company and on its behalf by the chairman of the board, the
president or any vice president; and the Board may authorize any other officer
or agent of the Company to enter into any contract or execute and deliver any
contract in the name and on behalf of the Company, and such authority may be
general or confined to specific instances as the Board may by resolution
determine. All bills, notes, checks or other instruments for the payment of
money shall be signed or countersigned by such officer, officers, agent or
agents and in such manner as are permitted by these Bylaws and/or as, from time
to time, may be prescribed by resolution (whether general or special) of the
Board. Unless authorized so to do by these Bylaws or by the Board, no officer,
agent or employee shall have any power or authority to bind the Company by any
contract or engagement, or to pledge its credit, or to render it liable
pecuniarily for any purpose or to any amount.
Section 10.9. Fiscal Year. The fiscal year of the Company shall be
fixed by resolution of the Board.
Section 10.10. Seal. The seal of the Company shall be in such form as
shall from time to time be adopted by the Board. The seal may be used by
causing it or a facsimile thereof to be impressed, affixed or otherwise
reproduced.
18
<PAGE> 23
Section 10.11. Books and Records. The Company shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its shareholders, Board and committees and shall keep at its registered
office or principal place of business, or at the office of its transfer agent
or registrar, a record of its shareholders, giving the names and addresses of
all shareholders and the number and class of the shares held by each.
Section 10.12. Resignation. Any director, committee member, officer or
agent may resign by giving written notice to the chairman of the board, the
president or the secretary. The resignation shall take effect at the time
specified therein, or immediately if no time is specified. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 10.13. Surety Bonds. Such officers and agents of the Company
(if any) as the chairman of the board, the president or the Board may direct,
from time to time, shall be bonded for the faithful performance of their duties
and for the restoration to the Company, in case of their death, resignation,
retirement, disqualification or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in their possession or
under their control belonging to the Company, in such amounts and by such
surety companies as the chairman of the board, the president or the Board may
determine. The premiums on such bonds shall be paid by the Company and the
bonds so furnished shall be in the custody of the Secretary.
Section 10.14. Proxies in Respect of Securities of Other Corporations.
The chairman of the board, the president, any vice president or the secretary
may from time to time appoint an attorney or attorneys or an agent or agents
for the Company to exercise, in the name and on behalf of the Company, the
powers and rights which the Company may have as the holder of stock or other
securities in any other corporation to vote or consent in respect of such stock
or other securities, and the chairman of the board, the president, any vice
president or the secretary may instruct the person or persons so appointed as
to the manner of exercising such powers and rights; and the chairman of the
board, the president, any vice president or the secretary may execute or cause
to be executed, in the name and on behalf of the Company and under its
corporate seal or otherwise, all such written proxies or other instruments as
he may deem necessary or proper in order that the Company may exercise such
powers and rights.
Section 10.15. Amendments. Unless otherwise provided by the Articles
of Incorporation, these Bylaws may be altered, amended, repealed or replaced at
any annual or regular meeting of the Board at which a quorum is present, if
notice of such alteration, amendment, repeal or replacement is contained in the
notice of such special meeting, by the affirmative vote of the directors
present at the meeting.
19
<PAGE> 1
EXHIBIT 4.2
================================================================================
RIGHTS AGREEMENT
by and between
INSPIRE INSURANCE SOLUTIONS, INC.
and
U.S. TRUST COMPANY OF TEXAS, N.A.
as Rights Agent
Dated as of
[DATE OF AGREEMENT]
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Section 1. Certain Definitions....................................................................................1
Section 2. Appointment of Rights Agent............................................................................6
Section 3. Issuance of Right Certificates.........................................................................6
Section 4. Form of Right Certificates.............................................................................7
Section 5. Countersignature and Registration......................................................................8
Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated,
Destroyed, Lost or Stolen Right Certificates...........................................................8
Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights..........................................9
Section 8. Cancellation and Destruction of Right Certificates....................................................10
Section 9. Reservation and Availability of Shares of Preferred Stock.............................................11
Section 10. Preferred Stock Record Date..........................................................................12
Section 11. Adjustment of Exercise Price, Number and Kind of Shares or Number of Rights..........................12
Section 12. Certification of Adjusted Exercise Price or Number of Shares.........................................17
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.................................18
Section 14. Fractional Rights and Fractional Shares..............................................................20
Section 15. Rights of Action.....................................................................................21
Section 16. Agreement of Right Holders...........................................................................21
Section 17. Right Certificate Holder Not Deemed a Shareholder....................................................22
Section 18. Concerning the Rights Agent..........................................................................22
Section 19. Merger or Consolidation of, or Change in Name of, the Rights Agent...................................22
Section 20. Duties of Rights Agent...............................................................................23
Section 21. Change of Rights Agent...............................................................................24
Section 22. Issuance of New Right Certificates...................................................................25
Section 23. Redemption...........................................................................................25
Section 24. Exchange.............................................................................................26
Section 25. Notice of Proposed Actions...........................................................................27
Section 26. Notices..............................................................................................28
Section 27. Supplements and Amendments...........................................................................29
Section 28. Successors...........................................................................................29
Section 29. Benefits of this Rights Agreement....................................................................29
Section 30. Determinations and Actions by the Board; etc.........................................................29
Section 31. Texas Contract.......................................................................................29
Section 32. Counterparts.........................................................................................30
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
Section 33. Descriptive Headings.................................................................................30
Section 34. Severability.........................................................................................30
</TABLE>
Exhibit A -- Summary of Rights
Exhibit B -- Form of Right Certificate
Exhibit C -- Form of Statement of Resolution
ii
<PAGE> 4
RIGHTS AGREEMENT
Rights Agreement, dated as of July ___, 1997, by and between INSpire
Insurance Solutions, Inc., a Texas corporation (the "Company"), and U.S. Trust
Company of Texas, N.A. (the "Rights Agent").
W I T N E S S E T H:
WHEREAS, on July 30, 1997, the Board of Directors of the Company has
authorized the issuance and declared a dividend of one right (a "Right") for
each share of the Company's Common Stock, par value $0.01 per share (the
"Common Stock"), outstanding as of the close of business on August ___, 1997
(the "Record Date"), each such Right representing the right to purchase one
one-hundredth of a share of Series A Junior Preferred Stock of the Company (the
"Preferred Stock") having the rights and preferences set forth in the form of
the Statement of Resolution attached hereto as Exhibit C authorized by the
Board of Directors on July 30, 1997, upon the terms and subject to the
conditions hereinafter set forth; and
WHEREAS, the Board of Directors of the Company has further authorized
the issuance of one Right (subject to adjustment) with respect to each share of
Common Stock that may become outstanding (whether originally issued or
delivered from the Company's treasury) between the Record Date and the earlier
to occur of the Redemption Date or the Final Expiration Date (as such terms are
hereinafter defined);
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms shall have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
hereinafter defined) who or which, together with all Affiliates (as such term
is hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall be the Beneficial Owner (as such term is hereinafter
defined) of 15% or more of the Voting Stock (as such term is hereinafter
defined) of the Company then outstanding; provided that an Acquiring Person
shall not include (i) an Exempt Person (as such term is hereinafter defined) or
(ii) any Person, together with all Affiliates and Associates of such Person,
who or which would be an Acquiring Person solely by reason of (A) being the
Beneficial Owner of shares of Voting Stock of the Company, the Beneficial
Ownership of which was acquired by such Person pursuant to any action or
transaction or series of related actions or transactions approved by the Board
of Directors before such Person otherwise became an Acquiring Person, or (B) a
reduction in the number of issued and outstanding shares of Voting Stock of the
Company pursuant to a transaction or a series of related transactions approved
by the Board of Directors of the Company (upon approval, in the case of
subclauses (A) and (B) of this clause (ii), by a majority of the Continuing
Directors (as such term is hereinafter defined)); provided further that in the
event the Person described in this clause (ii) does not become an Acquiring
Person by reason of subclause (A) or (B) of this clause (ii), such Person shall
nonetheless become an Acquiring Person upon its becoming the Beneficial Owner,
together with all Affiliates and Associates of such Person, of an additional 1%
of more of the Company's Voting Stock unless such additional 1% or more
Beneficial Ownership will not
<PAGE> 5
result in such Person becoming an Acquiring Person by reason of subclause (A)
or (B) of this clause (ii). Notwithstanding the foregoing, if the Board of
Directors of the Company determines in good faith (upon approval by a majority
of the Continuing Directors) that a Person who would otherwise be an "Acquiring
Person" as defined pursuant to the foregoing provisions of this paragraph (a)
has become such inadvertently, and such Person divests itself as promptly as
practicable (as determined in good faith by the Board of Directors of the
Company and a majority of the Continuing Directors), but in any event within
five Business Days, following receipt of written notice from the Company of
such event, of a sufficient number of shares of Voting Stock so that such
Person would no longer be an "Acquiring Person" as defined pursuant to the
foregoing provisions of this paragraph (a), then such Person shall not be
deemed an "Acquiring Person" for any purposes of this Rights Agreement.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Rights Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of, or to
"Beneficially Own", any securities (and correlative terms shall have
correlative meanings):
(i) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly,
"beneficially owns" (as determined pursuant to Rule 13d-3 of
the General Rules and Regulations under the Exchange Act, as
in effect on the date hereof); or
(ii) which such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has (A) the
right to acquire (whether such right is exercisable
immediately or only after the passage of time or the
fulfillment of a condition or both) pursuant to any
agreement, arrangement or understanding, or upon the exercise
of conversion rights, exchange rights, other rights (other
than these Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "Beneficially Own", securities
tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until
such tendered securities are accepted for purchase or
exchange, or (B) the right to vote, alone or in concert with
others, pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of,
or to "Beneficially Own", any securities if the agreement,
arrangement or understanding to vote such securities (1)
arises solely from a revocable proxy or consent given in
response to a proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations
under the Exchange Act, and (2) is not at the time reportable
by such Person on a Schedule 13D report under the Exchange
Act (or any comparable or successor report), other than by
reference to a proxy or consent solicitation being conducted
by such Person; or
(iii) which are beneficially owned, directly or
indirectly, by any other Person with which such Person or any
of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in writing) for
the purpose of acquiring, holding, voting (except as
described in clause (B) of subparagraph (ii) of this
paragraph (c)) or disposing of any securities of the Company;
provided, however, that for purposes of determining
Beneficial Ownership of securities under this Rights
Agreement, officers and directors of the Company solely by
reason of their status as such shall not constitute a group
2
<PAGE> 6
(notwithstanding that they may be Associates of one another
or may be deemed to constitute a group for purposes of
Section 13(d) of the Exchange Act) and shall not be deemed to
own shares owned by another officer or director of the
Company.
Notwithstanding anything in this paragraph (c) to the contrary, a
Person shall not be deemed the "Beneficial Owner" of, or to "Beneficially Own,"
any security beneficially owned by another Person solely by reason of an
agreement, arrangement or understanding with such other Person for the purposes
of: (x) soliciting the Company's shareholders for the election of director
nominees or any other shareholder resolution, the formation of and membership
on any committee for the purpose of promoting or opposing any shareholder
resolution or for electing a slate of nominees to the Company's Board of
Directors, service on such a slate of nominees, or agreement to a slate of
director nominees, provided that such other Person retains the right at any
time to withdraw as a nominee or member of any such committee, and to withhold
or revoke any vote or proxy for or against any such shareholder resolution or
for such slate of nominees; (y) entering into revocable voting agreements or
the granting or solicitation of revocable proxies with respect to any of the
matters described in the foregoing clause (x); or (z) the sharing of expenses
and the indemnification against expenses and liabilities by any such other
Person with respect to expenses incurred or conduct occurring during the time
such other Person is a nominee or a member of any such committee described in
the foregoing clause (x). Further, notwithstanding anything in this paragraph
(c) to the contrary, a Person engaged in the business of underwriting
securities shall not be deemed the "Beneficial Owner" of, or to "Beneficially
Own," any securities acquired in good faith in a firm commitment underwriting
until the expiration of forty days after the date of such acquisition.
Notwithstanding anything in this paragraph (c) to the contrary, the
phrase "then outstanding," when used with reference to a Person's Beneficial
Ownership of securities of the Company, shall mean the number of such
securities then issued and outstanding which such Person would be deemed to own
beneficially hereunder.
(d) "Business Day" shall mean any day other than a Saturday, Sunday,
or a day on which banking institutions in the State of Texas are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M. Fort
Worth, Texas time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Fort Worth, Texas time, on the next
succeeding Business Day.
(f) "Common Stock" when used with reference to the Company shall mean
the Common Stock (presently par value $0.01 per share) of the Company. "Common
Stock" when used with reference to any Person other than the Company which
shall be organized in corporate form shall mean the capital stock or other
equity security with the greatest per share voting power of such Person or, if
such Person is a Subsidiary of another Person, the Person or Persons which
ultimately control such first-mentioned Person. "Common Stock" when used with
reference to any Person other than the Company which shall not be organized in
corporate form shall mean units of beneficial interest which shall represent
the right to participate in profits, losses, deductions and credits of such
Person and which shall be entitled to exercise the greatest voting power per
unit of such Person or, if such other Person is a Subsidiary of another Person,
the Person or Persons which ultimately control such first-mentioned Person.
(g) "Continuing Director" shall mean any member of the Board of
Directors, while such person is a member of the Board of Directors, who is not
an Acquiring Person, or an
3
<PAGE> 7
Affiliate or Associate of an Acquiring Person, or a representative or
nominee of an Acquiring Person or of any such Affiliate or Associate, and who
either (i) was a member of the Board of Directors on the date of this Rights
Agreement or (ii) subsequently became a member of the Board of Directors, and
whose nomination for election or election to the Board of Directors was
recommended or approved by a majority of the Continuing Directors then on the
Board of Directors.
(h) "Distribution Date" shall have the meaning set forth in Section
3(b) hereof.
(i) "Exchange Act" shall have the meaning set forth in Section 1(b)
hereof.
(j) "Exempt Person" shall mean (i) the Company, (ii) any Subsidiary
of the Company, (iii) any employee benefit plan or employee stock plan of the
Company or any Subsidiary of the Company, or any trust or other entity
organized, appointed, established or holding Common Stock for or pursuant to
the terms of any such plan; (iv) The Millers Mutual Fire Insurance Company and
its Affiliates and Associates; (v) F. George Dunham, III ("Dunham") and any
descendant of Dunham, or any spouse, widow or widower of Dunham or of any such
descendant (Dunham and any such descendants, spouses, widows and widowers
collectively defined as the "Family Members"); (vi) any trust of which Dunham
is a trustee; (vii) any estate of a Family Member, or any trust established by
or for the benefit directly or indirectly of one or more Family Members
provided that one or more Family Members or charitable organizations which
qualify as exempt organizations under Section 501(c) of the Internal Revenue
Code of 1986, as amended ("Charitable Organizations") collectively are the
beneficiaries of at least 50% of the actuarially-determined beneficial interest
in such estate or trust; (viii) any charitable Organization which is
established by one or more Family Members (a "Family Charitable Organization");
(ix) any corporation of which a majority of the voting power or a majority of
the equity interest is held, directly or indirectly, by or for the benefit of
one or more Family Members, estates or trusts described in clause (vii) above,
or Family Charitable Organizations; (x) any partnership, limited liability
company or other entity or arrangement of which a majority of the voting
interest or a majority of the economic interest is held, directly or
indirectly, by or for the benefit of one or more Family Members, estates or
trusts described in clause (vii) above, or Family Charitable Organizations;
(xi) any trustee, executor, director or indirect managing or general partner or
other Person who has or shares voting and/or investment power over Common
Shares beneficially owned by any of the foregoing Persons solely in their
capacities as such; or (xiii) any Person designated as such an "Exempt Person"
by the Board of Directors of the Company (but only if such action is approved
by a majority of Continuing Directors); provided, however, that the Board of
Directors may determine by a two-thirds (2/3) majority vote that a Person
previously designated as an "Exempt Person" shall no longer be designated as
such an "Exempt Person" with effect on the date of such vote (but only if such
action is approved by a majority of Continuing Directors).
(k) "Exercise Price" shall have the meaning set forth in Sections 4
and 7(b) hereof.
(l) "Fair Market Value" of any property shall mean the fair market
value of such property as determined in accordance with Section 11(d) hereof.
(m) "Final Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
4
<PAGE> 8
(n) "Person" shall mean individual, corporation, partnership, limited
liability company, business trust, association, estate, trust, foundation or
other entity and shall include any successor (by merger or otherwise) of such
entity.
(o) "Preferred Stock" shall mean shares of Series A Junior Preferred
Stock, $1.00 par value, of the Company and, to the extent that there is not a
sufficient number of shares of Series A Junior Preferred Stock authorized to
permit the full exercise of the Rights, any other series of Preferred Stock,
$1.00 par value, of the Company designated for such purpose containing terms
substantially similar to the terms of the Series A Junior Preferred Stock.
(p) "Principal Party" shall have the meaning set forth in Section
13(b) hereof.
(q) "Qualifying Tender Offer" shall mean a tender or exchange offer
for all outstanding shares of Common Stock of the Company approved by a
majority of the Board of Directors (upon approval by a majority of the
Continuing Directors), after taking into account the potential long-term value
of the Company and all other factors that they consider relevant. (r)
"Redemption Date" shall have the meaning set forth in Section 7(a) hereof.
(s) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(t) "Right Certificate" shall have the meaning set forth in Section
3(d) hereof.
(u) "Spread" shall have the meaning set forth in Section 11(a)(iii)
hereof.
(v) "Stock Acquisition Date" shall mean the first date on which there
shall be a public announcement by the Company or an Acquiring Person that an
Acquiring Person has become such (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) or such earlier date as a majority of the Continuing Directors
shall become aware of the existence of an Acquiring Person.
(w) "Subsidiary" of a Person shall mean any corporation or other
entity of which securities or other ownership interests having voting power
sufficient to elect a majority of the board of directors or other persons
performing similar functions are beneficially owned, directly or indirectly, by
such Person or by any corporation or other entity that is otherwise controlled
by such Person.
(x) "Summary of Rights" shall have the meaning set forth in Section
3(a) hereof.
(y) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
(z) "Transfer Tax" shall mean any tax or charge, including any
documentary stamp tax, imposed or collected by any governmental or regulatory
authority in respect of any transfer of any security, instrument or right,
including Rights, shares of Common Stock and shares of Preferred Stock.
(aa) "Triggering Event" shall mean any event described in Section
11(a)(ii) or Section 13(a).
5
<PAGE> 9
(bb) "Voting Stock" shall mean (i) the Common Stock of the Company,
and (ii) any other shares of capital stock of the Company entitled to vote
generally in the election of directors or entitled to vote together with the
Common Stock in respect of any merger, consolidation, sale of all or
substantially all of the Company's assets, liquidation, dissolution or winding
up. For purposes of this Agreement, a stated percentage of the Voting Stock
shall mean a number of shares of the Voting Stock as shall equal in voting
power that stated percentage of the total voting power of the then outstanding
shares of Voting Stock in the election of a majority of the Board of Directors
or in respect of any merger, consolidation, sale of all or substantially all of
the Company's assets, liquidation, dissolution or winding up.
Section 2. Appointment of Rights. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights in
accordance with the terms and conditions hereof, and the Rights Agent hereby
accepts such appointment. The Company may from time to time appoint such
co-rights agents as it may deem necessary or desirable.
Section 3. Issuance of Right Certificates.
(a) On the Record Date (or as soon as practicable thereafter), the
Company or the Rights Agent shall send a copy of a Summary of Rights, in
substantially the form attached hereto as Exhibit A (the "Summary of Rights"),
by first class mail, postage prepaid, to each record holder of the Common Stock
as of the close of business on the Record Date, at the address of such holder
shown on the records of the Company.
(b) Until the Close of Business on the day which is the earlier of
(i) the tenth day after the Stock Acquisition Date, or (ii) the tenth business
day (or such later date as may be determined by action of the Board of
Directors upon approval by a majority of the Continuing Directors, prior to
such time as any Person becomes an Acquiring Person) after the date of the
commencement by any Person (other than an Exempt Person) of, or the first
public announcement of the intent of any Person (other than an Exempt Person)
to commence, a tender or exchange offer upon the successful consummation of
which such Person, together with its Affiliates and Associates, would be the
Beneficial Owner of 15% or more of the then outstanding shares of Voting Stock
of the Company (irrespective of whether any shares are actually purchased
pursuant to any such offer) (the earlier of such dates being herein referred to
as the "Distribution Date"), (x) the Rights shall be evidenced by the
certificates for Common Stock registered in the name of the holders of Common
Stock and not by separate Right Certificates and the record holders of such
certificates for Common Stock shall be the record holders of the Rights
represented thereby, and (y) each Right shall be transferable only
simultaneously and together with the transfer of a share of Common Stock
(subject to adjustment as hereinafter provided), including a transfer to the
Company, except pursuant to the provisions of Section 23 or Section 24. Until
the Distribution Date (or, if earlier, the Redemption Date or Final Expiration
Date), the surrender for transfer of any certificate for Common Stock shall
constitute the surrender for transfer of the Right or Rights associated with
the Common Stock evidenced thereby, whether or not accompanied by a copy of the
Summary of Rights.
(c) Rights shall be issued in respect of all shares of Common Stock
that become outstanding after the Record Date but prior to the earliest of the
Distribution Date, the Redemption Date or the Final Expiration Date and, in
certain circumstances provided in Section 22 hereof, may be issued in respect
of shares of Common Stock that become outstanding after the Distribution Date.
Certificates for Common Stock (including, without limitation, certificates
issued upon original issuance, disposition from the Company's treasury or
transfer or exchange of Common Stock) after the Record Date but prior to the
earliest of the Distribution Date, the
6
<PAGE> 10
Redemption Date, or the Final Expiration Date (or, in certain
circumstances as provided in Section 22 hereof, after the Distribution Date)
shall have impressed, printed, written or stamped thereon or otherwise affixed
thereto the following legend:
This certificate also evidences and entitles the holder
hereof to the same number of Rights (subject to adjustment)
as the number of shares of Common Stock represented by this
certificate, such Rights being on the terms provided under
the Rights Agreement between INSpire Insurance Solutions,
Inc. and U.S. Trust Company of Texas, N.A. (the "Rights
Agent"), dated as of July ___, 1997, as it may be amended
from time to time (the "Rights Agreement"), the terms of
which are incorporated herein by reference and a copy of
which is on file at the principal executive offices of
INSpire Insurance Solutions, Inc. Under certain
circumstances, as set forth in the Rights Agreement, such
Rights shall be evidenced by separate certificates and shall
no longer be evidenced by this certificate. INSpire
Insurance Solutions, Inc. shall mail to the registered
holder of this certificate a copy of the Rights Agreement
without charge within five days after receipt of a written
request therefor. Under certain circumstances as provided in
Section 7(e) of the Rights Agreement, Rights issued to or
Beneficially Owned by Acquiring Persons or their Affiliates
or Associates (as such terms are defined in the Rights
Agreement) or any subsequent holder of such Rights shall be
null and void and may not be transferred to any Person.
(d) As soon as practicable after the Distribution Date, the Company
will prepare and execute, the Rights Agent will countersign, and the Company
will send or cause to be sent (and the Rights Agent will, if requested, send),
by first class mail, postage prepaid, to each record holder of the Common Stock
as of the Close of Business on the Distribution Date, as shown by the records
of the Company, at the address of such holder shown on such records, a
certificate in the form provided by Section 4 hereof (a "Right Certificate"),
evidencing one Right (subject to adjustment as provided herein) for each share
of Common Stock so held. As of and after the Distribution Date, the Rights
shall be evidenced solely by Right Certificates and may be transferred by the
transfer of the Right Certificate as permitted hereby, separately and apart
from any transfer of one or more shares of Common Stock.
Section 4. Form of Right Certificates. The Right Certificates (and
the forms of election to purchase shares, certificate and assignment to be
printed on the reverse thereof), when, as and if issued, shall be substantially
in the form set forth in Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Common Stock or the Rights may from time to time be
listed or as the Company may deem appropriate to conform to usage or otherwise
and as are not inconsistent with the provisions of this Rights Agreement.
Subject to the provisions of Section 22 hereof, Right Certificates evidencing
Rights whenever issued, (i) shall be dated as of the date of issuance of the
Rights they represent, and (ii) subject to adjustment from time to time as
provided herein, on their face shall entitle the holders thereof to purchase
such number of shares (including fractional shares which are integral multiples
of one-hundredth of a share) of Preferred Stock as shall be set forth therein
at the price payable upon exercise of a Right provided by Section 7(b) hereof
as the same may from time to time be adjusted as provided herein (the "Exercise
Price").
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<PAGE> 11
Section 5. Countersignature and Registration
(a) Each Right Certificate shall be executed on behalf of the Company
by its Chairman of the Board, President or any Vice President, either manually
or by facsimile signature, and have affixed thereto the Company's seal or a
facsimile thereof which shall be attested by the Secretary or any Assistant
Secretary of the Company, either manually or by facsimile signature. Each Right
Certificate shall be countersigned by the Rights Agent either manually or by
facsimile signature and shall not be valid for any purpose unless so
countersigned. In case any officer of the Company who shall have signed any
Right Certificate shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery of the
certificate by the Company, such Right Certificate, nevertheless, may be
countersigned by the Rights Agent and issued and delivered with the same force
and effect as though the person who signed such Right Certificates had not
ceased to be such officer of the Company. Any Right Certificate may be signed
on behalf of the Company by any person who, on the date of the execution of
such Right Certificate, shall be a proper officer of the Company to sign such
Right Certificate, although at the date of the execution of this Rights
Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or one or more offices designated as
the appropriate place for surrender of Right Certificates upon exercise or
transfer, and in such other locations as may be required by law, books for
registration and transfer of the Right Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
(a) Subject to the provisions of Sections 7(e), 7(f), 14 and 24
hereof, at any time after the Close of Business on the Distribution Date, and
at or prior to the Close of Business on the earlier of the Redemption Date or
the Final Expiration Date, any Right Certificate may be (i) transferred, or
(ii) split up, combined or exchanged for one or more other Right Certificates,
entitling the registered holder to purchase a like number of shares of
Preferred Stock as the Right Certificate or Right Certificates surrendered then
entitled such holder to purchase. Any registered holder desiring to transfer
any Right Certificate shall surrender the Right Certificate at the office of
the Rights Agent designated for the surrender of Right Certificates with the
form of certificate and assignment on the reverse side thereof duly endorsed
(or enclosed with such Right Certificate a written instrument of transfer in
form satisfactory to the Company and the Rights Agent), duly executed by the
registered holder thereof or his attorney duly authorized in writing, and with
such signature duly guaranteed. Any registered holder desiring to split up,
combine or exchange any Right Certificate shall make such request in writing
delivered to the Rights Agent, and shall surrender the Right Certificate to be
split up, combined or exchanged at the office of the Rights Agent designated
therefor. Thereupon, the Rights Agent shall countersign and deliver to the
person entitled thereto a Right Certificate or Right Certificates, as the case
may be, as so requested. The Company may require payment of a sum sufficient to
cover any Transfer Tax that may be imposed in connection with any transfer,
split up, combination or exchange of any Right Certificates.
(b) Subject to the provisions of Sections 7(e), 7(f), 14 and 24
hereof, upon receipt by the Company and the Rights Agent of evidence reasonably
satisfactory to them of the loss, theft, destruction or mutilation of a Right
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to them and, if requested
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<PAGE> 12
by the Company, reimbursement to the Company and the Rights Agent of
all reasonable expenses incidental thereto, or upon surrender to the
Rights Agent and cancellation of the Right Certificate if mutilated,
the Company shall issue and deliver a new Right Certificate of like
tenor to the Rights Agent for delivery to the registered owner in lieu
of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Exercise Price; Expiration Date of
Rights.
(a) The Rights shall not be exercisable until, and shall become
exercisable on, the Distribution Date (unless otherwise provided herein,
including, without limitation, the restrictions on exercisability set forth in
Sections 7(e), 23(b) and 24 hereof). Except as otherwise provided herein, the
Rights may be exercised, in whole or in part, at any time commencing with the
Distribution Date upon surrender of the Right Certificate, with the form of
election to purchase and certificate on the reverse side thereof duly executed
(with signatures duly guaranteed), to the Rights Agent at the principal office
of the Rights Agent, in Dallas, Texas, together with payment of the Exercise
Price for each Right exercised, subject to adjustment as hereinafter provided,
at or prior to the Close of Business on the earliest of (i) August ___, 2007
(the "Final Expiration Date"), (ii) the date on which the Rights are redeemed
as provided in Section 23 hereof (the "Redemption Date"), (iii) the date on
which such Rights expire pursuant to Section 13(e) hereof, or (iv) the date on
which the Rights are exchanged as provided in Section 24 hereof.
(b) The Exercise Price shall initially be $40.00 for each one
one-hundredth (1/100) of a share of Preferred Stock issued pursuant to the
exercise of a Right. The Exercise Price and the number of shares of Preferred
Stock or other securities to be acquired upon exercise of a Right shall be
subject to adjustment from time to time as provided in Sections 11 and 13
hereof. The Exercise Price shall be payable in lawful money of the United
States of America, in accordance with paragraph (c) below.
(c) Except as otherwise provided herein, upon receipt of a Right
Certificate representing exercisable Rights with the form of election to
purchase duly executed, accompanied by payment by certified check, cashier's
check, bank draft or money order payable to the Company or the Rights Agent of
the Exercise Price for the shares to be purchased and an amount equal to any
applicable Transfer Tax required to be paid by the holder of the Right
Certificate in accordance with Section 9(e) hereof, the Rights Agent shall
thereupon promptly (i) requisition from any transfer agent of the Preferred
Stock of the Company one or more certificates representing the number of shares
of Preferred Stock to be so purchased, and the Company hereby authorizes and
directs such transfer agent to comply with all such requests, (ii) as provided
in Section 14(b) hereof, at the election of the Company, cause depositary
receipts to be issued in lieu of fractional shares of Preferred Stock, (iii) if
the election provided for in the immediately preceding clause (ii) has not been
made, requisition from the Company the amount of cash to be paid in lieu of the
issuance of fractional shares in accordance with Section 14(b) hereof, (iv)
after receipt of such Preferred Stock certificates and, if applicable,
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Right Certificate, registered in such name or names
as may be designated by such holder, and (v) when appropriate, after receipt,
promptly deliver such cash to or upon the order of the registered holder of
such Right Certificate; provided, however, that in the case of a purchase of
securities, other than Preferred Stock, pursuant to Section 13 hereof, the
Rights Agent shall promptly take the appropriate actions corresponding in such
case to that referred to in the foregoing clauses (i) through (v) of this
Section 7(c). Notwithstanding the foregoing provisions of this Section 7(c),
the Company may suspend the exercisability of the Rights for a reasonable
period, not in excess of 90 days, during which the Company seeks to register
under the Securities Act of 1933, as amended (the
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<PAGE> 13
"Securities Act"), and any applicable securities law of any other
jurisdiction, the shares of Preferred Stock to be issued pursuant to the
Rights.
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be
issued by the Rights Agent to the registered holder of such Right Certificate
or his assign, subject to the provisions of Section 14(b) hereof.
(e) Notwithstanding any provision of this Rights Agreement to the
contrary, from and after the time (the "invalidation time") when any Person
first becomes an Acquiring Person, other than pursuant to a Qualifying Tender
Offer, any Rights that are beneficially owned by (x) such Acquiring Person (or
any Associate or Affiliate of such Acquiring Person), (y) a transferee of such
Acquiring Person (or any such Associate or Affiliate) who becomes a transferee
after the invalidation time, or (z) a transferee of such Acquiring Person (or
any such Associate or Affiliate) who becomes a transferee prior to or
concurrently with the invalidation time pursuant to either (I) a transfer from
the Acquiring Person to holders of its equity securities or to any Person with
whom it has any continuing agreement, arrangement or understanding regarding
the transferred Rights, or (II) a transfer which the Board of Directors has
determined is part of a plan, arrangement or understanding which has the
purpose or effect of avoiding the provisions of this Section 7(e), and
subsequent transferees of such Persons referred to in clause (y) and (z) above,
shall be void without any further action and any holder of such Rights shall
thereafter have no rights whatsoever with respect to such Rights under any
provision of this Rights Agreement. The Company shall use all reasonable
efforts to ensure that the provisions of this Section 7(e) are complied with,
but shall have no liability to any holder of Right Certificates or any other
Person as a result of its failure to make any determination with respect to an
Acquiring Person or its Affiliates, Associates or transferees hereunder. No
Right Certificate shall be issued pursuant to Section 3 hereof that represents
Rights Beneficially Owned by an Acquiring Person whose Rights would be void
pursuant to the provisions of this Section 7(e) or any Associate or Affiliate
thereof; no Right Certificate shall be issued at any time upon the transfer of
any Rights to an Acquiring Person whose Rights would be void pursuant to the
provisions of this Section 7(e) or any Associate or Affiliate thereof or to any
nominee of such Acquiring Person, Associate or Affiliate; and any Right
Certificate delivered to the Rights Agent for transfer to an Acquiring Person
whose Rights would be void pursuant to the provisions of this Section 7(e)
shall be canceled.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such record holder shall have
(i) completed and signed the certificate following the form of election to
purchase set forth on the reverse side of the Right Certificate surrendered for
such exercise, and (ii) provided such additional evidence of the identity of
the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All
Right Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in canceled form,
or, if surrendered to the Rights Agent, shall be canceled by it, and no Right
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Rights Agreement. The Company shall deliver to
the Rights Agent for cancellation and retirement, and the Rights Agent shall
cancel and retire, any Right Certificate purchased or acquired by the Company
otherwise than upon the exercise thereof. The Rights Agent shall deliver all
canceled Right Certificates to the Company, or shall, at the written request
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<PAGE> 14
of the Company, destroy such canceled Right Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
Section 9. Reservation and Availability of Shares of Preferred Stock.
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock or out of authorized and issued shares of Preferred Stock held
in its treasury, such number of shares of Preferred Stock as will from time to
time be sufficient to permit the exercise in full of all outstanding Rights
and, after the occurrence of a Triggering Event, shall, to the extent
reasonably practicable, so reserve and keep available a sufficient number of
shares of Common Stock (and/or other securities) which may be required to
permit the exercise in full of all outstanding Rights.
(b) If the Preferred Stock (or, following the occurrence of a
Triggering Event, the Common Stock and/or other securities) is at any time
listed on a national securities exchange or included for quotation on any
transaction reporting system, then so long as the Preferred Stock (and,
following the occurrence of any such Triggering Event, Common Stock and/or
other securities) issuable and deliverable upon exercise of the Rights may be
listed on such exchange or included for quotation on any such transaction
reporting system, the Company shall use its best efforts to cause, from and
after such time as the Rights become exercisable (but only to the extent that
it is reasonably likely that the Rights will be exercised), all shares reserved
for such issuance to be listed on such exchange or included for quotation on
any such transaction reporting system upon official notice of issuance upon
such exercise.
(c) The Company covenants and agrees that it will take all such
action as may be necessary to insure that all shares of Preferred Stock
delivered upon exercise of Rights (or, following the occurrence of a Triggering
Event, shares of Common Stock and/or other securities) shall, at the time of
delivery of the certificates for such shares or other securities (subject to
payment of the Exercise Price in respect thereof), be duly and validly
authorized and issued and fully paid and nonassessable.
(d) The Company shall use its best efforts to (i) file, as soon as
practicable following the occurrence of the event described in Section
11(a)(ii) hereof, or as soon as is required by law following the Distribution
Date, as the case may be, a registration statement under the Securities Act,
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Securities Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (b) the
date of the expiration of the Rights. The Company may temporarily suspend, for
a period of time not to exceed 90 days, exercisability of the Rights in order
to prepare and file a registration statement under the Securities Act and
permit it to become effective. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained and until a registration
statement under the Securities Act (if required) shall have been declared
effective.
(e) The Company covenants and agrees that it will pay when due and
payable any and all U.S. federal and state Transfer Taxes which may be payable
in respect of the issuance or delivery of the Right Certificates or of any
shares of Preferred Stock (or, following the occurrence of a Triggering Event,
Common Stock and/or other securities) issued or delivered
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<PAGE> 15
upon the exercise of Rights. The Company shall not, however, be
required to pay any Transfer Tax which may be payable in respect of
any transfer or delivery of a Right Certificate to a Person other
than, or the issuance or delivery of certificates for Preferred Stock
(or, following the occurrence of a Triggering Event, Common Stock
and/or other securities) upon exercise of Rights in a name other than
that of, the registered holder of the Right Certificate, and the
Company shall not be required to issue or deliver a Right Certificate
or certificate for Preferred Stock (or, following the occurrence of a
Triggering Event, Common Stock and/or other securities) to a Person
other than such registered holder until any such Transfer Tax shall
have been paid (any such Transfer Tax being payable by the holder of
such Right Certificate at the time of surrender) or until it has been
established to the Company's satisfaction that no such Transfer Tax is
due.
Section 10. Preferred Stock Record Date". Each Person in whose name
any certificate for shares of Preferred Stock (or Common Stock and/or
other securities, as the case may be) is issued upon the exercise of
Rights shall for all purposes be deemed to have become the holder of
record of the securities represented thereby on, and such certificate
shall be dated as of, the date upon which the Right Certificate
evidencing such Rights was duly surrendered and payment of the
Exercise Price (and any applicable Transfer Taxes) was made; provided,
however, that, if the date of such surrender and payment is a date
upon which the Preferred Stock (or Common Stock and/or other
securities, as the case may be) transfer books of the Company are
closed, such Person shall be deemed to have become the record holder
of such securities on, and such certificate shall be dated as of, the
next succeeding Business Day on which the applicable transfer books of
the Company are open. Prior to the exercise of the Rights evidenced
thereby, the holder of a Right Certificate, as such, shall not be
entitled to any rights of a shareholder of the Company with respect to
shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other
distributions or to exercise any preemptive rights, and shall not be
entitled to receive any notice of any proceedings of the Company,
except as provided herein.
Section 11. Adjustment of Exercise Price, Number and Kind of Shares
or Number of Rights. The Exercise Price, the number and kind of shares
which may be purchased upon exercise of a Right and the number of
Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any time after
the date of this Rights Agreement (A) declare or pay any dividend on
the Preferred Stock payable in shares of Preferred Stock, (B)
subdivide or split the outstanding shares of Preferred Stock into a
greater number of shares, (C) combine or consolidate the outstanding
shares of Preferred Stock into a smaller number of shares or effect a
reverse split of the outstanding shares of Preferred Stock, or (D)
issue any shares of its capital stock in a reclassification of the
Preferred Stock (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing
or surviving corporation), except as otherwise provided in this
Section 11(a), the Exercise Price in effect at the time of the record
date for such event, and the number and kind of shares of capital
stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be
entitled to receive the aggregate number and kind of shares of
capital stock which, if such Right had been exercised immediately
prior to such date and at a time when the Preferred Stock transfer
books of the Company were open, he would have owned upon such
exercise and been entitled to receive by virtue of such event;
provided, however, that in no event shall the consideration to be
paid upon the exercise of one Right be less than the aggregate par
value of the
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<PAGE> 16
shares of capital stock of the Company issuable upon exercise of one
Right. If an event occurs which would require an adjustment under
both this Section 11(a)(i) and Section 11(a)(ii) hereof, the
adjustment provided for in this Section 11(a)(i) shall be in addition
to, and shall be made prior to, any adjustment required pursuant to
Section 11(a)(ii) hereof.
(ii) Subject to Section 23 and Section 24 of this Rights
Agreement, in the event that any Person (other than an Exempt
Person), alone or together with its Affiliates and Associates, shall
become an Acquiring Person, except pursuant to a Qualifying Tender
Offer, then, except as otherwise provided in this Section 11, each
holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive upon exercise of such Right at a
price equal to the then current Exercise Price multiplied by the
number of one one-hundredths of a share of Preferred Stock for which
a Right is then exercisable, in accordance with the terms of this
Rights Agreement and in lieu of Preferred Stock, such number of
shares of Common Stock of the Company as shall equal the result
obtained by (x) multiplying the then current Exercise Price by the
number of one one-hundredths of a share of Preferred Stock for which
a Right is then exercisable and dividing that product by (y) 50% of
the Fair Market Value of the Company's Common Stock (determined
pursuant to Section 11(d) hereof) on the date of the occurrence of
such event; provided, however, that if the transaction that would
otherwise give rise to the foregoing adjustment is also subject to
the provisions of Section 13 hereof, then only the provisions of
Section 13 hereof shall apply and no adjustment shall be made
pursuant to this Section 11(a)(ii).
(iii) In lieu of issuing Common Stock in accordance with Section
11(a)(ii) hereof, the Company may, if the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors,
determines that such action is necessary or appropriate and not
contrary to the interest of holders of Rights (and, in the event that
the number of shares of Common Stock which are authorized by the
Company's Articles of Incorporation but not outstanding or reserved
for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit the exercise in full of the Rights, the
Company shall): (A) determine the excess of (1) the value of the
Common Stock issuable upon the exercise of a Right (the "Current
Value") over (2) the Exercise Price (such excess being referred to as
the "Spread") and (B) with respect to each Right, make adequate
provision to substitute for such Common Stock, upon exercise of the
Rights, (1) cash, (2) a reduction in the Exercise Price, (3) other
equity securities of the Company (including, without limitation,
shares or units of shares of any series of preferred stock which the
Board of Directors of the Company, upon approval by a majority of the
Continuing Directors, has deemed to have the same value as Common
Stock (such shares or units of shares of preferred stock are herein
called "common stock equivalents")), (4) debt securities of the
Company, (5) other assets or (6) any combination of the foregoing,
having an aggregate value equal to the Current Value, where such
aggregate value has been determined by the Board of Directors of the
Company, upon approval by a majority of the Continuing Directors;
provided, however, if the Company shall not have made adequate
provision to deliver value pursuant to clause (B) above within thirty
(30) days following the occurrence of an event described in Section
11(a)(ii), then the Company shall be obligated to deliver, upon the
surrender for exercise of a Right and without requiring payment of
the Exercise Price, Common Stock (to the extent available), and then,
if necessary, cash, which shares and/or cash have an
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<PAGE> 17
aggregate value equal to the Spread. If the Board of Directors, upon
approval by a majority of the Continuing Directors, shall determine
in good faith that it is likely that sufficient additional Common
Stock could be authorized for issuance upon exercise in full of the
Rights, the thirty (30) day period set forth above may be extended to
the extent necessary, but not more than ninety (90) days after the
occurrence of an event described in Section 11(a)(ii), in order that
the Company may seek stockholder approval for the authorization of
such additional shares. To the extent that the Company determines
that some action need be taken pursuant to the preceding sentences of
this Section 11(a)(iii), the Company may suspend the exercisability
of the Rights until the expiration of any such period, as extended,
in order to seek any authorization of additional shares and/or to
decide the appropriate form of distribution to be made pursuant to
this Section 11(a)(iii) and to determine the value thereof. In the
event of any such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time
as the suspension is no longer in effect and shall promptly notify
the Rights Agent of such suspension. For purposes of this Section
11(a)(iii), the value of the Common Stock shall be the Fair Market
Value (as determined pursuant to Section 11(d) hereof) per share of
the Common Stock at the Close of Business on the date of the
occurrence of one of the events described in Section 11(a)(ii) and
the value of any "common stock equivalent" shall be deemed to have
the same value as the Common Stock on such date.
(b) In the event that the Company shall, after the Record Date, fix a
record date for the issuance of rights, options or warrants to all holders of
Preferred Stock entitling them (for a period expiring within 45 calendar days
after such record date) to subscribe for or purchase Preferred Stock (or shares
having the same rights, privileges and preferences as the Preferred Stock
("equivalent preferred stock")) or securities convertible into Preferred Stock
or equivalent preferred stock at a price per share of Preferred Stock or
equivalent preferred stock (or having a conversion price per share, if a
security convertible into Preferred Stock or equivalent preferred stock) less
than the Fair Market Value per share of the Preferred Stock (as defined in
Section 11(d)) on such record date, the Exercise Price to be in effect after
such record date shall be determined by multiplying the Exercise Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of shares of Preferred Stock outstanding on such
record date plus the number of shares of Preferred Stock which the aggregate
offering price of the total number of shares of Preferred Stock and/or the
equivalent preferred stock so to be offered (and/or the aggregate initial
conversion price of the convertible securities so to be offered) would purchase
at such Fair Market Value and the denominator of which shall be the number of
shares of Preferred Stock outstanding on such record date plus the number of
additional shares of Preferred Stock and/or equivalent preferred stock to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible); provided, however, that in no
event shall the consideration to be paid upon the exercise of one Right be less
than the aggregate par value of the shares of capital stock of the Company
issuable upon exercise of one Right. Preferred Stock owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed; and in the event that such rights, options or warrants
are not so issued, the Exercise Price shall be adjusted to be the Exercise
Price which would then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of the Preferred Stock (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation)
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<PAGE> 18
or evidences of indebtedness or assets (other than a regular quarterly cash
dividend or a dividend payable in Preferred Stock) or subscription rights or
warrants (excluding those referred to in Section 11(b) hereof), the Exercise
Price to be in effect after such record date shall be determined by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the Fair Market Value per share of
the Preferred Stock on such record date, less the Fair Market Value of the
portion of the assets or evidences of indebtedness so to be distributed or of
such subscription rights or warrants applicable to one share of Preferred Stock
and the denominator of which shall be the Fair Market Value per share of the
Preferred Stock; provided, however, that in no event shall the consideration to
be paid upon the exercise of one Right be less than the aggregate par value of
the shares of capital stock of the Company to be issued upon exercise of one
Right. Such adjustments shall be made successively whenever such a record date
is fixed; and in the event that such distribution is not so made, the Exercise
Price shall again be adjusted to be the Exercise Price which would then be in
effect if such record date had not been fixed.
(d) For the purpose of this Rights Agreement, the "Fair Market Value"
of any share of Preferred Stock, Common Stock or any other stock or any Right
or other security or any other property on any date shall be determined as
provided in this Section 11(d). In the case of a publicly-traded stock or other
security, the Fair Market Value on any date shall be deemed to be the average
of the daily closing prices per share of such stock or per unit of such other
security for the 30 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however, that in the event
that the Fair Market Value per share of any security is determined during a
period which includes any date that is within 30 Trading Days after (i) the
ex-dividend date for a dividend or distribution on such security payable in
shares of such security or securities convertible into shares of such security,
or (ii) the effective date of any subdivision, split, combination,
consolidation, reverse stock split or reclassification of such security, then,
and in each such case, the Fair Market Value shall be appropriately adjusted by
the Board of Directors of the Company to take into account ex-dividend or
post-effective date trading. The closing price for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way (in either case, as
reported in the applicable transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange), or,
if the securities are not listed or admitted to trading on the New York Stock
Exchange, as reported in the applicable transaction reporting system with
respect to securities listed on the principal national securities exchange on
which such security is listed or admitted to trading; or, if not listed or
admitted to trading on any national securities exchange, the last quoted price
(or, if not so quoted, the average of the high bid and low asked prices) in the
over-the-counter market, as reported by The Nasdaq Stock Market or such other
system then in use; or, if no bids for such security are quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such security selected by the
Board of Directors of the Company (upon approval by a majority of the
Continuing Directors). The term "Trading Day" shall mean a day on which the
principal national securities exchange on which such security is listed or
admitted to trading is open for the transaction of business or, if such
security is not listed or admitted to trading on any national securities
exchange, a Business Day. If a security is not publicly held or not so listed
or traded, "Fair Market Value" shall mean the fair value per share of stock or
per other unit of such other security, as determined in good faith by the Board
of Directors of the Company (upon approval by a majority of the Continuing
Directors); provided, however, that if the Preferred Stock is not publicly
traded, the Fair Market Value of a share of Preferred Stock shall be
conclusively deemed to be the Fair Market Value of a share of Common Stock
(appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof), multiplied by one hundred. In the
case of property other than securities, the
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"Fair Market Value" thereof shall be determined in good faith by
the Board of Directors of the Company (upon approval by a majority of the
Continuing Directors). Any such determination of Fair Market Value shall be
described in a statement filed with the Rights Agent and shall be binding upon
the Rights Agent and the holders of the Rights.
(e) All calculations under this Section 11 shall be made to the
nearest cent or to the nearest one one-hundredth of a share, as the case may
be. No adjustment in the Exercise Price shall be required unless adjustment
would require an increase or decrease of at least 1% in such price; provided,
however, that any adjustments which by reason of this Section 11(e) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. Notwithstanding the preceding sentence, any adjustment
required by this Section 11 shall be made no later than the earlier of (i)
three years from the date of the transaction which mandates the adjustment or
(ii) the date of the expiration of the right to exercise the Rights.
(f) Irrespective of any adjustment or change in the Exercise Price or
the number of shares of Preferred Stock issuable upon the exercise of the
Rights, the Right Certificates theretofore and thereafter issued may continue
to express the Exercise Price and the number of shares to be issued upon
exercise of the Rights as in the initial Right Certificates issued hereunder
but, nevertheless, shall represent the Rights as so adjusted.
(g) Before taking any action that would cause an adjustment reducing
the purchase price per whole share of Preferred Stock upon exercise of the
Rights below the then par value, if any, of the shares of Preferred Stock, the
Company shall use its best efforts to take any corporate action which may, in
the opinion of its counsel, be necessary in order that the Company may validly
and legally issue fully paid and non-assessable shares of such Preferred Stock
at such adjusted purchase price per share.
(h) If as a result of an adjustment made pursuant to Section 11(a) or
Section 13(a) hereof, the holder of any Right thereafter exercised shall become
entitled to receive any shares of capital stock of the Company other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (f),
(g), (i), (j) and (k), and the provisions of Sections 7, 9, 10, 13 and 14 with
respect to the Preferred Stock shall apply on like terms to any such other
shares.
(i) Unless the Company shall have exercised its election as provided
in Section 11(j), upon each adjustment of the Exercise Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of one one-hundredths of
a share of Preferred Stock (calculated to the nearest one one-hundred
thousandth of a share) obtained by (i) multiplying (x) the number of one
one-hundredths of a share covered by a Right immediately prior to this
adjustment by (y) the Exercise Price in effect immediately prior to such
adjustment of the Exercise Price and (ii) dividing the product so obtained by
the Exercise Price in effect immediately after such adjustment of the Exercise
Price.
(j) The Company may elect on or after the date of any adjustment of
the Exercise Price to adjust the number of Rights, in substitution for any
adjustment in the number of one one-hundredths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
such adjustment of the number of Rights shall be exercisable for the number of
one one-hundredths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such
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<PAGE> 20
adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one ten-hundredth) obtained by dividing the
Exercise Price in effect immediately prior to adjustment of the Exercise Price
by the Exercise Price in effect immediately after adjustment of the Exercise
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Exercise Price is adjusted or any day thereafter,
but, if the Right Certificates have been issued, shall be at least 10 days
later than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(j), the Company shall, as promptly as practicable, cause to be distributed
to holders of record of Right Certificates on such record date Right
Certificates evidencing, subject to Section 14 hereof, the additional Rights to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall cause to be distributed to such holders of record
in substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein and shall be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public announcement.
(k) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Exercise Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it, in its sole discretion, shall determine to be advisable in
order that any consolidation or subdivision of the Preferred Stock, issuance
wholly for cash of any Preferred Stock at less than the current market price,
issuance wholly for cash of Preferred Stock or securities which by their terms
are convertible into or exchangeable for Preferred Stock, dividends on
Preferred Stock payable in Preferred Stock or issuance of rights, options or
warrants referred to hereinabove in Section 11(b), hereafter made by the
Company to holders of its Preferred Stock shall not be taxable to such
stockholders.
(l) In the event that at any time after the date of this Rights
Agreement and prior to the Distribution Date, the Company shall (i) declare or
pay any dividend on the Common Stock payable in Common Stock or (ii) effect a
subdivision, combination or consolidation of the Common Stock (by
reclassification or otherwise than by payment of dividends in Common Stock)
into a greater or lesser number of shares of Common Stock, then in any such
case (A) the number of one one-hundredths of a share of Preferred Stock
purchasable after such event upon proper exercise of each Right shall be
determined by multiplying the number of one one-hundredths of a share of
Preferred Stock so purchasable immediately prior to such event by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately before such event and the denominator of which is the number of
shares of Common Stock outstanding immediately after such event, and (B) each
share of Common Stock outstanding immediately after such event shall have
issued with respect to it that number of Rights which each share of Common
Stock outstanding immediately prior to such event had issued with respect to
it. The adjustments provided for in this Section 11(1) shall be made
successively whenever such dividend is declared or paid or such a subdivision,
combination or consolidation is effected.
Section 12. Certification of Adjusted Exercise Price or Number of
Shares. Whenever an adjustment is made as provided in Section 11 or Section
13, the Company shall (a) promptly prepare a certificate setting forth such
adjustment, and a brief statement of the facts giving rise to such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Preferred Stock a copy of such certificate, and (c) mail a brief summary
thereof to each holder of a Right Certificate in accordance with Section 25
hereof. Notwithstanding the
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foregoing sentence, the failure of the Company to make such certification or
give such notice shall not affect the validity of or the force or effect of the
requirement for such adjustment. Any adjustment to be made pursuant to Section
11 or Section 13 of this Rights Agreement shall be effective as of the date of
the event giving rise to such adjustment. The Rights Agent shall be fully
protected in relying on any such certificate and on any adjustment therein
contained and shall not be deemed to have knowledge of any adjustment unless
and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) Except for any transaction approved by the Board of Directors
(upon approval by a majority of the Continuing Directors), in the event that,
at any time on or after the Distribution Date, (x) the Company shall, directly
or indirectly, consolidate with, or merge with and into, any other Person or
Persons (other than an Exempt Person) and the Company shall not be the
surviving or continuing corporation of such consolidation or merger, or (y) any
Person or Persons (other than an Exempt Person) shall, directly or indirectly,
consolidate with, or merge with and into, the Company, and the Company shall be
the continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
shares of Common Stock shall be changed into or exchanged for stock or other
securities of any other Person (other than an Exempt Person) or of the Company
or cash or any other property, or (z) the Company or one or more of its
Subsidiaries shall, directly or indirectly, sell or otherwise transfer to any
other Person or any Affiliate or Associate of such Person, in one or more
transactions, or the Company or one or more of its Subsidiaries shall sell or
otherwise transfer to any Persons in one or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning
power of the Company and its Subsidiaries (taken as a whole), then, on the
first occurrence of any such event (except as may be contemplated by Section
13(e) hereof), proper provision shall be made so that (i) each holder of record
of a Right, except as provided in Section 7(e) hereof, shall thereafter have
the right to receive, upon the exercise thereof and payment of the Exercise
Price in accordance with the terms of this Rights Agreement, such number of
shares of validly issued, fully paid, non-assessable and freely tradable Common
Stock of the Principal Party (as defined herein), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall, based
on the Fair Market Value of the Common Stock of the Principal Party on the date
of the consummation of such consolidation, merger, sale or transfer, equal
twice the Exercise Price; (ii) such Principal Party shall thereafter be liable
for, and shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to this Rights
Agreement; (iii) the term "Company" for all purposes of this Rights Agreement
shall thereafter be deemed to refer to such Principal Party; (iv) such
Principal Party shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock in accordance
with the provisions of Section 9 hereof) in connection with such consummation
as may be necessary to assure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to its shares of Common
Stock thereafter deliverable upon the exercise of the Rights; and (v) the
provisions of Section 11(a)(ii) hereof shall be of no effect following the
occurrence of any event described in clause (x), (y) or (z) above of this
Section 13(a). The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in clause (x)
or (y) of the first sentence of Section 13(a) hereof: (A) the Person that is
the issuer of the securities into which shares of Common Stock of the Company
are changed or otherwise exchanged or converted in
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<PAGE> 22
such merger, consolidation or other fundamental transaction, or, if there is
more than one such issuer, the issuer the Common Stock of which has the
greatest market value or (B) if no securities are so issued, (x) the Person
that is the other party to the merger, consolidation or other fundamental
transaction and that survives such merger, consolidation or other fundamental
transaction, or, if there is more than one such Person, the Person the Common
Stock of which has the greatest market value or (y) if the Person that is the
other party to the merger, consolidation or other fundamental transaction does
not survive the merger, consolidation or other fundamental transaction, the
Person that does survive the merger, consolidation or other fundamental
transaction (including the Company if it survives); and
(ii) in the case of any transaction described in clause (z)
of the first sentence in Section 13(a), the Person that is the party
receiving the greatest portion of the assets or earning power transferred
pursuant to such transaction or transactions, or, if each Person that is a
party to such transaction or transactions receives the same portion of the
assets or earning power so transferred or if the Person receiving the greatest
portion of the assets or earning power cannot be determined, whichever of such
Persons is the issuer of Common Stock having the greatest market value of
shares outstanding; provided, however, that in any such case, if the Common
Stock of such Person is not at such time and has not been continuously over the
preceding 12-month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Stock of which is and has been so registered, the term "Principal Party" shall
refer to such other Person, or if such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Stocks of all of which are and
have been so registered, the term "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Stock having the greatest market value
of shares outstanding.
(c) The Company shall not consummate any consolidation, merger, other
fundamental transaction or sale or transfer of assets or earning power referred
to in Section 13(a) unless the Principal Party shall have a sufficient number
of authorized shares of its Common Stock that have not been issued or reserved
for issuance to permit exercise in full of all Rights in accordance with this
Section 13 and unless prior thereto the Company and the Principal Party
involved therein shall have executed and delivered to the Rights Agent an
agreement confirming that the Principal Party shall, upon consummation of such
consolidation, merger, other fundamental transaction or sale or transfer of
assets or earning power, assume this Rights Agreement in accordance with
Section 13(a) hereof and that all rights of first refusal or preemptive rights
in respect of the issuance of shares of Common Stock of the Principal Party
upon exercise of outstanding Rights have been waived and that such transaction
shall not result in a default by the Principal Party under this Rights
Agreement, and further providing that, as soon as practicable after the date of
any consolidation, merger, other fundamental transaction or sale or transfer of
assets or earning power referred to in Section 13(a) hereof, the Principal
Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, use
its best efforts to cause such registration statement to become
effective as soon as practicable after such filing and use its best
efforts to cause such registration statement to remain effective
(with a prospectus at all times meeting the requirements of the
Securities Act) until the date of expiration of the Rights, and
similarly comply with applicable state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the Rights
on a national securities
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exchange or to meet the eligibility requirements for quotation on The
Nasdaq Stock Market; and
(iii) deliver to holders of the Rights historical financial
statements for the Principal Party which comply in all respects with
the requirements for registration on Form 10 (or any successor form)
under the Exchange Act.
In the event that any of the transactions described in Section 13(a)
hereof shall occur at any time after the occurrence of a transaction described
in Section 11(a)(ii) hereof, the Rights which have not theretofore been
exercised shall, subject to the provisions of Section 7(e) hereof, thereafter
be exercisable in the manner described in Section 13(a) hereof.
(d) In case the Principal Party which is to be a party to a
transaction referred to in this Section 13 has a provision in any of its
authorized securities or in its Articles of Incorporation, Certificate of
Incorporation, By-laws, or other instrument governing its corporate affairs,
which provision would have the effect of (i) causing such Principal Party to
issue, in connection with, or as a consequence of, the consummation of a
transaction referred to in this Section 13, shares of Common Stock of such
Principal Party at less than the then Fair Market Value per share (determined
pursuant to Section 11(d) hereof) or securities exercisable for, or convertible
into, Common Stock of such Principal Party at less than such then Fair Market
Value (other than to holders of Rights pursuant to this Section 13) or (ii)
providing for any special tax or similar payment in connection with the
issuance to any holder of a Right of Common Stock of such Principal Party
pursuant to the provisions of this Section 13, then, in such event, the Company
shall not consummate any such transaction unless prior thereto the Company and
such Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing that the provision in question of such
Principal Party shall have been canceled, waived or amended, or that the
authorized securities shall be redeemed, so that the applicable provision will
have no effect on the benefits intended to be afforded by the Rights in
connection with, or as a consequence of, the consummation of the proposed
transaction.
(e) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in subparagraphs
(x) and (y) of Section 13(a) if (i) such transaction is consummated with a
Person or Persons (or a wholly-owned subsidiary of any such Person or Persons)
who acquired shares of Common Stock pursuant to a Qualifying Tender Offer, (ii)
the price per share of Common Stock offered in such transaction is not less
than the price per share of Common Stock paid to all holders of Common Stock
whose shares were purchased pursuant to such Qualifying Tender Offer and (iii)
the form of consideration being offered to the remaining holders of shares of
Common Stock pursuant to such transaction is the same as the form of
consideration paid pursuant to such Qualifying Tender Offer. Upon consummation
of any such transaction contemplated by this Section 13(d), all Rights
hereunder shall expire.
Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Right Certificates which evidence fractional Rights (i.e., Rights
to acquire less than one one-hundredth of a share of Preferred Stock). If the
Company shall determine not to issue such fractional Rights, then, in lieu of
such fractional Rights, there shall be paid to the holders of record of the
Right Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the Fair Market
Value of a whole Right.
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<PAGE> 24
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one
one-hundredth of a share) upon exercise of the Rights or to distribute
certificates which evidence fractional shares (other than fractions which are
integral multiples of one one-hundredth of a share). In lieu of issuing
fractions of shares of Preferred Stock, the Company may, at its election, issue
depositary receipts evidencing fractions of shares pursuant to an appropriate
agreement between the Company and a depositary selected by it, provided that
such agreement shall provide that the holders of such depositary receipts shall
have all of the rights, privileges and preferences to which they would be
entitled as owners of the Preferred Stock. With respect to fractional shares
that are not integral multiples of one one-hundredth of a share, if the Company
does not issue such fractional shares or depositary receipts in lieu thereof,
there shall be paid to the holders of record of Right Certificates at the time
such Right Certificates are exercised as herein provided an amount in cash
equal to the same fraction of the Fair Market Value of a share of Preferred
Stock.
(c) The holder of a Right by the acceptance of a Right expressly
waives his right to receive any fractional Right or any fractional shares of
Preferred Stock (other than fractions which are integral multiples of one
one-hundredths of a share) upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Rights Agreement, except the rights of action given to the Rights Agent in
Section 18 hereof, are vested in the respective registered holders of the Right
Certificates (and, prior to the Distribution Date, the holders of record of the
Common Stock); and any holder of record of any Right Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Right Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Right Certificate in the manner provided
in such Right Certificate and in this Rights Agreement. Without limiting the
foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Rights Agreement and will be entitled to
specific performance of the obligations under, and injunctive relief against
actual or threatened violations of, the obligations of any Person subject to
this Rights Agreement.
Section 16. Agreement of Right Holders. Each holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be evidenced by
the certificates for Common Stock registered in the name of the holders of
Common Stock (together, as applicable, with the Summary of Rights), which
certificates for Common Stock shall also constitute certificates for Rights,
and not by separate Right Certificates, and each Right shall be transferable
only simultaneously and together with the transfer of shares of Common Stock;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office of the Rights Agent designated for such purpose, duly endorsed or
accompanied by a proper instrument of transfer;
(c) the Company and the Rights Agent may deem and treat the person in
whose name the Right Certificate (or, prior to the Distribution Date, the
associated Common Stock certificate) is registered as the absolute owner
thereof and of the Rights evidenced thereby (notwithstanding any notations of
ownership or writing on the Right Certificates or the associated Common Stock
certificate made by anyone other than the Company or the Rights Agent) for all
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<PAGE> 25
purposes whatsoever, and neither the Company nor the Rights Agent shall be
affected by any notice to the contrary; and
(d) notwithstanding anything in this Rights Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Rights Agreement by reason of any preliminary
or permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative
agency or commission, or any statute, rule, regulation or execute order
promulgated or enacted by any governmental authority, prohibiting or otherwise
restraining performance of such obligation.
Section 17. Right Certificate Holder Not Deemed a Shareholder. No
holder, as such, of any Right Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of Preferred Stock or any
other securities which may at any time be issuable on the exercise of the
Rights represented thereby, nor shall anything contained herein or in any Right
Certificate be construed to confer upon the holder of any Right Certificate, as
such, any of the rights of a shareholder of the Company or any right to vote
for the election of directors or upon any matter submitted to shareholders at
any meeting thereof, or to give or withhold consent to any corporate action, or
to receive notice of meetings or other actions affecting shareholders (except
as provided in Section 25 hereof), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by such Right
Certificate shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this Rights
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against,
any loss, liability, or expense, incurred without negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or
omitted to be done by the Rights Agent in connection with the acceptance and
administration of this Rights Agreement, including the cost and expenses of
defending against any claim of liability relating to the Rights or this Rights
Agreement.
(b) The Rights Agent shall be protected against, and shall incur no
liability for or in respect of, any action taken, suffered or omitted by it in
connection with its administration of this Rights Agreement in reliance upon
any Right Certificate or certificate for Preferred Stock or for other
securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement or other paper or document believed by it to be genuine
and to be signed, executed and, where necessary, verified or acknowledged, by
the proper Person or Persons.
Section 19. Merger or Consolidation of, or Change in Name of, the
Rights Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights
Agent or any successor Rights Agent, shall be the successor to the Rights Agent
under this Rights Agreement without the execution or filing of any paper or any
further act on the part of any of the
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<PAGE> 26
parties hereto, provided that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Rights Agreement any of the Rights Certificates shall
have been countersigned but not delivered, any such successor Rights Agent may
adopt the countersignature of the predecessor Rights Agent and deliver such
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such
cases such Right Certificates shall have the full force provided in the Right
Certificates and in this Rights Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Right Certificates so countersigned; in case at that
time any of the Right Certificates shall not have been countersigned, the
Rights Agent may countersign such Right Certificates either in its prior name
or in its changed name; in all such cases such Right Certificates shall have
the full force provided in the Right Certificates and in this Rights Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Rights Agreement upon the following
terms and conditions, by all of which the Company and the holders of Right
Certificates by their acceptance thereof shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action
taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Rights
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or suffering
any action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed by the Chairman of the Board,
the President or any Vice President and by the Treasurer, the Secretary or any
Assistant Secretary of the Company and delivered to the Rights Agent. Any such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Rights
Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Rights Agreement or in the
Right Certificates (except its countersignature thereof) or be required to
verify the same, but all such statements and recitals are and shall be deemed
to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Rights Agreement or the execution and delivery hereof
(except the due execution hereof by the Rights Agent) or in respect of the
validity or execution of any Right Certificate (except its countersignature
thereof); nor shall it be responsible for any breach by the Company of any
covenant or condition contained in this Rights Agreement or in any Right
Certificate; nor shall
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<PAGE> 27
it be responsible for any adjustment required under the provisions of Section
11 or 13 hereof or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Right Certificates after receipt of a certificate describing any such
adjustment); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Preferred Stock to be issued pursuant to this Rights Agreement or any Right
Certificate or as to whether any shares of Preferred Stock will, when issued,
be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be
required by the Rights Agent for the carrying out or performing by the Rights
Agent of the provisions of the Rights Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President or any Vice President or the Secretary or
the Treasurer of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
the Rights Agent under this Rights Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company or for any other
legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable
or accountable for any act, default, neglect or misconduct of any such
attorneys or agents or for any loss to the Company resulting from any such act,
default, neglect or misconduct, provided reasonable care was exercised in the
selection and continued employment thereof.
(j) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate following the form of
election to purchase set forth on the reverse side of such Rights Certificate
has either not been completed or indicates an affirmative response to clause 1
and/or 2 thereof, the Rights Agent shall not take further action with respect
to the requested exercise or transfer without first consulting with the
Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Rights
Agreement upon 30 days' notice in writing mailed to the Company and to each
transfer agent of the Common Stock and the Preferred Stock by registered or
certified mail. The Company may remove the Rights Agent or any successor Rights
Agent (with or without cause) upon 30 days' notice in writing, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each
transfer agent of the Common Stock and the Preferred Stock by registered or
certified mail. If the Rights Agent shall resign or be removed or shall
otherwise become incapable of acting, the Company shall appoint a successor to
the Rights Agent. Notwithstanding the foregoing provisions of this Section 21,
in no event shall the resignation or removal of a Rights Agent be effective
until a successor Rights Agent shall have been appointed and have accepted such
appointment. If the Company shall fail to
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<PAGE> 28
make such appointment within a period of 30 days after such removal or after it
has been notified in writing of such resignation or incapacity by the resigning
or incapacitated Rights Agent or by the holder of a Right Certificate (who
shall, with such notice, submit his Right Certificate for inspection by the
Company), then the incumbent Rights Agent or the holder of record of any Right
Certificate may apply to any court of competent jurisdiction for the
appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be (a) a corporation
organized and doing business under the laws of the United States or of any
state thereof, in good standing, which is authorized under such laws to
exercise corporate trust or stock transfer powers and is subject to supervision
or examination in the conduct of its corporate trust or stock transfer business
by federal or state authorities and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $5,000,000, or (b) an
Affiliate controlled by a corporation described in clause (a) of this sentence.
After appointment, the successor Rights Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
as Rights Agent without further act or deed, but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Right Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the
appointment of the successor Rights Agent, as the case may be. Notwithstanding
the foregoing provisions, in the event of resignation, removal or incapacity of
the Rights Agent, the Company shall have the authority to act as the Rights
Agent until a successor Rights Agent shall have assumed the duties of the
Rights Agent hereunder.
Section 22. Issuance of New Right Certificates. Notwithstanding any
of the provisions of this Rights Agreement or of the Rights to the contrary,
the Company may, at its option, issue new Right Certificates evidencing Rights
in such form as may be approved by its Board of Directors to reflect any
adjustment or change in the Exercise Price per share and the number or kind or
class of shares of stock or other securities or property purchasable under the
Right Certificates made in accordance with the provisions of this Rights
Agreement.
Section 23. Redemption.
(a) The Company may, at its option, but only by the vote of a
majority of the Board of Directors (upon approval by a majority of the
Continuing Directors), redeem all but not less than all of the then outstanding
Rights, at any time prior to the Close of Business on the earlier of (i) the
tenth day following the Stock Acquisition Date; provided, however, that, during
the time period relating to when the Rights may be redeemed, the Board of
Directors of the Company (upon approval of a majority of the Continuing
Directors) may extend the time during which the Rights may be redeemed to be at
any time as may be determined by the Board of Directors of the Company and the
Continuing Directors, or (ii) the Final Expiration Date, at a redemption price
of $0.01 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction after the date hereof (the "Redemption Price").
Notwithstanding anything contained in this Rights Agreement to the contrary,
the Rights shall not be exercisable pursuant to Section 11(a)(ii) hereof prior
to the expiration of the Company's right of redemption hereunder.
(b) Without any further action and without any notice, the right to
exercise the Rights will terminate effective at the effective time of the
action of the Board of Directors and the Continuing Directors ordering the
redemption of the Rights and the only right thereafter of the
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<PAGE> 29
holders of Rights shall be to receive the Redemption Price. Within 10 days
after the effective time of the action of the Board of Directors and the
Continuing Directors ordering the redemption of the Rights, the Company shall
give notice of such redemption to the holders of the then outstanding Rights by
mailing such notice to all such holders at their last addresses as they appear
upon the registry books of the Rights Agent or, prior to the Distribution Date,
on the registry books of the transfer agent for the Common Stock. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice; provided, however, that the failure to
give, or any defect in, any such notice shall not affect the validity of such
redemption. Each notice of redemption will state the method by which the
payment of the Redemption Price will be made. At the option of the Board of
Directors, the Redemption Price may be paid in cash to each Rights holder or by
the issuance of shares (and, at the Company's election pursuant to Section
14(b) hereof, cash or depositary receipts in lieu of fractions of shares other
than fractions which are integral multiples of one one-hundredth (1/100) of a
share) of Preferred Stock or Common Stock having a Fair Market Value equal to
such cash payment.
Section 24. Exchange.
(a) By the vote of a majority of the Board of Directors (upon
approval by a majority of the Continuing Directors), the Company may, at its
option, at any time after any Person becomes an Acquiring Person, exchange all
or part of the then outstanding and exercisable Rights (which shall not include
Rights which have become void pursuant to Section 7(e) hereof) for shares of
Common Stock at an exchange rate of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (the "Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors shall not be empowered to
effect such exchange at any time after any Person (other than an Exempt
Person), together with all Affiliates and Associates of such Person, becomes
the Beneficial Owner of 50% or more of any class of Voting Stock of the Company
then outstanding.
(b) Without any further action and without any notice, the right to
exercise the Rights to be so exchanged will terminate at the effective time of
the action of the Board of Directors and the Continuing Directors ordering the
exchange and the only right thereafter of each holder of such Rights shall be
to receive that number of shares of Common Stock equal to the number of such
rights held by such holder multiplied by the Exchange Ratio. The Company shall
promptly give notice of the exchange to the holders of such Rights then
outstanding by mailing such notice to all such holders at their last addresses
as they appear upon the registry books of the Rights Agent or, prior to the
Distribution Date, on the registry books of the transfer agent for the Common
Stock. Any notice which is mailed in the manner herein provided shall be deemed
given, whether or not the holder receives the notice; provided, however, that
the failure to give, or any defect in, any such notice shall not affect the
validity of such exchange. Each such notice shall state the method by which the
exchange for Rights will be effected and, in the event of a partial exchange,
the number of Rights which will be exchanged. Any partial exchange shall be
effected pro rata based on the number of Rights (other than Rights which have
become void pursuant to Section 7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute shares of Preferred Stock for shares of Common Stock
exchangeable for the Rights, at the initial rate of one one-hundredth of a
share of Preferred Stock for each share of Common Stock, as appropriately
adjusted to reflect adjustments in the voting rights of the Preferred Stock
pursuant to the terms thereof, so that the fraction of a share of Preferred
Stock delivered in lieu of each share of Common Stock shall have the same
voting rights as one share of Common Stock.
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<PAGE> 30
(d) In the event that there shall not be sufficient shares of Common
Stock or Preferred Stock issued but not outstanding or authorized but unissued
to permit any exchange of Rights as contemplated in accordance with this
Section 24, the Company shall either take such action as may be necessary to
authorize additional Common Stock or Preferred Stock for issuance upon exchange
of the Rights or, alternatively, by the vote of a majority of the Board of
Directors (upon approval by a majority of the Continuing Directors) with
respect to each Right, (i) pay cash in an amount equal to the Exercise Price,
in lieu of issuing Common Stock or Preferred Stock in exchange therefor, or
(ii) issue debt or equity securities, or a combination thereof, having a value
equal to the Current Value (as hereinafter defined) of the Common Stock or
Preferred Stock exchangeable for each such Right, where the value of such
securities shall be determined in good faith by the Board of Directors (upon
approval by a majority of the Continuing Directors), or (iii) deliver any
combination of cash, property, Common Stock, Preferred Stock and/or other
securities having a value equal to the Current Value in exchange for each
Right. The term "Current Value," for purposes of this Section 24, shall mean
the product of the per share market price of the Common Stock (determined
pursuant to Section 11(d) on the date of the occurrence of the event described
above in subparagraph (a)), multiplied by the number of shares of Common Stock
for which the Right otherwise would be exchangeable if there were sufficient
shares available. To the extent that the Company determines that some action
need be taken pursuant to clauses (i), (ii) or (iii) of this Section 24(d), the
Board of Directors (upon approval by a majority of the Continuing Directors)
may temporarily suspend the exercisability of the Rights for a period of up to
sixty (60) days following the date on which the event described in Section
24(a) shall have occurred, in order to seek any authorization of additional
Common Stock or Preferred Stock and/or to decide the appropriate form of
distribution to be made pursuant to the above provision and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended.
(e) The Company shall not be required to issue fractions of shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to each registered holder of a Right Certificate with regard to which
a fractional share of Common Stock would otherwise be issuable, an amount in
cash equal to the same fraction of the fair market value of a whole share of
Common Stock. For the purposes of this paragraph (e), the fair market value of
a whole share of Common Stock shall be the closing price of a share of Common
Stock (as determined pursuant to Section 11(d) hereof) for the Trading Day
immediately prior to the date of exchange pursuant to this Section 24.
Section 25. Notice of Proposed Actions.
(a) In case the Company, after the Distribution Date, shall propose
(i) to pay any dividend payable in stock of any class to the holders of its
Preferred Stock or to make any other distribution to the holders of its
Preferred Stock (other than a regular quarterly cash dividend), (ii) to offer
to the holders of record of its Preferred Stock rights or warrants to subscribe
for or to purchase shares of Preferred Stock or shares of stock of any class or
any other securities, rights or options, (iii) to effect any reclassification
of its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding Preferred Stock), (iv) to effect any consolidation
or merger with or into, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one
or more transactions, of more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to, any other Person or
Persons, or (v) to effect the liquidation, dissolution or winding up of the
Company, then, in each such case, the Company shall give to each holder of
record of a Right Certificate, in accordance with Section 26 hereof, notice of
such proposed action, which shall specify the record date for the purposes of
such stock dividend or distribution of rights or
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<PAGE> 31
warrants, or the date on which such reclassification, consolidation, merger,
sale or transfer of assets, liquidation, dissolution, or winding up is to take
place and the record date for determining participation therein by the holders
of record of Common Stock or Preferred Stock, if any such date is to be fixed,
and such notice shall be so given in the case of any action covered by clause
(i) or (ii) above at least 10 days prior to the record date for determining
holders of record of the Preferred Stock for purposes of such action, and in
the case of any such other action, at least 10 days prior to the date of the
taking of such proposed action or the date of participation therein by the
holders of record of Common Stock or Preferred Stock, whichever shall be the
earlier. The failure to give notice required by this Section 25 or any defect
therein shall not affect the legality or validity of the action taken by the
Company or the vote upon any such action.
(b) In case any event described in Section 11(a)(ii) hereof shall
occur, then the Company shall, as soon as practicable thereafter, give to each
holder of a Right Certificate, in accordance with Section 26 hereof, a notice
of the occurrence of such event, which notice shall describe such event and the
consequences of such event to holders of Rights under Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Rights
Agreement to be given or made by the Rights Agent or by the holder of record of
any Right Certificate or Right to or on the Company shall be sufficiently given
or made if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing with the Rights Agent) as follows:
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas 76102
Attention: General Counsel
With a copy to:
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific Avenue
Suite 4100
Dallas, Texas 75201
Attention: Terry M. Schpok, P.C.
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Rights Agreement to be given or made by the Company or by the holder of
record of any Right Certificate or Right to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) as
follows:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue
Suite 2700
Dallas, Texas 75201
Attention: Mr. Bill Barber
Telephone: (214) 754-1255
Telecopier: (214) 754-1303
Notices or demands authorized by this Rights Agreement to be given or made by
the Company or the Rights Agent to the holder of record of any Right
Certificate or Right shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed to such holder at the address of such holder
as shown on the registry books of the Company.
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<PAGE> 32
Section 27. Supplements and Amendments. For as long as the Rights are
then redeemable and except as provided in the last sentence of this Section 27,
the Company may in its sole and absolute discretion, and the Rights Agent shall
if the Company so directs, supplement or amend any provision of this Agreement
without the approval of any holders of the Rights. At any time when the Rights
are not then redeemable and except as provided in the last sentence of this
Section 27, the Company may, and the Rights Agent shall if the Company so
directs, supplement or amend this Rights Agreement without the approval of any
holders of Right Certificates (i) to cure any ambiguity, (ii) to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, or (iii) to change or supplement
the provisions hereunder in any manner which the Company may deem necessary or
desirable, provided that no such supplement or amendment pursuant to this
clause (iii) shall materially adversely affect the interest of the holders of
Right Certificates. Upon the delivery of a certificate from an appropriate
officer of the Company which states that the proposed supplement or amendment
is in compliance with the terms of this Section 27, the Rights Agent shall
execute such supplement or amendment. Notwithstanding anything contained in
this Rights Agreement to the contrary, supplements or amendments may be made
only upon approval by a majority of the Continuing Directors.
Section 28. Successors. All of the covenants and provisions of this
Rights Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
Section 29. Benefits of this Rights Agreement. Nothing in this Rights
Agreement shall be construed to give to any person or corporation other than
the Company, the Rights Agent and the registered holders of the Right
Certificates (and, prior to the Distribution Date, the holders of Common Stock
in their capacity as holders of the Rights) any legal or equitable right,
remedy or claim under this Rights Agreement; but this Rights Agreement shall be
for the sole and exclusive benefit of the Company, the Rights Agent and the
holders of record of the Right Certificates (and, prior to the Distribution
Date, the holders of Common Stock in their capacity as holders of the Rights).
Section 30. Determinations and Actions by the Board; etc. The Board
of Directors (upon approval by a majority of the Continuing Directors) shall
have the exclusive power and authority to administer this Rights Agreement and
to exercise all rights and powers specifically granted to the Board, or to the
Company, or as may be necessary or advisable in the administration of this
Rights Agreement, including, without limitation, the right and power to (i)
interpret the provisions of this Agreement and (ii) make all determinations
deemed necessary or advisable for the administration of this Agreement. All
such actions, calculations, interpretations and determinations (including, for
purposes of clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board of Directors in good faith (and with the
approval of a majority of the Continuing Directors then in office) in
accordance with the preceding sentence, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties and (y) not subject any director to any liability to the holders
of the Rights. Notwithstanding anything contained in this Agreement to the
contrary, whenever any action, calculation, interpretation or determination
made pursuant to this Agreement requires the approval of a majority of the
Continuing Directors, and no Continuing Directors are then in office, such
action, calculation, interpretation or determination may not be made.
Section 31. Texas Contract. This Rights Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Texas and for all purposes shall be governed by and
construed and enforced in accordance with the laws of such state applicable to
contracts to be made and performed entirely within such state.
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<PAGE> 33
Section 32. Counterparts. This Rights Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together
constitute but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the several
Sections of this Rights Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
Section 34. Severability. If any term, provision, covenant or
restriction of this Rights Agreement is held by a court of competent
jurisdiction or other authority to be invalid, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions of this Rights
Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
[The remainder of this page is intentionally left blank.]
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have caused this Rights
Agreement to be duly executed, all as of the day and year first above written.
INSPIRE INSURANCE SOLUTIONS, INC.
Attest: By:
-------------------- ---------------------------------------
(SEAL) Name: F. George Dunham, III
Title: President and Chief Executive Officer
U.S. TRUST COMPANY OF TEXAS, N.A.
Attest: By:
-------------------- ---------------------------------------
(SEAL) Name:
---------------------------------
Title:
--------------------------------
<PAGE> 35
EXHIBIT A
UNDER CERTAIN CIRCUMSTANCES AS PROVIDED IN THE
RIGHTS AGREEMENT (AS REFERRED TO BELOW), RIGHTS
ISSUED TO OR BENEFICIALLY OWNED BY ACQUIRING
PERSONS OR THEIR AFFILIATES OR ASSOCIATES (AS SUCH
TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) OR ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS SHALL BE NULL AND
VOID AND MAY NOT BE TRANSFERRED TO ANY PERSON.
INSPIRE INSURANCE SOLUTIONS, INC.
SUMMARY OF RIGHTS TO PURCHASE
SERIES A JUNIOR PREFERRED STOCK
On July 30, 1997, the Board of Directors of INSpire Insurance Solutions,
Inc. (the "Company"), declared a dividend distribution of one right (a "Right")
for each outstanding share of the Company's Common Stock, par value $0.01 per
share (the "Common Stock"), outstanding at the close of business on August ___,
1997 (the "Record Date") and has authorized the issuance of one Right (subject
to adjustment) with respect to each share of Common Stock that shall become
outstanding between the Record Date and the earliest of the Distribution Date,
the Redemption Date and the Final Expiration Date (as such terms are defined in
the Rights Agreement). Each Right entitles the registered holder to purchase
from the Company one one-hundredth (1/100) of a share of preferred stock of the
Company, designated as Series A Junior Preferred Stock (the "Preferred Stock"),
at a price of $40.00 per one one-hundredth (1/100) of a share ("Exercise
Price"). The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement"), between the Company and U.S. Trust Company
of Texas, N.A., as Rights Agent (the "Rights Agent").
As discussed below, initially the Rights will not be exercisable,
certificates will not be sent to stockholders and the Rights will automatically
trade with the Common Stock.
The Rights, unless earlier redeemed by the Board of Directors, become
exercisable upon the close of business on the day (the "Distribution Date"),
which is the earlier of (i) the tenth day following a public announcement that
a person or group of affiliated or associated persons, with certain exceptions
set forth below, has acquired beneficial ownership of 15% or more of the
outstanding voting stock of the Company (an "Acquiring Person"), and (ii) the
tenth business day after the date of the commencement or announcement of a
person's or group's intention to commence a tender or exchange offer the
consummation of which would result in the ownership of 15% or more of the
Company's outstanding voting stock (even if no shares are actually purchased
pursuant to such offer) or such later date as may be determined by a majority
of the Board of Directors and the Continuing Directors (as defined in the
Rights Agreement); prior thereto, the Rights will not be exercisable, will not
be represented by a separate certificate, and will not be transferable apart
from the Company's Common Stock, but will instead be evidenced, with respect to
any of the Common Stock certificates outstanding as of August ___, 1997, by
such Common
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<PAGE> 36
Stock certificate. An Acquiring Person does not include the following (each an
"Exempt Person") (A) the Company, (B) any subsidiary of the Company, (C) any
employee benefit plan or employee stock plan of the Company or of any
subsidiary of the Company, or any trust or other entity organized, appointed,
established or holding Common Stock for or pursuant to the terms of any such
plan, (D) The Millers Mutual Fire Insurance Company and its Affiliates and
Associates; (E) F. George Dunham, III ("Dunham") and any descendant of Dunham,
or any spouse, widow or widower of Dunham or of any such descendant (Dunham and
any such descendants, spouses, widows and widowers collectively defined as the
"Family Members"); (F) any trust of which Dunham is a trustee; (G) any estate
of a Family Member, or any trust established by or for the benefit directly or
indirectly of one or more Family Members provided that one or more Family
Members or charitable organizations which qualify as exempt organizations under
Section 501(c) of the Internal Revenue Code of 1986, as amended ("Charitable
Organizations") collectively are the beneficiaries of at least 50% of the
actuarially-determined beneficial interest in such estate or trust; (H) any
charitable Organization which is established by one or more Family Members (a
"Family Charitable Organization"); (I) any corporation of which a majority of
the voting power or a majority of the equity interest is held, directly or
indirectly, by or for the benefit of one or more Family Members, estates or
trusts described in clause (H) above, or Family Charitable Organizations; (J)
any partnership, limited liability company or other entity or arrangement of
which a majority of the voting interest or a majority of the economic interest
is held, directly or indirectly, by or for the benefit of one or more Family
Members, estates or trusts described in clause (H) above, or Family Charitable
Organizations; (K) any trustee, executor, director or indirect managing or
general partner or other Person who has or shares voting and/or investment
power over Common Shares beneficially owned by any of the foregoing Persons
solely in their capacities as such; (L) any Person designated as such an Exempt
Person by the Board of Directors of the Company (but only if such action is
approved by a majority of Continuing Directors); provided, however, that the
Board of Directors may determine by a two-thirds (2/3) majority vote that a
Person previously designated as an Exempt Person shall no longer be designated
as such an Exempt Person with effect on the date of such vote (but only if such
action is approved by a majority of Continuing Directors); (M) any Person
designated as such an Exempt Person by the Board of Directors of the Company
(but only if such determination is approved by a majority of Continuing
Directors); provided however, that the Board of Directors may determine by a
two-thirds (2/3) majority vote that a Person previously designated as an Exempt
Person shall no longer be designated as such an Exempt Person with effect on
the date of such vote (but only if such action is approved by a majority of
Continuing Directors), or (N) any person or group whose ownership of 15% or
more of the shares of voting stock of the Company then outstanding results
solely from (i) any action or transaction or transactions approved by a
majority of the Board of Directors and the Continuing Directors before such
person or group became an Acquiring Person, or (ii) a reduction in the number
of issued and outstanding shares of voting stock of the Company pursuant to a
transaction or transactions approved by a majority of the Board of Directors
and Continuing Directors (provided that any person or group that does not
become an Acquiring Person by reason of clause (i) or (ii) above shall become
an Acquiring Person upon acquisition of an additional 1% or more of the
Company's voting stock unless such acquisition of additional voting stock will
not result in such person or group becoming an Acquiring Person by reason of
such clause (i) or (ii)).
Until the Distribution Date (or earlier redemption or expiration of the
Rights), new Common Stock certificates issued after August ___, 1997 will
contain a legend incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any of the Common Stock certificates outstanding as
of August ___, 1997, with or without a copy of this Summary of Rights attached
thereto, will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date and such separate certificates
alone will evidence the Rights from and after the Distribution Date.
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<PAGE> 37
The Rights are not exercisable until the Distribution Date. The Rights
will expire at the close of business on August ___, 2007, unless earlier
redeemed by the Company as described below.
The Preferred Stock is nonredeemable and, unless otherwise provided in
connection with the creation of a subsequent series of preferred stock,
subordinate to any other series of the Company's preferred stock. The Preferred
Stock may not be issued except upon exercise of Rights. Each share of Preferred
Stock will be entitled to a minimum quarterly dividend payment of $1.00 per
share but will be entitled to an aggregate dividend of 100 times the dividend
declared on the Company's Common Stock. In the event of the liquidation of the
Company, the holders of Preferred Stock will be entitled to receive, for each
share of Preferred Stock, a payment of the greater of (i) $100.00 per share
plus accrued and unpaid dividends or (ii) 100 times the aggregate amount to be
distributed per share to holders of Common Stock. Each share of Preferred Stock
will have 100 votes, voting together with the Common Stock. In the event of any
merger, consolidation or other transaction in which Common Stock is exchanged,
each share of Preferred Stock will be entitled to receive 100 times the amount
received per share of Common Stock. The rights of Preferred Stock as to
dividends, liquidation and voting are protected by anti-dilution provisions.
The Exercise Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) upon the grant to holders of the Preferred Stock of
certain rights or warrants to subscribe for or purchase Preferred Stock at a
price, or securities convertible into Preferred Stock with a conversion price,
less than the then current market price of the Preferred Stock or (iii) upon
the distribution to holders of the Preferred Stock of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Stock) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Preferred Stock issuable upon exercise of each Right are also subject
to adjustment in the event of a stock split of the Common Stock or a dividend
on the Common Stock payable in Common Stock or subdivisions, consolidations or
combinations of the Common Stock occurring, in any such case, prior to the
Distribution Date.
Fractions of shares of Preferred Stock (other than fractions which are
integral multiples of one one-hundredth of a share) may, at the election of the
Company, be evidenced by depositary receipts. The Company may also issue cash
in lieu of fractional shares which are not integral multiples of one
one-hundredth of a share.
Unless the Rights are earlier redeemed or the transaction is approved by a
majority of the Board of Directors and the Continuing Directors, if the Company
at any time after the Distribution Date were to be acquired in a merger or
other business combination (in which any shares of Common Stock are changed
into or exchanged for other securities or assets) (other than, subject to
certain conditions, a merger that follows a tender offer or exchange offer for
all outstanding shares of the Company approved by a majority of the Board of
Directors and Continuing Directors after taking into account the potential
long-term value of the Company and all other factors that they consider
relevant (a "Qualifying Tender Offer")) or more than 50% of the assets or
earning power of the Company and its subsidiaries (taken as a whole) were to be
sold or transferred in one or a series of related transactions, the Rights
Agreement provides
3
<PAGE> 38
that proper provision will be made so that each holder of record of a Right
will from and after such date have the right to receive, upon payment of the
Exercise Price, that number of shares of common stock of the acquiring company
having a market value at the time of such transaction equal to two times the
Exercise Price. In addition, unless the Rights are earlier redeemed, in the
event that a person or group becomes an Acquiring Person (other than pursuant
to a Qualifying Tender Offer), the Rights Agreement provides that proper
provision will be made so that each holder of record of a Right, other than the
Acquiring Person (whose Rights will thereupon become null and void), will
thereafter have the right to receive, upon payment of the Exercise Price, that
number of shares of the Common Stock (or cash, other securities or property)
having a market value at the time of the transaction equal to two times the
Exercise Price (such market value to be determined with reference to the market
value of the Company's Common Stock as provided in the Rights Agreement).
At any time on or prior to the close of business on the earlier of (i) the
tenth day after the time that a person (or group of affiliated or associated
persons) has become an Acquiring Person (or such later date as a majority of
the Board of Directors and the Continuing Directors may determine) or (ii)
August ___, 2007, the Company may, with the approval of a majority of the
Continuing Directors, redeem the Rights in whole, but not in part, at a price
of $0.01 per Right, subject to adjustment (the "Redemption Price"). Immediately
upon the effective time of the action of the Board of Directors of the Company
authorizing redemption of the Rights, the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
For as long as the Rights are then redeemable, the Company may amend the
Rights in any manner, including an amendment to extend the time period in which
the Rights may be redeemed. At any time when the Rights are not then
redeemable, the Company may amend the Rights in any manner that does not
materially adversely affect the interests of holders of the Rights as such.
Amendments to the Rights Agreement require the approval of the Continuing
Directors.
At any time after a person (or group of affiliated or associated persons)
becomes an Acquiring Person and prior to the acquisition by any such person or
group of 50% or more of any class of outstanding voting stock of the Company,
the Board of Directors of the Company (with the approval of a majority of the
Continuing Directors) may exchange the Rights (other than Rights owned by such
person or group which have become void), in whole or in part, at an exchange
ratio of one share of Common Stock (or a fraction of a share of Preferred Stock
or other consideration having equivalent market value) per Right (subject to
adjustment).
Until a Right is exercised, the holder, as such, will have no rights as a
stockholder of the Company, including, without limitation, the right to vote or
to receive dividends.
A copy of the Rights Agreement is available free of charge from the
Company. This summary description of the Rights does not purport to be complete
and is qualified in its entirety by reference to the Rights Agreement which is
incorporated in this summary description herein by reference.
4
<PAGE> 39
EXHIBIT B
[Form of Right Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER AUGUST ___, 2007 OR EARLIER IF REDEMPTION OR
EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION
OF THE COMPANY, AT $0.01 PER RIGHT (SUBJECT TO ADJUSTMENT), AND TO
EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER
CERTAIN CIRCUMSTANCES AS PROVIDED IN THE RIGHTS AGREEMENT (AS REFERRED
TO BELOW), RIGHTS ISSUED TO OR BENEFICIALLY OWNED BY ACQUIRING PERSONS
OR THEIR AFFILIATES OR ASSOCIATES (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT) OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS SHALL BE
NULL AND VOID AND MAY NOT BE TRANSFERRED TO ANY PERSON.
Right Certificate
INSPIRE INSURANCE SOLUTIONS, INC.
This certifies that ______________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Rights Agreement dated as of July ___, 1997 (the "Rights Agreement")
between INSpire Insurance Solutions, Inc., a Texas corporation (the "Company"),
and U.S. Trust Company of Texas, N.A. (the "Rights Agent"), to purchase from
the Company at any time after the Distribution Date (as such term is defined in
the Rights Agreement) and prior to 5:00 P.M. Fort Worth, Texas time on August
___, 2007 at the office of the Rights Agent designated in the Rights Agreement
for such purpose, or its successor as Rights Agent, one one-hundredth (1/100)
of a fully paid nonassessable share of Series A Junior Preferred Stock (the
"Preferred Stock") of the Company at a purchase price of $40.00, as the same
may from time to time be adjusted in accordance with the Rights Agreement (the
"Exercise Price"), upon presentation and surrender of this Right Certificate
with the Form of Election to Purchase attached hereto duly executed.
As provided in the Rights Agreement, the Exercise Price and the number
of shares of Preferred Stock which may be purchased upon the exercise of the
Rights evidenced by this Right Certificate are subject to modification and
adjustment upon the happening of certain events and,
1
<PAGE> 40
upon the happening of certain events, securities other than shares of Preferred
Stock, or other property, may be acquired upon exercise of the Rights evidenced
by this Right Certificate, as provided in the Rights Agreement.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
incorporated herein by reference and made a part hereof and to which Rights
Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities of the Rights Agent,
the Company and the holders of record of Right Certificates. Copies of the
Rights Agreement are on file at the principal executive office of the Company.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office of the Rights Agent designated in the Rights Agreement
for such purpose, may be exchanged for another Right Certificate or Right
Certificates of like tenor and date evidencing Rights entitling the holder of
record to purchase a like aggregate number of shares of Preferred Stock as the
Rights evidenced by the Right Certificate or Right Certificates surrendered
shall have entitled such holder to purchase. If this Right Certificate shall
be exercised in part, the holder shall be entitled to receive upon surrender
hereof, another Right Certificate or Right Certificates for the number of whole
Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate (i) may be redeemed by the Company at a
redemption price of $0.01 per Right, subject to adjustment or (ii) may be
exchanged in whole or in part for shares of the Company's Common Stock, par
value $0.01 per share, shares of Preferred Stock or substantially equivalent
rights or other consideration as determined by the Company.
No fractional shares of Preferred Stock (other than fractions which
are integral multiples of one one-hundredth (1/100) of a share) are required to
be issued upon the exercise of any Right or Rights evidenced hereby, and in
lieu thereof the Company may cause depositary receipts to be issued and/or a
cash payment may be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of Preferred
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at meeting
thereof, or to give or withhold consent to any corporate action or to receive
notice of meetings or other actions affecting shareholders (except as provided
in the Rights Agreement), or to receive dividends or subscription rights, or
otherwise, until the Right or Rights evidenced by this Right Certificate shall
have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
2
<PAGE> 41
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal. Dated as of _____________.
ATTEST: INSPIRE INSURANCE SOLUTIONS, INC.
By:
- -------------------------- ----------------------------------
[Secretary or Assistant Name:
Secretary] Title:
Countersigned:
U.S. TRUST COMPANY OF TEXAS, N.A.
By:
-----------------------
Name:
Title:
3
<PAGE> 42
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate)
FOR VALUE RECEIVED
---------------------------------------------------
hereby sells, assigns and transfers unto
----------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
- --------------------------------------------------------------------------------
Rights evidenced by this Right Certificate, together with all right, title and
interest therein, and does hereby irrevocably constitute and appoint
------------
- --------------------------------------------------------------------------------
Attorney to transfer the within Right Certificate on the books of the within-
named Company, with full power of substitution.
Dated:
-----------------
------------------------------
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of the Right
Certificate)
Signature Guaranteed:
<PAGE> 43
Certificate
-----------
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Right Certificate [ ] is [ ] is not being sold,
assigned or transferred by or on behalf of a Person who is or was an Acquiring
Person or an Associate or an Affiliate thereof (as such terms are defined in
the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Right Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement).
Dated:
--------------
------------------------------
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of the Right
Certificate)
<PAGE> 44
FORM OF ELECTION TO PURCHASE
(To be executed if registered holder
desires to exercise the Right Certificate)
TO INSPIRE INSURANCE SOLUTIONS, INC.:
The undersigned hereby irrevocably elects to exercise________________
Rights represented by this Right Certificate to purchase the shares of
Preferred Stock (or other securities) issuable upon the exercise of such Rights
and requests that certificates for such share(s) be issued in the following
name:
Please insert social security
or other identifying
number:
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate, a new Right Certificate for the balance remaining of such
Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying
number:
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Pleaseprint name and address)
- --------------------------------------------------------------------------------
Dated:
------------
------------------------------
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of the Right
Certificate)
Signature Guaranteed:
<PAGE> 45
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) this Rights Certificate [ ] is [ ] is not being exercised by
or on behalf of a Person who is or was an Acquiring Person or an Associate or
an Affiliate thereof (as such terms are defined in the Rights Agreement); and
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this
Rights Certificate from any Person who is, was or subsequently became an
Acquiring Person or an Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement).
Dated:
---------------------
------------------------------
Signature
(Signature must conform in
all respects to name of
holder as specified on the
face of the Right
Certificate)
<PAGE> 46
EXHIBIT C
FORM OF
STATEMENT OF RESOLUTION
FOR
SERIES A PREFERRED STOCK
OF
INSPIRE INSURANCE SOLUTIONS, INC.
PURSUANT TO ARTICLE 2.13 OF THE TEXAS
BUSINESS CORPORATION ACT
I, F. George Dunham, III, President of INSpire Insurance
Solutions, Inc., a corporation organized and existing under the Texas Business
Corporation Act (the "Company"), DO HEREBY CERTIFY that at a meeting of the
Board of Directors on July 30, 1997, at which meeting a quorum was present, the
following resolutions were adopted:
RESOLVED, that pursuant to the authority vested in the Board
of Directors of the Company in accordance with the provisions of Article 4 of
the Company's Restated Articles of Incorporation, as amended, a series of
Preferred Stock, par value $1.00 per share ("Preferred Stock"), of the Company
be, and hereby is, created, and the designations, preferences, and relative
rights of the shares of such series, and the qualifications, limitations or
restrictions thereof, be, and hereby are, as follows:
Section 1. Designation and Amount. The shares of such
series shall be designated as "Series A Junior Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting such series initially
shall be 300,000. Notwithstanding the foregoing, however, if more than a total
of 300,000 shares of Series A Preferred Stock shall be issuable upon the
exercise of Rights (the "Rights") issued pursuant to the Rights Agreement,
dated as of July ___, 1997, between the Company and U.S. Trust Company of
Texas, N.A., as Rights Agent (as such agreement may be amended from time to
time, the "Rights Agreement"), the Board of Directors of the Company shall
direct by resolution or resolutions that the total number of shares of Series A
Preferred Stock authorized to be issued be increased (to the extent that the
Articles of Incorporation, as amended and/or restated, then permits) to the
largest number of whole shares (rounded up to the nearest whole number)
issuable upon exercise of such Rights.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of
any series of Preferred Stock (or any similar stock) ranking prior and superior
to the Series A Preferred Stock with respect to dividends, the holders of
shares of Series A Preferred Stock, in preference to the holders of Common
Stock, par value $.01 per share (the "Common Stock"), of the Company, and of
any other junior stock, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the first day of
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<PAGE> 47
March, June, September and December in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (x) $1.00 or (y) subject to the provision
for adjustment hereinafter set forth, 100 times the aggregate per share amount
of all cash dividends, and 100 times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Preferred Stock. In the event
the Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (y) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) The Company shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share
on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date
of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be
cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares of Series A
Preferred Stock in an amount less than the total amount of such dividends at
the time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board
of Directors may fix a record date for the determination of holders of shares
of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
2
<PAGE> 48
Section 3. Voting Rights. The holders of shares of
Series A Preferred Stock shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter
set forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders of
the Company. In the event the Company shall at any time declare or pay any
dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or a combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such
event shall be adjusted by multiplying such number by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in the Company's
Restated Articles of Incorporation, in each case as the same may be restated or
amended, in any other Statement of Resolutions creating a series of Preferred
Stock or any similar stock, or by law, the holders of shares of Series A
Preferred Stock and the holders of shares of Common Stock and any other capital
stock of the Company having general voting rights shall vote together as one
class on all matters submitted to a vote of shareholders of the Company.
(C) Except as set forth herein, or as otherwise required
by the Company's Restated Articles of Incorporation, in each case as the same
may be restated or amended, or as otherwise required by law, holders of Series
A Preferred Stock shall have no other special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for the taking of any corporate
action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, and in addition to any and all other
rights which any holder of shares of Series A Preferred Stock may have in such
circumstances, the Company shall not:
(i) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock;
(ii) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A
Preferred Stock and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
3
<PAGE> 49
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Stock, provided that the Company may at any time redeem, purchase or
otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Company ranking junior (both as to
dividends and upon liquidation, dissolution or winding up) to the
Series A Preferred Stock; or
(iv) redeem, purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on
a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except in accordance
with a purchase offer made in writing or by publication (as determined
by the Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not permit any Subsidiary (as
hereinafter defined) of the Company to purchase or otherwise acquire for
consideration any shares of stock of the Company unless the Company could,
under paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner. A "Subsidiary" of the Company shall
mean any corporation or other entity of which securities or other ownership
interests having ordinary voting power sufficient to elect a majority of the
board of directors of such corporation or other entity or other persons
performing similar functions are beneficially owned, directly or indirectly, by
the Company or by any corporation or other entity that is otherwise controlled
by the Company.
Section 5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the Company in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares upon their retirement and cancellation shall become
authorized but unissued shares of Preferred Stock, without designation as to
series, and such shares may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, no distribution shall be made (1) to
the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received an amount per share (the "Series A Liquidation Preference") equal to
the higher of (i) $100 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, or (ii) an aggregate amount per share, subject to the provision
for adjustment hereinafter set forth, equal to 100 times the aggregate amount
to be distributed per share to holders of shares of Common Stock; or (2) to the
holders of shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock and all such
parity stock in proportion to the total amounts to which the holders of all
such shares are
4
<PAGE> 50
entitled upon such liquidation, dissolution or winding up. In the event the
Company shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other classes and series of
stock of the Corporation, if any, that rank on a parity with the Series A
Preferred Stock in respect thereof, then the assets available for such
distribution shall be distributed ratably to the holders of such parity shares
in proportion to their respective liquidation preferences.
(C) Neither the merger or consolidation of the
Corporation into or with another corporation nor the merger or consolidation of
any other corporation into or with the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section 6.
Section 7. Consolidation, Merger, etc. In case the
Company shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, then in any
such case each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount of stock, securities, cash and/or any other property (payable
in kind), as the case may be, into which or for which each share of Common
Stock is changed or exchanged. In the event the Company shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. No Redemption. The shares of Series A
Preferred Stock shall not be redeemable at the option of the Company or any
holder thereof. Notwithstanding the foregoing sentence of this Section, the
Company may acquire shares of Series A Preferred Stock in any other manner
permitted by law, and the provisions hereof and the Restated Articles of
Incorporation of the Company, in each case as the same may be restated or
amended.
5
<PAGE> 51
Section 9. Ranking. Unless otherwise provided in a
Statement of Resolution relating to a subsequent series of preferred stock of
the Company, the Series A Preferred Stock shall rank junior to all other series
of the Company's preferred stock as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up and senior to
the Common Stock.
Section 10. Amendment. The provisions hereof and the
Restated Articles of Incorporation, as restated or amended, of the Company
shall not be amended in any manner which would adversely affect the rights,
privileges or powers of the Series A Preferred Stock without, in addition to
any other vote of shareholders required by law, the affirmative vote of the
holders of two-thirds or more of the outstanding shares of Series A Preferred
Stock, voting together as a single class.
Section 11. Fractional Shares. Series A Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Preferred Stock. Notwithstanding the
foregoing, fractions of shares of Preferred Stock (other than fractions which
are integral multiples of one one-hundredth of a share) may, at the election of
the Company, be evidenced by depositary receipts. The Company may also issue
cash in lieu of fractional shares which are not integral multiples of one
one-hundredth of a share.
[The remainder of this page is intentionally left blank]
6
<PAGE> 52
IN WITNESS WHEREOF, I have executed and subscribed this
Statement of Resolution and do affirm the foregoing as true under the penalties
of perjury this 30th day of July, 1997.
By:
-------------------------------
Name: F. George Dunham, III
Title: President
ATTEST:
By:
--------------------------------
Name:
------------------------------
Title: Secretary
7
<PAGE> 1
EXHIBIT 5
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD]
August ___, 1997
INSpire Insurance Solutions, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Ladies and Gentlemen:
We have acted as counsel to INSpire Insurance Solutions, Inc., a Texas
corporation (the "Company"), in connection with the proposed public offering of
up to 5,175,000 shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock") and up to 5,175,000 Class A Junior Preferred Stock
Purchase Rights (the "Rights"), as described in Registration Statement No.
333-31173 on Form S-1 (the "Registration Statement") filed with the Securities
and Exchange Commission.
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinions listed below. In
rendering such opinions, we have assumed the genuineness of all signatures and
the authenticity of all documents examined by us. As to various questions of
fact material to such opinions, we have relied upon representations of the
Company.
Based upon such examination and representations, we advise you that,
in our opinion:
A. The shares of Common Stock and the Rights which are to be sold
and delivered by the Company and The Millers Mutual Fire Insurance Company (the
"Selling Shareholder") as contemplated by the Underwriting Agreement (the
"Underwriting Agreement"), the form of which is filed as Exhibit 1.1 to the
Registration Statement, have been duly and validly authorized by the Company.
<PAGE> 2
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
INSpire Insurance Solutions, Inc.
August __, 1997
Page 2
B. The shares of Common Stock and the Rights which are to be sold
and delivered by the Company as contemplated by the Underwriting Agreement
will, when issued and delivered in accordance with the terms of the
Underwriting Agreement, be validly issued, fully paid and non-assessable.
C. The shares of Common Stock and the Rights which are currently
held by the Selling Shareholder and which are to be sold and delivered by the
Selling Shareholder as contemplated by the Underwriting Agreement, have been
validly issued and are fully paid and non-assessable.
We consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
Sincerely,
<PAGE> 1
EXHIBIT 10.1
BENEFITS ADMINISTRATION CONTRACT
THIS BENEFITS ADMINISTRATION CONTRACT ("Agreement") dated as
of July 1, 1997, is made by and between The Millers Mutual Fire Insurance
Company, a Texas mutual insurance company ("Millers Mutual"), and MiliRisk,
Inc., a Texas corporation ("MiliRisk," and together with Millers Mutual, the
"Parties").
PRELIMINARY STATEMENTS
A. Millers Mutual and MiliRisk are parties to a management
agreement, dated as of January 1, 1996 (the "Prior Agreement"), pursuant to
which Millers Mutual performs certain services for and on behalf of MiliRisk.
B. Millers Mutual and MiliRisk desire to amend in its entirety
the Prior Agreement.
C. MiliRisk desires to procure certain services from Millers
Mutual in connection with the business of MiliRisk and Millers Mutual is
willing to provide such services.
NOW, THEREFORE, in consideration of the foregoing preliminary
statements, the mutual covenants and agreements contained herein, the parties
hereto, intending to be legally bound hereby, agree to amend and restate in its
entirety the Prior Agreement as follows:
STATEMENT OF AGREEMENT
ARTICLE I.
DEFINITIONS
Unless the context otherwise requires, the terms defined in this
Article I shall, for the purposes of this Agreement, have the meanings herein
specified:
"Effective Date" means July 1, 1997.
"Fiscal Year" shall mean the period from January 1 through December 31
of each year.
"Term of Agreement" means the period from the Effective Date until the
Agreement is terminated pursuant to Article 5.
ARTICLE II.
DUTIES AND OBLIGATIONS OF MILLERS MUTUAL
Section 2.1 Benefits Administration Services. Millers Mutual
shall provide administrative and support services for and on behalf of MiliRisk
and its subsidiaries which shall include payroll and benefits administration.
Millers Mutual shall make available facilities and equipment as MiliRisk may
determine to be reasonably necessary in the conduct of its business
<PAGE> 2
including, but not limited to, business property and communications equipment,
whether owned or leased.
ARTICLE III.
COMPENSATION, EXPENSES AND PAYMENT
Section 3.1 Fee. The compensation due Millers Mutual from
MiliRisk for services provided pursuant to Section 2.1 of this Agreement shall
be a monthly fee of $15,000 (the "Monthly Fee").
Section 3.2 Invoicing and Payment. Millers Mutual shall bill
MiliRisk monthly for the Monthly Fee within 15 days after the end of each
calendar month during the Term of Agreement. Payment shall be made by MiliRisk
within 30 days after the delivery of such invoice.
Section 3.3 Late Payment. Any amount owing from MiliRisk to
Millers Mutual that has not been paid by the due date shall be subject to a
late payment charge of 1% per month.
ARTICLE IV.
ACCESS TO INFORMATION, BOOKS AND RECORDS
Millers Mutual and its duly authorized representatives shall have
access, to the extent necessary to perform the services pursuant to Section
2.1, to MiliRisk's offices, facilities and records wherever located, in order
to discharge Millers Mutual's responsibilities hereunder; provided, however,
MiliRisk shall provide and make available to Millers Mutual and its duly
authorized representatives at Millers Mutual's Fort Worth, Texas, USA offices,
at Millers Mutual's request, all such records required by Millers Mutual to
perform its duties pursuant to this Agreement. All records and materials
furnished to Millers Mutual by MiliRisk in performance of this Agreement shall
at all times during the Term of Agreement remain the property of MiliRisk.
ARTICLE V.
TERM AND TERMINATION OF THE AGREEMENT
Section 5.1 Initial Term. This Agreement shall be effective from
the Effective Date and shall continue for three (3) years thereafter (the
"Initial Term"); subject, however, to the terms of Section 5.2 hereof. At the
end of the Initial Term, this Agreement shall continue in force and effect for
subsequent one (1) year periods unless terminated by either Party by written
notice at least sixty (60) days prior to the anniversary date of the Effective
Date.
Section 5.2 Termination. This Agreement may be sooner terminated
on the first to occur of the following:
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<PAGE> 3
(a) Termination by Mutual Agreement
In the event the Parties shall mutually agree in writing, this
Agreement may be terminated on the terms and dates stipulated
therein.
(b) Uncorrected Material Breach
In the event either Party shall fail to discharge any of its
material obligations hereunder, or shall commit a material
breach of this Agreement, and such default or breach shall
continue for a period of thirty (30) days after the other
Party has served notice of such default, this Agreement may
then be terminated at the option of the non-breaching Party by
notice thereof to the breaching Party.
Section 5.3 Effects of Termination. Except for covenants or
other provisions herein that, by their terms, expressly extend beyond the Term
of Agreement, the Parties' obligations hereunder are limited to the Term of
Agreement.
Section 5.4 Reimbursement by Millers Mutual. In the event of
termination under this Agreement, Millers Mutual shall reimburse MiliRisk
within 30 days after such termination for fees paid by MiliRisk but unearned by
Millers Mutual.
Section 5.5 Force Majeure. If either Party shall be prevented
from performing any portion of this Agreement (except the payment of money) by
causes beyond its control, including labor disputes, civil commotion, war,
governmental regulations or controls, casualty, inability to obtain material or
services or acts of God, the defaulting party shall be excused from performance
for the period of the delay and for a reasonable time thereafter.
ARTICLE VI.
INDEMNIFICATION OF MILLERS MUTUAL
Section 6.1 Limitation of Liability. In providing services
hereunder, Millers Mutual shall have a duty to act, and cause its affiliates
and designees to act, in a reasonably prudent manner. Neither Millers Mutual,
nor any officer, director, employee or agent of Millers Mutual shall be liable
to MiliRisk for any error of judgment or for any loss incurred by MiliRisk in
connection with the matters to which this Agreement relates, except a loss
resulting from the gross negligence or willful misconduct on the part of
Millers Mutual.
Section 6.2 Indemnification. MiliRisk hereby agrees to indemnify
and hold harmless Millers Mutual from and against any and all claims, causes of
action, liabilities, damages, costs, charges, fees, expenses (including
reasonable attorneys' fees and expenses to be reimbursed as incurred), suits,
orders, judgments, adjudications and losses of whatever nature and kind which
Millers Mutual or its affiliates or designees or for which Millers Mutual or
its affiliates or designees become liable as the result of the performance of
Millers Mutual's obligations and duties pursuant to this Agreement; provided,
Millers Mutual shall not be indemnified for gross negligence or willful
misconduct on the part of Millers Mutual.
3
<PAGE> 4
ARTICLE VII.
MISCELLANEOUS
Section 7.1 Relationship of Parties. This Agreement does not
create a partnership, joint venture or association; nor does this Agreement, or
the operations hereunder, create the relationship of lessor and lessee or
bailor and bailee. Nothing contained in this Agreement or in any agreement
made pursuant hereto shall ever be construed to create a partnership, joint
venture or association, or the relationship of lessor and lessee or bailor and
bailee, or to impose any duty, obligation or liability that would arise
therefrom with respect to either or both of the Parties. Specifically, but not
by way of limitation, except as otherwise expressly provided for herein,
nothing contained herein shall be construed as imposing any responsibility on
Millers Mutual for the debts or obligations of MiliRisk or any of its
affiliates. It is hereby expressly understood that Millers Mutual is hereby
engaged by MiliRisk to provide benefits administration services as an agent of
MiliRisk. Millers Mutual, its affiliates and designees shall have the right to
render similar services for other business entities and persons, including its
own, whether or not engaged in the same business as MiliRisk, and may enter
into such other business activities as Millers Mutual and its affiliates, in
their sole discretion, may determine.
Section 7.2 No Third Party Beneficiaries. Except to the extent a
third party is expressly given rights herein, any agreement herein contained,
expressed or implied, shall be only for the benefit of the Parties and their
respective legal representatives, successors and assigns, and such agreements
or assumption shall not inure to the benefit of any other party whomsoever, it
being the intention of the Parties hereto that no person or entity shall be
deemed a third party beneficiary of this Agreement except to the extent a third
party is expressly given rights herein.
Section 7.3 General Representations. Each Party represents and
warrants that on the Effective Date: (i) it is a corporation, duly established,
validly existing and in good standing under the laws of its state or
jurisdiction of incorporation, with power and authority to carry on the
business in which it is engaged and to perform its respective obligations under
this Agreement; (ii) the execution and delivery of this Agreement have been
duly authorized and approved by all requisite corporate action; (iii) it has
all the requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder; and (iv) the execution and delivery
of this Agreement do not, and consummation of the transactions contemplated
herein will not, violate any of the provisions of its charter or bylaws or any
applicable state or federal laws applicable to them.
Section 7.4 Assignment. No assignment of this Agreement or any
of the rights or obligations set forth herein by either Party shall be valid
without the specific written consent of the other Party.
Section 7.5 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, mailed by first class mail postage prepaid and return
receipt requested or sent by recognized overnight delivery service or facsimile
transmission to the address below indicated:
4
<PAGE> 5
If to Millers Mutual: The Millers Mutual Fire Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Joy J. Keller
Facsimile: (817) 348-3765
If to MiliRisk: MiliRisk, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Terry G. Gaines
Facsimile: (817) 348-3765
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by recognized overnight delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or, as the case may be,
personal delivery.
Section 7.6 Failure to Pursue Remedies. The failure of any party
to seek redress for violation of, or to insist upon the strict performance of,
any provision of this Agreement shall not prevent a subsequent act, which would
have originally constituted a violation, from having the effect of an original
violation.
Section 7.7 Cumulative Remedies. The rights and remedies
provided by this Agreement are cumulative and the use of any one right or
remedy by any party shall not preclude or waive its right to use any or all
other remedies. Said rights and remedies are given in addition to any other
rights the parties may have by law, statute, ordinance or otherwise.
Section 7.8 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of all of the parties and, to the extent permitted by
this Agreement, their successors, legal representatives and assigns.
Section 7.9 Interpretation. Throughout this Agreement, nouns,
pronouns and verbs shall be construed as masculine, feminine, neuter, singular
or plural, whichever shall be applicable. All references herein to "Articles,"
"Sections" and paragraphs shall refer to corresponding provisions of this
Agreement.
Section 7.10 Headings. Headings are solely for convenience and
ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
5
<PAGE> 6
Section 7.11 Severability. The invalidity or unenforceability of
any particular provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision were omitted unless such invalid or
unenforceable provision affects the fundamental purpose of this Agreement.
Section 7.12 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, with the same effect as if all parties hereto had signed the same
document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument. This
Agreement may also be executed and delivered by exchange of facsimile
transmissions of originally executed copies.
Section 7.13 Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
Section 7.14 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF TEXAS.
Section 7.15 Arbitration.
(a) To the fullest extent permitted by law, any controversy or
claim arising out of or relating to any alleged breach shall be resolved by
arbitration by a panel of three (3) arbitrators under the American Arbitration
Association ("AAA") Arbitration Rules in force (the "AAA Rules") in accordance
with the following:
(1) In the event of any conflict between the AAA Rules and the
provisions of this Agreement, the provisions of this Agreement
shall prevail.
(2) Either party may refer a matter to arbitration by written
notice to the other party by giving notice as provided in this
Agreement.
(3) The place of the arbitration shall be Fort Worth, Texas.
(4) The claimant party shall appoint one arbitrator and the
respondent party shall appoint one arbitrator, and the two
arbitrators so appointed shall appoint the third arbitrator,
in accordance with the AAA Rules. In the event of an
inability to agree on a third arbitrator, the appointing
authority shall be the AAA.
(5) The decision of the arbitrators shall be made by majority vote
and shall be in writing.
(6) The decision of the arbitrators shall be final and binding on
the parties save in the event of fraud, manifest mistake or
failure by any of the arbitrators to disclose any conflict of
interest.
6
<PAGE> 7
(7) The decision of the arbitrators may be enforced by any court
of competent jurisdiction and may be executed against the
person and assets of the losing party in any jurisdiction.
(b) In the event any dispute is submitted to arbitration pursuant
to Section 7.15(a) above, the panel of arbitrators may, if it deems such award
appropriate, award a party costs and expenses incurred by such party in
enforcing its rights. Except as so awarded, each party shall bear its own
costs and expenses of enforcing its rights to arbitrate under this Section
7.15.
(c) Except for arbitration proceedings pursuant to Section 7.15(a)
above, no action (other than the enforcement of any arbitration decision) or
lawsuit shall be brought by or between MiliRisk and Millers Mutual concerning
or arising out of this Agreement.
Section 7.16 Agreement to Perform Necessary Acts. Each party
agrees to perform any further acts and execute and deliver any and all further
documents and/or instruments which may be reasonably necessary to carry out the
provisions of this Agreement and the transactions contemplated hereby.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
THE MILLERS MUTUAL FIRE
INSURANCE COMPANY
By: /s/ JOY J. KELLER
-------------------------------------------
Name: Joy J. Keller
------------------------------------------
Title: Chief Financial Officer
-----------------------------------------
MILIRISK, INC.
By: /s/ F. GEORGE DUNHAM, III
-------------------------------------------
Name: F. George Dunham, III
------------------------------------------
Title: President and Chief Executive Officer
-----------------------------------------
8
<PAGE> 1
EXHIBIT 10.2
AMENDED SERVICE CONTRACT
THIS AMENDED SERVICE CONTRACT ("Agreement") dated as of July
1, 1997, is made by and between The Millers Mutual Fire Insurance Company, a
Texas mutual insurance company ("Millers Mutual"), The Millers Casualty
Insurance Company, a Texas insurance company ("Millers Casualty"), and
MiliRisk, Inc., a Texas corporation ("MiliRisk," and together with Millers
Mutual and Millers Casualty, the "Parties").
PRELIMINARY STATEMENTS
A. Millers Mutual, MiliRisk, and Millers Casualty are parties to
a service contract, effective as of December 1, 1996, as amended (the "Prior
Service Contract"), pursuant to which MiliRisk provides certain claims
processing services to Millers Mutual and Millers Casualty.
B. Millers Mutual, Millers Casualty, and MiliRisk desire to amend
in its entirety the Prior Service Contract.
C. Millers Mutual and Millers Casualty desire to procure certain
claims processing services from MiliRisk in connection with the business of
Millers Mutual and Millers Casualty and MiliRisk is willing to provide such
services.
NOW, THEREFORE, in consideration of the foregoing preliminary
statements and the mutual covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
STATEMENT OF AGREEMENT
ARTICLE I.
DEFINITIONS
Unless the context otherwise requires, the terms defined in this
Article I shall, for the purposes of this Agreement, have the meanings herein
specified:
"Effective Date" means July 1, 1997.
"Fiscal Year" shall mean the period from January 1 through December 31
of each year.
"Term of Agreement" means the period from the Effective Date until the
Agreement is terminated pursuant to Article 5.
<PAGE> 2
ARTICLE II.
DUTIES AND OBLIGATIONS OF MILIRISK
Section 2.1 Claims Processing Services. MiliRisk shall provide
claims processing services for and on behalf of Millers Mutual and Millers
Casualty which shall include, but shall not be limited to:
(a) investigating, evaluating, appraising, settling and/or giving
notice of the necessity to defend all claims;
(b) reporting claims settlements to Millers Mutual and Millers
Casualty which, if any payment is required, Millers Mutual or
Millers Casualty, as appropriate, shall pay directly;
(c) apprising Millers Mutual and Millers Casualty of major
developments which arise in the administration, investigation,
adjustment, or settlement of a particular claim and to
communicate with Millers Mutual or Miller's Casualty's
designated representative regarding all important matters
concerning the proper disposition of claims involving complex
or questionable circumstances. "Major developments" within
the context of this section are understood to mean:
(i) controverted claims;
(ii) receipt of an adverse medical report, e.g., "injury
more serious than originally reported;"
(iii) death of claimant;
(iv) adverse ruling from a court; or
(v) the need for attorney representation in a previously
unrepresented case;
(d) refraining from disclosing the contents of Millers Mutual or
Millers Casualty's files to third parties except as is
reasonably necessary in carrying out the responsibilities
under this Agreement or in delegating certain responsibilities
to others as legally required;
(e) maintaining a complete and accurate file on each reported
claim.
2
<PAGE> 3
ARTICLE III.
COMPENSATION, EXPENSES AND PAYMENT
Section 3.1 Fee. The compensation due MiliRisk from both Millers
Mutual and Millers Casualty for services provided pursuant to Section 2.1 of
this Agreement shall be an amount equal to the sum of (i) 7.5% of monthly net
earned premiums for the Agribusiness line of business (the "Agribusiness
Percentage"); (ii) 10.2% of monthly net earned premiums for the Commercial
Casualty line of business (the "Commercial Casualty Percentage"), (iii) 8.5% of
monthly net earned premiums for the Commercial Property line of business (the
"Commercial Property Percentage"); and (iv) 7.5% of monthly net earned premiums
for the Personal insurance lines of business (the "Personal Percentage"). The
Agribusiness Percentage, Commercial Casualty Percentage, Commercial Property
Percentage, and Personal Percentage shall be adjusted annually by agreement
between the Parties; provided, however, that if the Parties cannot agree on a
percentage within 60 days after the end of the calendar year, such percentage
shall remain the same as the previous calendar year.
Section 3.2 Invoicing and Payment. MiliRisk shall bill each of
Millers Mutual and Millers Casualty monthly for services within 15 days after
the end of each calendar month during the Term of Agreement. Payment shall be
made by each of Millers Mutual and Millers Casualty within 30 days after the
delivery of such invoice.
Section 3.3 Late Payment. Any amount owing from Millers Mutual
and/or Millers Casualty to MiliRisk that has not been paid by the due date
shall be subject to a late payment charge of 1% per month.
ARTICLE IV.
ACCESS TO INFORMATION, BOOKS AND RECORDS
MiliRisk and its duly authorized representatives shall have access, to
the extent necessary to perform the services pursuant to Section 2.1, to each
of Millers Mutual and Millers Casualty's offices, facilities and records
wherever located, in order to discharge MiliRisk's responsibilities hereunder;
provided, however, Millers Mutual and Millers Casualty shall provide and make
available to MiliRisk and its duly authorized representatives at MiliRisk's
Fort Worth, Texas, USA offices, at MiliRisk's request, all such records
required by MiliRisk to perform its duties pursuant to this Agreement. All
records and materials furnished to MiliRisk by Millers Mutual and Millers
Casualty in performance of this Agreement shall at all times during the Term of
Agreement remain the property of Millers Mutual and Millers Casualty, as
appropriate.
3
<PAGE> 4
ARTICLE V.
TERM AND TERMINATION OF THE AGREEMENT
Section 5.1 Initial Term. This Agreement shall be effective from
the Effective Date and shall continue for three (3) years thereafter (the
"Initial Term"); subject, however, to the terms of Section 5.2 hereof. At the
end of the Initial Term, this Agreement shall continue in force and effect for
subsequent one (1) year periods unless terminated by any Party by written
notice at least sixty (60) days prior to the anniversary date of the Effective
Date.
Section 5.2 Termination. This Agreement may be sooner terminated
on the first to occur of the following:
(a) Termination by Mutual Agreement
In the event the Parties shall mutually agree in writing, this
Agreement may be terminated on the terms and dates stipulated
therein.
(b) Uncorrected Material Breach
In the event any Party shall fail to discharge any of its
material obligations hereunder, or shall commit a material
breach of this Agreement, and such default or breach shall
continue for a period of thirty (30) days after any other
Party has served notice of such default, this Agreement may
then be terminated at the option of any nonbreaching Party by
notice thereof to the breaching Party.
Section 5.3 Effects of Termination. Except for covenants or
other provisions herein that, by their terms, expressly extend beyond the Term
of Agreement, the Parties' obligations hereunder are limited to the Term of
Agreement.
Section 5.4 Reimbursement by MiliRisk. In the event of
termination under this Agreement, MiliRisk shall reimburse Millers Mutual and
Millers Casualty within 30 days after such termination for fees paid by Millers
Mutual and Millers Casualty but unearned by MiliRisk.
Section 5.5 Force Majeure. If any Party shall be prevented from
performing any portion of this Agreement (except the payment of money) by
causes beyond its control, including labor disputes, civil commotion, war,
governmental regulations or controls, casualty, inability to obtain material or
services or acts of God, the defaulting party shall be excused from performance
for the period of the delay and for a reasonable time thereafter.
4
<PAGE> 5
ARTICLE VI.
INDEMNIFICATION OF MILIRISK
Section 6.1 Limitation of Liability. In providing services
hereunder, MiliRisk shall have a duty to act, and cause its affiliates and
designees to act, in a reasonably prudent manner. Neither MiliRisk, nor any
officer, director, employee or agent of MiliRisk shall be liable to Millers
Mutual and/or Millers Casualty for any error of judgment or for any loss
incurred by Millers Mutual and/or Millers Casualty in connection with the
matters to which this Agreement relates, except a loss resulting from the gross
negligence or willful misconduct on the part of MiliRisk.
Section 6.2 Indemnification. Millers Mutual and Millers Casualty
hereby agree to indemnify and hold harmless MiliRisk from and against any and
all claims, causes of action, liabilities, damages, costs, charges, fees,
expenses (including reasonable attorneys' fees and expenses to be reimbursed as
incurred), suits, orders, judgments, adjudications and losses of whatever
nature and kind which MiliRisk or its affiliates or designees or for which
MiliRisk or its affiliates or designees become liable as the result of the
performance of MiliRisk's obligations and duties pursuant to this Agreement;
provided, MiliRisk shall not be indemnified for gross negligence or willful
misconduct on the part of MiliRisk.
ARTICLE VII.
MISCELLANEOUS
Section 7.1 Relationship of Parties. This Agreement does not
create a partnership, joint venture or association; nor does this Agreement, or
the operations hereunder, create the relationship of lessor and lessee or
bailor and bailee. Nothing contained in this Agreement or in any agreement
made pursuant hereto shall ever be construed to create a partnership, joint
venture or association, or the relationship of lessor and lessee or bailor and
bailee, or to impose any duty, obligation or liability that would arise
therefrom with respect to either or both of the Parties. Specifically, but not
by way of limitation, except as otherwise expressly provided for herein,
nothing contained herein shall be construed as imposing any responsibility on
MiliRisk for the debts or obligations of Millers Mutual or Millers Casualty or
any of its affiliates. It is hereby expressly understood that MiliRisk is
hereby engaged by Millers Mutual and Millers Casualty to provide claims
processing services as an agent of Millers Mutual and Millers Casualty.
MiliRisk, its affiliates and designees shall have the right to render similar
services for other business entities and persons, including its own, whether or
not engaged in the same business as Millers Mutual or Millers Casualty, and may
enter into such other business activities as MiliRisk and its affiliates, in
their sole discretion, may determine.
Section 7.2 No Third Party Beneficiaries. Except to the extent a
third party is expressly given rights herein, any agreement herein contained,
expressed or implied, shall be only for the benefit of the Parties and their
respective legal representatives, successors and assigns, and such agreements
or assumption shall not inure to the benefit of any other party whomsoever, it
being the
5
<PAGE> 6
intention of the Parties hereto that no person or entity shall be deemed a
third party beneficiary of this Agreement except to the extent a third party is
expressly given rights herein.
Section 7.3 General Representations. Each Party represents and
warrants that on the Effective Date: (i) it is a corporation, duly established,
validly existing and in good standing under the laws of its state or
jurisdiction of incorporation, with power and authority to carry on the
business in which it is engaged and to perform its respective obligations under
this Agreement; (ii) the execution and delivery of this Agreement have been
duly authorized and approved by all requisite corporate action; (iii) it has
all the requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder; and (iv) the execution and delivery
of this Agreement do not, and consummation of the transactions contemplated
herein will not, violate any of the provisions of its charter or bylaws or any
applicable state or federal laws applicable to them.
Section 7.4 Assignment. No assignment of this Agreement or any
of the rights or obligations set forth herein by any Party shall be valid
without the specific written consent of the other Parties.
Section 7.5 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered personally, mailed by first class mail postage prepaid and return
receipt requested or sent by recognized overnight delivery service or facsimile
transmission to the address below indicated:
If to Millers Mutual: The Millers Mutual Fire Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Joy J. Keller
Facsimile: (817) 348-3765
If to Millers Casualty: The Millers Casualty Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Joy J. Keller
Facsimile: (817)348-3765
If to MiliRisk: MiliRisk, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Terry G. Gaines
Facsimile: (817) 348-3765
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by recognized overnight delivery service, on the date of actual
delivery and,
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<PAGE> 7
in the case of notice so given by facsimile transmission or personal delivery,
on the date of actual transmission or, as the case may be, personal delivery.
Section 7.6 Failure to Pursue Remedies. The failure of any party
to seek redress for violation of, or to insist upon the strict performance of,
any provision of this Agreement shall not prevent a subsequent act, which would
have originally constituted a violation, from having the effect of an original
violation.
Section 7.7 Cumulative Remedies. The rights and remedies
provided by this Agreement are cumulative and the use of any one right or
remedy by any party shall not preclude or waive its right to use any or all
other remedies. Said rights and remedies are given in addition to any other
rights the parties may have by law, statute, ordinance or otherwise.
Section 7.8 Binding Effect. This Agreement shall be binding upon
and inure to the benefit of all of the parties and, to the extent permitted by
this Agreement, their successors, legal representatives and assigns.
Section 7.9 Interpretation. Throughout this Agreement, nouns,
pronouns and verbs shall be construed as masculine, feminine, neuter, singular
or plural, whichever shall be applicable. All references herein to "Articles,"
"Sections" and paragraphs shall refer to corresponding provisions of this
Agreement.
Section 7.10 Headings. Headings are solely for convenience and
ease of reference and are not to be considered in the construction or
interpretation of any provision of this Agreement.
Section 7.11 Severability. The invalidity or unenforceability of
any particular provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision were omitted unless such invalid or
unenforceable provision affects the fundamental purpose of this Agreement.
Section 7.12 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, with the same effect as if all parties hereto had signed the same
document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument. This
Agreement may also be executed and delivered by exchange of facsimile
transmissions of originally executed copies.
Section 7.13 Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
Section 7.14 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF TEXAS.
7
<PAGE> 8
Section 7.15 Arbitration.
(a) To the fullest extent permitted by law, any controversy or
claim arising out of or relating to any alleged breach shall be resolved by
arbitration by a panel of three (3) arbitrators under the American Arbitration
Association ("AAA") Arbitration Rules in force (the "AAA Rules") in accordance
with the following:
(1) In the event of any conflict between the AAA Rules and the
provisions of this Agreement, the provisions of this Agreement
shall prevail.
(2) Either party may refer a matter to arbitration by written
notice to the other party by giving notice as provided in this
Agreement.
(3) The place of the arbitration shall be Fort Worth, Texas.
(4) The claimant party shall appoint one arbitrator and the
respondent party shall appoint one arbitrator, and the two
arbitrators so appointed shall appoint the third arbitrator,
in accordance with the AAA Rules. In the event of an
inability to agree on a third arbitrator, the appointing
authority shall be the AAA.
(5) The decision of the arbitrators shall be made by majority vote
and shall be in writing.
(6) The decision of the arbitrators shall be final and binding on
the parties save in the event of fraud, manifest mistake or
failure by any of the arbitrators to disclose any conflict of
interest.
(7) The decision of the arbitrators may be enforced by any court
of competent jurisdiction and may be executed against the
person and assets of the losing party in any jurisdiction.
(b) In the event any dispute is submitted to arbitration pursuant
to Section 7.15(a) above, the panel of arbitrators may, if it deems such award
appropriate, award a party costs and expenses incurred by such party in
enforcing its rights. Except as so awarded, each party shall bear its own
costs and expenses of enforcing its rights to arbitrate under this Section
7.15.
(c) Except for arbitration proceedings pursuant to Section 7.15(a)
above, no action (other than the enforcement of any arbitration decision) or
lawsuit shall be brought by or between MiliRisk and Millers Mutual and/or
Millers Casualty concerning or arising out of this Agreement.
Section 7.16 Agreement to Perform Necessary Acts. Each party
agrees to perform any further acts and execute and deliver any and all further
documents and/or instruments which may be reasonably necessary to carry out the
provisions of this Agreement and the transactions contemplated hereby.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the date first above written.
THE MILLERS MUTUAL FIRE
INSURANCE COMPANY
By: /s/ JOY J. KELLER
------------------------------------------
Name: Joy J. Keller
-----------------------------------------
Title: Chief Financial Officer
----------------------------------------
THE MILLERS CASUALTY
INSURANCE COMPANY
By: /s/ JOY J. KELLER
------------------------------------------
Name: Joy J. Keller
-----------------------------------------
Title: Chief Financial Officer
----------------------------------------
MILIRISK, INC.
By: /s/ F. GEORGE DUNHAM, III
------------------------------------------
Name: F. George Dunham, III
-----------------------------------------
Title: President and Chief Executive Officer
----------------------------------------
9
<PAGE> 1
EXHIBIT 10.3
AMENDED INFORMATION SERVICES CONTRACT
THIS AMENDED INFORMATION SERVICES CONTRACT ("Agreement") dated as
of July 1, 1997, is made by and between The Millers Mutual Fire Insurance
Company, a Texas mutual insurance company ("Millers Mutual"), The Millers
Casualty Insurance Company, a Texas insurance company ("Millers Casualty"), and
MiliRisk, Inc., a Texas corporation ("MiliRisk," and together with Millers
Mutual and Millers Casualty, the "Parties").
PRELIMINARY STATEMENTS
A. Millers Mutual, MiliRisk, and Millers Casualty are parties to an
information services contract, effective as of October 1, 1996 (the "Prior
Services Contract"), pursuant to which MiliRisk provides certain information
system services to Millers Mutual and Millers Casualty.
B. Millers Mutual, MiliRisk, and Millers Casualty desire to amend in
its entirety the Prior Services Contract.
C. Millers Mutual and Millers Casualty desire to procure certain
information system services from MiliRisk in connection with the business of
Millers Mutual and Millers Casualty and MiliRisk is willing to provide such
services.
NOW, THEREFORE, in consideration of the foregoing preliminary statements
and the mutual covenants and agreements contained herein, the parties hereto,
intending to be legally bound hereby, agree as follows:
STATEMENT OF AGREEMENT
ARTICLE I.
DEFINITIONS
Unless the context otherwise requires, the terms defined in this Article
I shall, for the purposes of this Agreement, have the meanings herein
specified:
"Effective Date" means July 1, 1997.
"Fiscal Year" shall mean the period from January 1 through December 31
of each year.
"Term of Agreement" means the period from the Effective Date until the
Agreement is terminated pursuant to Article 5.
<PAGE> 2
ARTICLE II.
DUTIES AND OBLIGATIONS OF MILIRISK
Section 2.1 Information System Services. MiliRisk shall provide
information system services for and on behalf of Millers Mutual and Millers
Casualty which shall include, but shall not be limited to:
(a) telecommunications services;
(b) hardware services;
(c) application software services;
(d) system software services;
(e) network services;
(f) system integration services.
ARTICLE III.
COMPENSATION, EXPENSES AND PAYMENT
Section 3.1 Fee. The compensation due MiliRisk from Millers Mutual
and Millers Casualty for services provided pursuant to Section 2.1 of this
Agreement shall be an amount equal to (A) the monthly net written premiums,
multiplied by (B) a certain percentage (the "Premium Percentage"), which such
percentage shall be (I) 6% for the remainder of 1997, (ii) 5.5% in calendar
year 1998, (iii) 5% in calendar year 1999, and (iv) thereafter, the Premium
Percentage shall be adjusted annually by agreement between the Parties;
provided, however, that if the Parties cannot agree on the Premium Percentage
within 60 days after the end of the calendar year, such percentage shall remain
the same as the previous calendar year.
Section 3.2 Invoicing and Payment. MiliRisk shall bill Millers Mutual
and Millers Casualty monthly for services within 15 days after the end of each
calendar month during the Term of Agreement. Payment shall be made by Millers
Mutual and Millers Casualty within 30 days after the delivery of such invoice.
Section 3.3 Late Payment. Any amount owing from Millers Mutual and/or
Millers Casualty to MiliRisk that has not been paid by the due date shall be
subject to a late payment charge of 1% per month.
2
<PAGE> 3
ARTICLE IV.
ACCESS TO INFORMATION, BOOKS AND RECORDS
MiliRisk and its duly authorized representatives shall have access, to
the extent necessary to perform the services pursuant to Section 2.1, to each
of Millers Mutual and Millers Casualty's offices, facilities and records
wherever located, in order to discharge MiliRisk's responsibilities hereunder;
provided, however, Millers Mutual and Millers Casualty shall provide and make
available to MiliRisk and its duly authorized representatives at MiliRisk's
Fort Worth, Texas, USA offices, at MiliRisk's request, all such records
required by MiliRisk to perform its duties pursuant to this Agreement. All
records and materials furnished to MiliRisk by Millers Mutual and Millers
Casualty in performance of this Agreement shall at all times during the Term of
Agreement remain the property of Millers Mutual and Millers Casualty, as
appropriate.
ARTICLE V.
TERM AND TERMINATION OF THE AGREEMENT
Section 5.1 Initial Term. This Agreement shall be effective from the
Effective Date and shall continue for three (3) years thereafter (the "Initial
Term"); subject, however, to the terms of Section 5.2 hereof. At the end of
the Initial Term, this Agreement shall continue in force and effect for
subsequent one (1) year periods unless terminated by any Party by written
notice at least sixty (60) days prior to the anniversary date of the Effective
Date.
Section 5.2 Termination. This Agreement may be sooner terminated on
the first to occur of the following:
(a) Termination by Mutual Agreement
In the event the Parties shall mutually agree in writing, this
Agreement may be terminated on the terms and dates stipulated
therein.
(b) Uncorrected Material Breach
In the event any Party shall fail to discharge any of its
material obligations hereunder, or shall commit a material breach
of this Agreement, and such default or breach shall continue for
a period of thirty (30) days after any other Party has served
notice of such default, this Agreement may then be terminated at
the option of any nonbreaching Party by notice thereof to the
breaching Party.
Section 5.3 Effects of Termination. Except for covenants or other
provisions herein that, by their terms, expressly extend beyond the Term of
Agreement, the Parties' obligations hereunder are limited to the Term of
Agreement.
Section 5.4 Reimbursement by MiliRisk. In the event of termination
under this Agreement, MiliRisk shall reimburse Millers Mutual and Millers
Casualty within 30 days after such termination for fees paid by Millers Mutual
and Millers Casualty but unearned by MiliRisk.
3
<PAGE> 4
Section 5.5 Force Majeure. If any Party shall be prevented from
performing any portion of this Agreement (except the payment of money) by
causes beyond its control, including labor disputes, civil commotion, war,
governmental regulations or controls, casualty, inability to obtain material or
services or acts of God, the defaulting party shall be excused from performance
for the period of the delay and for a reasonable time thereafter.
ARTICLE VI.
INDEMNIFICATION OF MILIRISK
Section 6.1 Limitation of Liability. In providing services hereunder,
MiliRisk shall have a duty to act, and cause its affiliates and designees to
act, in a reasonably prudent manner. Neither MiliRisk, nor any officer,
director, employee or agent of MiliRisk shall be liable to Millers Mutual
and/or Millers Casualty for any error of judgment or for any loss incurred by
Millers Mutual and/or Millers Casualty in connection with the matters to which
this Agreement relates, except a loss resulting from the gross negligence or
willful misconduct on the part of MiliRisk.
Section 6.2 Indemnification. Millers Mutual and Millers Casualty
hereby agree to indemnify and hold harmless MiliRisk from and against any and
all claims, causes of action, liabilities, damages, costs, charges, fees,
expenses (including reasonable attorneys' fees and expenses to be reimbursed as
incurred), suits, orders, judgments, adjudications and losses of whatever
nature and kind which MiliRisk or its affiliates or designees or for which
MiliRisk or its affiliates or designees become liable as the result of the
performance of MiliRisk's obligations and duties pursuant to this Agreement;
provided, MiliRisk shall not be indemnified for gross negligence or willful
misconduct on the part of MiliRisk.
ARTICLE VII.
MISCELLANEOUS
Section 7.1 Relationship of Parties. This Agreement does not create a
partnership, joint venture or association; nor does this Agreement, or the
operations hereunder, create the relationship of lessor and lessee or bailor
and bailee. Nothing contained in this Agreement or in any agreement made
pursuant hereto shall ever be construed to create a partnership, joint venture
or association, or the relationship of lessor and lessee or bailor and bailee,
or to impose any duty, obligation or liability that would arise therefrom with
respect to either or both of the Parties. Specifically, but not by way of
limitation, except as otherwise expressly provided for herein, nothing
contained herein shall be construed as imposing any responsibility on MiliRisk
for the debts or obligations of Millers Mutual or Millers Casualty or any of
its affiliates. It is hereby expressly understood that MiliRisk is hereby
engaged by Millers Mutual and Millers Casualty to provide information system
services as an agent of Millers Mutual and Millers Casualty . MiliRisk, its
affiliates and designees shall have the right to render similar services for
other business entities and persons, including its own, whether or not engaged
in the same business as Millers Mutual or Millers Casualty , and may
4
<PAGE> 5
enter into such other business activities as MiliRisk and its affiliates, in
their sole discretion, may determine.
Section 7.2 No Third Party Beneficiaries. Except to the extent a
third party is expressly given rights herein, any agreement herein contained,
expressed or implied, shall be only for the benefit of the Parties and their
respective legal representatives, successors and assigns, and such agreements
or assumption shall not inure to the benefit of any other party whomsoever, it
being the intention of the Parties hereto that no person or entity shall be
deemed a third party beneficiary of this Agreement except to the extent a third
party is expressly given rights herein.
Section 7.3 General Representations. Each Party represents and
warrants that on the Effective Date: (i) it is a corporation, duly established,
validly existing and in good standing under the laws of its state or
jurisdiction of incorporation, with power and authority to carry on the
business in which it is engaged and to perform its respective obligations under
this Agreement; (ii) the execution and delivery of this Agreement have been
duly authorized and approved by all requisite corporate action; (iii) it has
all the requisite corporate power and authority to enter into this Agreement
and to perform its obligations hereunder; and (iv) the execution and delivery
of this Agreement do not, and consummation of the transactions contemplated
herein will not, violate any of the provisions of its charter or bylaws or any
applicable state or federal laws applicable to them.
Section 7.4 Assignment. No assignment of this Agreement or any of the
rights or obligations set forth herein by any Party shall be valid without the
specific written consent of the other Parties.
Section 7.5 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if delivered
personally, mailed by first class mail postage prepaid and return receipt
requested or sent by recognized overnight delivery service or facsimile
transmission to the address below indicated:
If to Millers Mutual: The Millers Mutual Fire Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Joy J. Keller
Facsimile: (817) 348-3765
If to Millers Casualty: The Millers Casualty Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Joy J. Keller
Facsimile: (817)348-3765
If to MiliRisk: MiliRisk, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn: Terry G. Gaines
Facsimile: (817) 348-3765
5
<PAGE> 6
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
Notice so given shall, in the case of notice so given by mail, be deemed to be
given and received on the fourth calendar day after posting, in the case of
notice so given by recognized overnight delivery service, on the date of actual
delivery and, in the case of notice so given by facsimile transmission or
personal delivery, on the date of actual transmission or, as the case may be,
personal delivery.
Section 7.6 Failure to Pursue Remedies. The failure of any party to
seek redress for violation of, or to insist upon the strict performance of, any
provision of this Agreement shall not prevent a subsequent act, which would
have originally constituted a violation, from having the effect of an original
violation.
Section 7.7 Cumulative Remedies. The rights and remedies provided by
this Agreement are cumulative and the use of any one right or remedy by any
party shall not preclude or waive its right to use any or all other remedies.
Said rights and remedies are given in addition to any other rights the parties
may have by law, statute, ordinance or otherwise.
Section 7.8 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of all of the parties and, to the extent permitted by this
Agreement, their successors, legal representatives and assigns.
Section 7.9 Interpretation. Throughout this Agreement, nouns,
pronouns and verbs shall be construed as masculine, feminine, neuter, singular
or plural, whichever shall be applicable. All references herein to "Articles,"
"Sections" and paragraphs shall refer to corresponding provisions of this
Agreement.
Section 7.10 Headings. Headings are solely for convenience and ease of
reference and are not to be considered in the construction or interpretation of
any provision of this Agreement.
Section 7.11 Severability. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions
hereof, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted unless such invalid or
unenforceable provision affects the fundamental purpose of this Agreement.
Section 7.12 Counterparts. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate
counterparts, with the same effect as if all parties hereto had signed the same
document. All such counterparts shall be deemed an original, shall be
construed together and shall constitute one and the same instrument. This
Agreement may also be executed and delivered by exchange of facsimile
transmissions of originally executed copies.
Section 7.13 Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
6
<PAGE> 7
Section 7.14 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAW, AND NOT THE LAW OF
CONFLICTS, OF THE STATE OF TEXAS.
Section 7.15 Arbitration.
(a) To the fullest extent permitted by law, any controversy or claim
arising out of or relating to any alleged breach shall be resolved by
arbitration by a panel of three (3) arbitrators under the American Arbitration
Association ("AAA") Arbitration Rules in force (the "AAA Rules") in accordance
with the following:
(1) In the event of any conflict between the AAA Rules and the
provisions of this Agreement, the provisions of this Agreement
shall prevail.
(2) Either party may refer a matter to arbitration by written notice
to the other party by giving notice as provided in this
Agreement.
(3) The place of the arbitration shall be Fort Worth, Texas.
(4) The claimant party shall appoint one arbitrator and the
respondent party shall appoint one arbitrator, and the two
arbitrators so appointed shall appoint the third arbitrator, in
accordance with the AAA Rules. In the event of an inability to
agree on a third arbitrator, the appointing authority shall be
the AAA.
(5) The decision of the arbitrators shall be made by majority vote
and shall be in writing.
(6) The decision of the arbitrators shall be final and binding on the
parties save in the event of fraud, manifest mistake or failure
by any of the arbitrators to disclose any conflict of interest.
(7) The decision of the arbitrators may be enforced by any court of
competent jurisdiction and may be executed against the person and
assets of the losing party in any jurisdiction.
(b) In the event any dispute is submitted to arbitration pursuant to
Section 7.15(a) above, the panel of arbitrators may, if it deems such award
appropriate, award a party costs and expenses incurred by such party in
enforcing its rights. Except as so awarded, each party shall bear its own
costs and expenses of enforcing its rights to arbitrate under this Section
7.15.
(c) Except for arbitration proceedings pursuant to Section 7.15(a)
above, no action (other than the enforcement of any arbitration decision) or
lawsuit shall be brought by or between MiliRisk and Millers Mutual and/or
Millers Casualty concerning or arising out of this Agreement.
7
<PAGE> 8
Section 7.16 Agreement to Perform Necessary Acts. Each party agrees to
perform any further acts and execute and deliver any and all further documents
and/or instruments which may be reasonably necessary to carry out the
provisions of this Agreement and the transactions contemplated hereby.
[SIGNATURE PAGE FOLLOWS]
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
THE MILLERS MUTUAL FIRE
INSURANCE COMPANY
By: /s/ JOY J. KELLER
----------------------------------
Name: Joy J. Keller
---------------------------------
Title: Chief Financial Officer
--------------------------------
THE MILLERS CASUALTY
INSURANCE COMPANY
By: /s/ JOY J. KELLER
----------------------------------
Name: Joy J. Keller
---------------------------------
Title: Chief Financial Officer
--------------------------------
MILIRISK, INC.
By: /s/ F. GEORGE DUNHAM, III
----------------------------------
Name: F. George Dunham, III
---------------------------------
Title: President and Chief Executive
--------------------------------
Officer
--------------------------------
9
<PAGE> 1
EXHIBIT 10.5
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Agreement"), effective as of January 1,
1997, is by and between The Millers Mutual Fire Insurance Company, a Texas
mutual insurance company (the "Sublessor"), and MiliRisk, Inc., a Texas
corporation (the "Sublessee").
W I T N E S S E T H:
WHEREAS, Sublessor has entered into certain lease agreements as a
lessee as further described in Schedule 1 attached hereto (the "Lease
Agreements") for the benefit of Sublessee for furniture, equipment, and other
personal property (the "Leased Property"); and
WHEREAS, Sublessor desires to sublet the Leased Property and assign
the Lease Agreements to Sublessee and Sublessee is willing to accept the
assignment of the Lease Agreements and take possession of the Leased Property;
NOW, THEREFORE, IT IS AGREED by and between the parties hereto as
follows:
1. Subject to the approval of certain lessors as required under the
Lease Agreements (the "Lessors"), Sublessor does hereby assign and
transfer to Sublessee each Lease Agreement and Sublessee does
hereby accept the assignment and transfer of each Lease Agreement.
2. Sublessor shall secure, as necessary, from the Lessors their
consent to the assignment and transfer of the Lease Agreements to
Sublessee.
3. Subject to the terms of this Agreement, Sublessee agrees to fully
perform the terms and conditions of each Lease Agreement upon
receipt of the subject Leased Property.
4. Unless the Lessor's consent to the assignment and transfer of a
Lease Agreement is required, Sublessee shall commence making lease
payments to the Lessor and
<PAGE> 2
performing the other terms and conditions of the Lease Agreement
immediately after the date Sublessee takes possession of the
Leased Property. If the Lessor's consent is required, Sublessee
shall commence making lease payments to the Lessor and performing
the other terms and conditions of the Lease Agreement immediately
after the date Sublessee is permitted by the Lessor to take
possession of the Leased Property. In the event that Sublessee's
possession is other than the first of the month, then the first
lease payment shall be prorated for the number of days of
Sublessee's occupancy.
5. Sublessee agrees to hold Sublessor harmless from any and all
claims under the Lease Agreements by the Lessors.
6. Sublessee agrees to abide by all applicable insurance clauses and
agrees that it will name Sublessor as an additional insured on any
liability policies issued pursuant to the Lease Agreements and
further agrees to hold Sublessor harmless from any and all claims
for injury to person or property as required under the terms of
the Lease Agreements.
7. Sublessee agrees that Sublessee shall pay to the Lessors when due
all lease payments and all other monetary obligations as set forth
in the Lease Agreements.
8. As the Sublessor enters into new lease agreements for the benefit
of Sublessee for furniture, equipment, or other personal property
after the effective date of this Agreement, if Sublessee approves
the terms of each such lease agreement, then each such lease
agreement shall become a "Lease Agreement" under this Agreement
and Schedule 1 hereto shall be deemed amended to include each such
lease agreement.
2
<PAGE> 3
9. This Agreement shall be binding upon the parties hereto and their
successors and assigns.
10. All notices to a party hereto shall be in writing and shall be
deemed to have been adequately given if delivered in person or
mailed, postage prepaid and registered or certified mail:
If to Sublessee: MiliRisk, Inc.
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn.: Terry G. Gaines
If to Sublessor: The Millers Mutual Fire Insurance Company
300 Burnett Street
Fort Worth, Texas 76102-2799
Attn.: Joy J. Keller
11. This Agreement constitutes the entire agreement between the
parties, and all representations, understandings, warranties and
agreements with reference to the subject matter hereof have been
expressed herein.
12. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Texas.
13. This Agreement may be executed in multiple counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same Agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this instrument under
seal to be effective as of the date first set forth above.
SUBLESSEE: SUBLESSOR:
MILIRISK, INC. THE MILLERS MUTUAL FIRE
INSURANCE COMPANY
By: By:
--------------------------------- ----------------------------------
Name: Name:
------------------------------- --------------------------------
Title: Title:
------------------------------ -------------------------------
4
<PAGE> 1
EXHIBIT 10.7
June 27, 1997
Mr. Jeff Robinson
The Millers Group
300 Burnett Street
Ft. Worth, Texas 76102-2799
Re: Clarendon National Program -- Dispute Resolution
Dear Mr. Robinson:
This letter is to document the agreed resolution to the current dispute between
our firms. References to "EWB" include E.W. Blanch Holdings, Inc. and its
subsidiaries. "Millers" refers to The Millers Group, Milirisk and their
subsidiaries. The provisions of the agreement are as follows:
EWB agrees to follow through with the acquisition/licensing of
Strategic Data Systems (SDS) software and services. EWB further agrees
to pay $420,000 to license the SDS Property and Casualty software.
Payment to be made in accordance with the SDS license payment terms.
Millers and EWB agree to amend the Policy Life Cycle Services
Agreement in accordance with the attached amendment.
EWB agrees to increase the fee on the claims life cycle services by
0.5% of incurred losses effective June 1, 1997.
EWB agrees to reduce its fee on the Millers Casualty (Florida) program
to 1.25% of net written premium form 2% for the life of the program.
Millers agrees to commence operations of this program immediately.
Millers and EWB agree to terminate their Marketing Alliance Agreement
as of June 20, 1997 and both parties agree to waive the 180 day notice
provision. All other agreements between WEB and Millers continue
unchanged, including but not limited to placement of Millers
reinsurance by EWB, acquisition of Unisure software and services by
Millers and continued repayment by Millers of the fee advance from
EWB.
This letter agreement will supersede and replace the letter agreement
dated June 19, 1997, as acknowledged by Millers on June 20, 1997.
Both parties agree to cooperate diligently and earnestly to reflect
the foregoing provisions as amendments to the relevant existing
contracts.
Thank you for your cooperation in resolving this dispute. Please
indicate your concurrence with the above agreement by signing and
returning one copy of this letter.
Sincerely,
/s/ DAVID W. LACEFIELD
David W. Lacefield
Executive Vice President
Blanch Insurance Services
for The Millers Group:
Name /s/ JEFF ROBINSON
------------------------
Title Vice President
------------------------
Date June 27, 1997
------------------------
<PAGE> 1
EXHIBIT 10.28
INSPIRE INSURANCE SOLUTIONS, INC.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. PURPOSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1. Purpose of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III. SHAREHOLDER APPROVAL; RESERVATION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1. Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2. Shares Reserved Under Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV. PARTICIPATION IN PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1. Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2. Participation Not Guarantee of Employment or Retention . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V. GRANT AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.1. Grant of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5.2. Option Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.3. Option Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.4. Payment of Exercise Price and Delivery of Shares . . . . . . . . . . . . . . . . . . . . . . . 9
5.5. Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.6. Dissolution or Liquidation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VI. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1. Termination of Employment for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2. Termination of Directorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.3. Death or Disability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4. Other Terminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.5. Subject to Repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
6.6. Alternative Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE VII. ADMINISTRATION OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.1. Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2. Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.3. Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII. AMENDMENT AND TERMINATION OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1. Amendment of Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3. Tax Status of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IX. MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.1. Restrictions Upon Grant of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.2. Restrictions Upon Resale of Unregistered Stock . . . . . . . . . . . . . . . . . . . . . . . . 19
9.3. Repurchase by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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<TABLE>
<S> <C> <C>
9.4. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.5. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.6. Substitution of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.7. Restrictive Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
9.8. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.9. Prior Option Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.10. Effective Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
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<PAGE> 4
INSPIRE INSURANCE SOLUTIONS, INC.
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
ARTICLE I.
PURPOSES
1.1. Purpose of Plan. The purposes of the INSpire Insurance
Solutions, Inc. Amended and Restated 1997 Stock Option Plan (the "Plan") are to
advance the interests of INSpire Insurance Solutions, Inc. (formerly known as
MiliRisk, Inc.) (the "Company") and its shareholders by providing significant
incentives to selected officers, directors and employees of the Company and its
Subsidiaries (as defined herein) and to enhance the interest of such officers,
directors and employees in the Company's success and progress by providing them
with an opportunity to become shareholders of the Company. Further, the Plan
is designed to enhance the Company's ability to attract and retain qualified
management and other personnel necessary for the success and progress of the
Company. The Plan amends and restates the MiliRisk, Inc. 1997 Stock Option
Plan adopted by the Company effective March 12, 1997 in order to (i) change the
name of the Plan to give effect to the name change of the Company to INSpire
Insurance Solutions, Inc. (ii) increase the number of shares of Common Stock
reserved under the Plan after giving effect to a stock split effected as a
stock dividend and (iii) amend the Plan by revising the definition of Fair
Market Value in Section 2.1(h), adding Section 5.3(d) to permit certain
assignments of Nonqualified Options, revising Section 5.4(a) to permit payments
of the exercise price in stock or other consideration acceptable to the
Company, revising Section 5.5 regarding Change of Control events, revising
Section 7.1 to require any Committee appointed by the Board to consist of not
less than three nonemployee directors, revising Section 9.1 to clarify that the
Company has no obligation to register shares for issuance to a permitted
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<PAGE> 5
transferee, add Section 9.9 to conform prior Option Agreements to the Plan, as
amended and add Section 9.10 to specify effective dates.
ARTICLE II.
DEFINITIONS
2.1. Definitions. Certain terms used herein shall have the meaning
below stated, subject to the provisions of Section 8.1 hereof.
(a) "Board" or "Board of Directors" means the Board of
Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Committee" means the committee of directors
appointed by the Board to administer the Plan pursuant to Article VII
hereof.
(d) "Common Stock" means the authorized common stock of
the Company, par value $.01 per share, as constituted on the date the
Plan becomes effective.
(e) "Company" means INSpire Insurance Solutions, Inc., a
Texas corporation.
(f) "Director" means a member of the Board of Directors
of the Company or a Subsidiary who is not an Employee.
(g) "Employee" means an officer or other employee of the
Company or a Subsidiary, including a member of the Board who is also
such an employee.
(h) "Fair Market Value" on any date for which fair market
value is to be determined hereunder means the reported closing price
on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading, or, if the shares of
Common Stock are not listed or admitted to tading on any national
securities exchange, on the National Association of Securities Dealers
Automated
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<PAGE> 6
Quotation National Market (the "NASDAQ National Market"), or, if the
shares of Common Stock are not quoted on the NASDAQ National Market,
the average of the highest reported bid and the lowest reported asked
prices as furnished by the national Association of Securities Dealers,
Inc. (the "NASD") through NASDAQ, or, if not so reported through
NASDAQ as reported through the National Quotation Bureau, Incorporated
("NQBI") or a similar organization if NASDAQ or NQBI is no longer
reporting such information. If the Common Stock is not reported or
quoted by any such organization, the fair market value of the shares
of Common Stock shall be the fair market value thereof determined in
good faith by the Committee. In addition to the above rules, Fair
Market Value shall be determined without regard to any restriction
other than a restriction which, by its terms, will never lapse.
(i) "Incentive Option" means an Option intended to
qualify as an incentive option under Section 422 of the Code.
(j) "Nonqualified Option" means an Option that does not
qualify as an Incentive Option.
(k) "Option" means an option to purchase Common Stock
granted by the Company to an Employee or a Director pursuant to
Section 5.1 hereof.
(l) "Option Agreement" means an agreement between the
Company and an Optionee evidencing the terms of an Option granted
under the Plan.
(m) "Optionee" means an Employee or a Director to whom an
Option has been granted under the Plan.
(n) "Plan" means the INSpire Insurance Solutions, Inc.
Amended and Restated 1997 Stock Option Plan, as set forth herein and
as from time to time amended.
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<PAGE> 7
(o) "Subsidiary" means a subsidiary of the Company within
the meaning of Section 424(f) of the Code.
ARTICLE III.
SHAREHOLDER APPROVAL; RESERVATION OF SHARES
3.1. Shareholder Approval. The Plan shall become effective only
if, within 12 months from the date the Plan is adopted by the Board, the Plan
is approved by the affirmative vote of the holders of a majority of the shares
of Common Stock of the Company, or by the unanimous written consent of such
holders, in accordance with the applicable provisions of the Articles of
Incorporation and Bylaws of the Company and applicable state law.
3.2. Shares Reserved Under Plan. The aggregate number of shares of
Common Stock which may be issued upon the exercise of Options granted under the
Plan shall not exceed 2,250,000 shares, all or any part of which may be issued
pursuant to Options; provided, however, that the maximum number of shares of
Common Stock which may be issued to an Optionee under the Plan during the term
of the Plan shall not exceed 1,200,000 (as may be adjusted pursuant to Section
9.4 of the Plan). Shares of Common Stock issued upon the exercise of Options
granted under the Plan may consist of either authorized but unissued shares or
shares which have been issued and which shall have been heretofore or shall be
hereafter reacquired by the Company. The total number of shares authorized
under the Plan shall be subject to increase or decrease in order to give effect
to the provisions of Section 9.4 hereof and to give effect to any amendment
adopted pursuant to Article VIII. If any Option granted under the Plan shall
expire, terminate or be cancelled for any reason without having been exercised
in full, the number of shares as to which such Option was not exercised shall
again be available for purposes of the Plan. The Company shall at all times
while the Plan is in effect reserve such number of shares of Common Stock as
will be sufficient to satisfy the requirements of the Plan.
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<PAGE> 8
ARTICLE IV.
PARTICIPATION IN PLAN
4.1. Eligibility. Options under the Plan may be granted to any
Director or Employee of the Company or a Subsidiary. The Committee shall
determine those Directors or Employees to whom Options shall be granted, and,
subject to Section 3.2 hereof, the number of shares of Common Stock subject to
each such Option. Incentive Options or Nonqualified Options may be granted to
an Employee. Only Nonqualified Options may be granted to a nonemployee
Director.
4.2. Participation Not Guarantee of Employment or Retention.
Nothing in this Plan or in any Option Agreement shall in any manner be
construed (i) to limit in any way the right of the Company or any Subsidiary to
terminate an Employee's employment at any time, without regard to the effect of
such termination on any rights such Employee would otherwise have under this
Plan, or give any right to an Employee to remain employed or retained by the
Company or a Subsidiary thereof in any particular position or at any particular
rate of compensation or (ii) limit in any way the right of the shareholders of
the Company or a Subsidiary or the Board to remove any Director or fail to
nominate any Director for re-election without regard to the effect of such
removal or non-election of a Director on any rights such Director would have
under this Plan, or give any right to a Director to continue to serve as a
Director of the Company or a Subsidiary.
ARTICLE V.
GRANT AND EXERCISE OF OPTIONS
5.1. Grant of Options. The Committee may from time to time in its
discretion grant Options to Employees or Directors. All Options under the Plan
shall be granted within ten years
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<PAGE> 9
from the date the Plan is adopted by the Board or the date the Plan is approved
by holders of the Common Stock of the Company, whichever is earlier.
5.2. Option Agreements. Each Option granted under the Plan shall
be evidenced by an Option Agreement between the Company and the Optionee in
such form as the Committee shall approve and containing such provisions and
conditions not inconsistent with the provisions of the Plan, including the term
during which the Option may be exercised and whether in installments or
otherwise, as the Committee shall determine. Each Option Agreement issued
under the Plan shall contain an agreement of the Optionee with respect to
nondisclosure of information, noncompete provisions and nonsolicitation of
customers and employees as shall be required by the Board from each Optionee as
additional consideration for the issuance of Options under the Plan.
5.3. Option Terms. Options granted under the Plan shall be subject
to the following requirements:
(a) Option Price. The exercise price of each Incentive
Option granted under the Plan shall not be less than the higher of the
par value or 100% of the Fair Market Value of the shares of Common
Stock subject to the Option on the date the Option is granted. The
exercise price of any Nonqualified Options granted under the Plan
shall be determined by the Committee. The exercise price of an Option
may be subject to adjustment pursuant to Section 9.4 hereof.
(b) Term of Option. The term during which an Option is
exercisable shall be that period determined by the Committee as set
forth in the applicable Option Agreement, provided that no Option
shall have a term that exceeds a period of ten years from the date of
its grant.
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<PAGE> 10
(c) Nontransferability of Incentive Options. No
Incentive Option granted under the Plan shall be transferable by the
Optionee otherwise than by will or the laws of descent and
distribution, and each such Incentive Option shall be exercisable
during the Optionee's lifetime only by him or her. No transfer of an
Incentive Option by an Optionee by will or by the laws of descent and
distribution shall be effective to bind the Company unless the Company
shall have been furnished with written notice thereof and a copy of
the will and/or such other evidence as the Committee may determine
necessary to establish the validity of the transfer.
(d) Assignability of Nonqualified Options. Nonqualified
Options granted hereunder may be transferred by the Optionee thereof
to one or more permitted transferees; provided that (i) there may be
no consideration for such transfer, (ii) the Optionee (or such
Optionee's estate or representative) shall remain obligated to satisfy
all employment tax and other withholding tax obligations associated
with the exercise of the Options, (iii) the Optionee shall notify the
Company in writing that such transfer has occurred, the identity and
address of the permitted transferee and the relationship of the
permitted transferee to the Optionee and (iv) such transfer shall be
effected pursuant to transfer documents approved from time to time by
the Committee. To the extent a Nonqualified Option transferred
pursuant to this Section 5.3(d) is not fully exercisable as of the
date of transfer thereof, the Optionee shall specify in the transfer
document whether and to what extent the transferred Options (if less
than all of the Options subject to the applicable Nonqualified Stock
Option Agreement) are exercisable, subject to the limitations on
exercisability contained in the applicable Nonqualified Stock Option
Agreement. Furthermore, to the extent the Optionee transfers Options
that are not exercisable as of the date of transfer and such Options
are less than all of the Options
7
<PAGE> 11
subject to the applicable Nonqualified Stock Option Agreement, the
Optionee shall specify in the transfer documents, subject to the
limitations on exercisability contained in the applicable Nonqualified
Stock Option Agreement, when the transferred Options become
exercisable as Options under the applicable Nonqualified Stock Option
Agreement subsequent to such transfer. No permitted transferee may
further assign or transfer the transferred Option otherwise than by
will or the laws of descent and distribution. Following any permitted
transfer, any such Options shall continue to be subject to the same
terms and conditions as were applicable immediately prior to transfer;
provided that for purposes of Sections 5.4(a), 5.4(b), 5.5, 5.6,
Article VII, and Article IX hereof the term "Optionee" shall be deemed
to refer also to each permitted transferee. The events of termination
of relationship in Article VI hereof shall continue to be applied with
respect to the original Optionee, following which the Options shall be
exercisable by the transferee only to the extent, and for the periods
specified in Article VI and the shares issued upon exercise of Options
shall be subject to repurchase pursuant to Section 9.3. The term
"permitted transferees" shall mean one or more of the following: (i)
any member of the optionee's immediate family; (ii) a trust
established for the exclusive benefit of one or more members of such
immediate family; or (iii) a partnership in which such immediate
family members are the only partners. The term "immediate family" is
defined for such purpose as spouses, children, stepchildren and
grandchildren, including relationships arising from adoption.
(e) Time and Amount Exercisable. Each Option shall be
exercisable in accordance with the provisions of the Option Agreement
pursuant to which it is granted in whole, or from time to time in
part, subject to any limitations with respect to the number of shares
for which the Option may be exercised at a particular time and to such
8
<PAGE> 12
other conditions as the Committee in its discretion may specify in the
Option Agreement. Any portion of an Option which has become
exercisable shall remain exercisable until it is exercised in full or
it terminates or expires pursuant to the terms of the Plan or the
applicable Option Agreement.
(f) Options Granted to Ten Percent Stockholders. No
Incentive Option shall be granted to any Employee who owns, directly
or indirectly within the meaning of Section 424(d) of the Code, stock
possessing more than 10% of the total combined voting power of all
classes of stock of the Company or any Subsidiary, unless at the time
the Option is granted, the exercise price of the Option is at least
110% of the Fair Market Value of the Common Stock subject to such
Option and such Option, by its terms, is not exercisable after the
expiration of five years from the date such Option is granted. The
provisions of this Section 5.3(e) shall not apply to the grant of
Nonqualified Options.
5.4. Payment of Exercise Price and Delivery of Shares.
(a) Manner of Exercise. Shares of Common Stock purchased
upon exercise of Options shall at the time of purchase be paid for in
full. The Company shall satisfy its employment tax and other tax
withholding obligations by requiring the Optionee (or such Optionee's
estate or representative) to pay the amount of employment tax and
withholding tax, if any, that must be paid under federal, state and
local law due to the exercise of the Option. To the extent that the
right to purchase shares has accrued hereunder, Options may be
exercised from time to time by written notice to the Company stating
the full number of shares with respect to which the Option is being
exercised and the time of delivery thereof, which shall be at least
fifteen days after the giving of such notice unless an earlier date
shall have been mutually agreed upon by the Optionee (or other person
entitled to exercise the Option) and the Company, accompanied by
payment
9
<PAGE> 13
to the Company of the purchase price in full and the amount of
employment tax and withholding tax due, if any, upon the exercise of
the Option. Such payment shall be effected (i) by certified or
official bank check, (ii) if so permitted by the Company, by the
delivery of a number of shares of Common Stock (plus cash if
necessary) having a fair market value equal to the amount of such
purchase price and employment or withholding tax or (iii) by delivery
of the equivalent thereof acceptable to the Company. The Company
will, as soon as reasonably possible notify the Optionee (or such
Optionee's representative) of the amount of employment tax and other
withholding tax that must be paid under federal, state and local law
due to the exercise of the Option. At the time of delivery, the
Company shall, without transfer or issue tax to the Optionee (or other
person entitled to exercise the Option), deliver to the Optionee (or
to such other person) at the principal office of the Company, or such
other place as shall be mutually agreed upon, a certificate or
certificates for the shares of Common Stock, provided, however, that
the time of delivery may be postponed by the Company for such period
as may be required for it with reasonable diligence to comply with any
requirements of law.
(b) Rights of Optionee in Stock. Neither any Optionee,
any permitted transferee nor the legal representatives, heirs,
legatees or distributees of any Optionee or permitted transferee shall
be deemed to be the holder of, or to have any of the rights of a
holder with respect to, any shares of Common Stock issuable upon
exercise of an Option granted hereunder unless and until such shares
are issued to him or her or them and such person or persons have
received a certificate or certificates therefor. Upon the issuance
and receipt of such certificate or certificates, such Optionee or the
legal representatives, heirs, legatees or distributees of such
Optionee shall have absolute
10
<PAGE> 14
ownership of the shares of Common Stock evidenced thereby, including
the right to vote such shares, to the same extent as any other owner
of shares of Common Stock, and to receive dividends thereon, subject,
however, to the terms, conditions and restrictions of the Plan.
5.5. Change of Control.
(a) A "Change of Control" for purposes of this Plan shall
mean: (i) the acquisition by a single entity or group of affiliated
entities of more than 50% of the Common Stock issued and outstanding
immediately prior to such acquisition; or (ii) the dissolution or
liquidation of the Company or the consummation of any merger or
consolidation of the Company or any sale or other disposition of all
or substantially all of its assets, if the shareholders of the Company
immediately before such transaction own, immediately after
consummation of such transaction, equity securities (other than
options and other rights to acquire equity securities) possessing less
than 50% of the voting power of the surviving or acquiring
corporation. All adjustments under this Section shall be made by the
Committee, whose determination as to what adjustments shall be made
and the extent thereof shall be final, binding and conclusive for all
purposes of the Plan and of each Option Agreement.
(b) Change of Control with Provision Being Made Therefor.
If in connection with a Change of Control a written provision is made
for the assumption and continuance of any Option granted under the
Plan, or the substitution for such option of a new Option covering the
shares of the successor employer corporation, with appropriate
adjustment as to the number and kind of shares and prices, the option
granted under the Plan, or the new Option substituted therefor, as the
case may be, shall continue in the manner and under the terms
provided.
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<PAGE> 15
(c) Change of Control Without Provision Being Made
Therefor. If no written provision is made in connection with a Change
of Control for the continuance and assumption of any Option granted
under the Plan or for the substitution of any Option covering the
shares of the successor employer corporation, then, the holder of any
such Option shall be entitled, prior to the effective date of any such
Change of Control, to purchase the full number of shares not
previously exercised under such Option, without regard to the periods
and installments of exercisability made pursuant to Section 5.3 if
(and only if) such Option has not at that time expired or been
terminated, failing which purchase, any unexercised portion shall be
deemed cancelled as of the effective date of such Change of Control.
5.6. Dissolution or Liquidation of the Company. In the event of
the proposed dissolution or liquidation of the Company, the Options granted
hereunder shall terminate as of a date to be fixed by the Committee, provided
that not less than 15 days' prior written notice of the date so fixed shall be
given to the Optionee, and the Optionee shall have the right, during the 15-day
period preceding such termination, to exercise his or her Option.
ARTICLE VI.
TERMINATION OF EMPLOYMENT OR DIRECTORSHIP
6.1. Termination of Employment for Cause. In the event that an
Optionee is an Employee and such Optionee's employment by the Company or a
Subsidiary shall terminate for Cause (as hereinafter defined), the Options
granted to the Optionee pursuant to this Plan shall terminate immediately upon
termination of employment. For the purposes of this Plan, the term "Cause"
shall mean "Cause" as defined in any written employment agreement in effect
between the applicable Optionee and the Company or a Subsidiary, or if such
Optionee is not a party to a written employment agreement in which Cause is
defined, then Cause shall mean (i) the failure
12
<PAGE> 16
by such Optionee to substantially perform his or her duties with the Company or
a Subsidiary in a manner reasonably deemed satisfactory by the Board of
Directors, (ii) the abuse of illegal drugs or other controlled substances or
the intoxication of Optionee during working hours, (iii) the arrest for, or
conviction of, a felony, (iv) the unexcused absence by such Optionee from
Optionee's regular job location for more than five consecutive days or for more
than the aggregate number of days permitted to Optionee under Company vacation
and sick leave policies applicable to Optionee or (v) any conduct or activity
of such Optionee deemed injurious to the Company in the reasonable discretion
of the Board of Directors.
6.2. Termination of Directorship. In the event that an Optionee is
a Director and such Optionee fails to be reelected as a Director, resigns as a
Director or is removed as a Director (other than due to Optionee's disability
as defined in Section 6.3 hereof), the Options granted to such Optionee
pursuant to this Plan shall terminate on the date such Optionee ceases to be a
Director.
6.3. Death or Disability. (a) In the event that an Optionee shall
die while employed by, or serving as a Director of, the Company or a Subsidiary
or if Optionee's employment by, or service as a Director of, the Company or a
Subsidiary is terminated because Optionee has become disabled, Optionee, his or
her estate, or beneficiary shall have the right to exercise his or her Option
at any time within 60 days from the date of death of Optionee or termination of
Optionee's employment by, or service as a Director of, the Company or a
Subsidiary due to disability, as the case may be, only to the extent the
Optionee was entitled to exercise his or her Option immediately prior to such
occurrence. To the extent that the Option is not so exercised, it shall expire
at the end of such 60 day period. For purposes of this Plan, disability shall
be as defined in any written employment agreement in effect between the
applicable Optionee and the Company or a Subsidiary, or if such Optionee is not
a party to a written employment
13
<PAGE> 17
agreement in which disability is defined, an Optionee shall be considered
disabled if he or she is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment that can
be expected to result in death or that has lasted or can be expected to last
for a continuous period of not less than 6 months.
(b) If an Optionee dies during the 60-day period after
the termination of his or her position as an Employee or Director of
the Company or a Subsidiary and at the time of his or her death the
Optionee was entitled to exercise an Option theretofore granted to him
or her, the Option shall, unless the applicable Option Agreement
provides otherwise, expire 60 days after the date on which his or her
position as an Employee or Director of the Company or a Subsidiary
terminated, but in no event, later than the date on which the Option
would have expired if the Optionee had lived. Until the expiration of
such 60-day period, the Option may be exercised by the Optionee's
executor or administrator or by any person or persons who shall have
acquired the Option directly from the Optionee by bequest or
inheritance, but only to the extent that the Optionee was entitled to
exercise the Option at the date of his or her death and, to the extent
the Option is not so exercised, it shall expire at the end of such
60-day period.
6.4. Other Terminations. In the event that termination of
employment with the Company occurs other than for Cause or for death or
disability pursuant to Sections 6.1 or 6.3 above, or in the event that the
directorship of an Optionee who is a Director is terminated for reasons other
than the removal, resignation, death or disability of such Director, the
applicable Optionee shall have the right to exercise his or her Option at any
time within 60 days after such termination to the extent he or she was entitled
to exercise the same immediately prior to such termination. To the extent that
the Option is not so exercised, it shall expire at the end of such 60 day
period.
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<PAGE> 18
6.5. Subject to Repurchase. All shares of Common Stock purchased
by an Optionee or his or her estate or beneficiary shall be subject to
repurchase by the Company pursuant to Section 9.3 of this Plan.
6.6. Alternative Provisions. The provisions of this Article VI
shall apply to all Options granted under the Plan except to the extent
expressly provided otherwise in any Option Agreement.
ARTICLE VII.
ADMINISTRATION OF PLAN
7.1. Administration. The Plan shall be administered by the Board
of Directors or a Committee of the Board of Directors consisting of not less
than three Non-Employee Directors (as defined in Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended) as may be appointed by the
Board of the Company, all of whom are members of the Board. Any such committee
appointed by the Board, or the Board itself during such periods as no such
properly constituted and appointed committee exists, is herein referred to as
the "Committee." A majority of the Committee shall constitute a quorum thereof
and the actions of a majority of the Committee approved at a meeting at which a
quorum is present, or actions unanimously approved in writing by all members of
the Committee, shall be the actions of the Committee. Vacancies occurring on
the Committee shall be filled by the Board. The Committee shall have full and
final authority (i) to interpret the Plan and each of the Option Agreements,
(ii) to prescribe, amend and rescind rules and regulations, if any, relating to
the Plan, (iii) to make all determinations necessary or advisable for the
administration of the Plan and (iv) to correct any defect, supply any omission
and reconcile any inconsistency in the Plan and any Option Agreement. The
determination by the Committee in all matters referred to herein shall be
conclusive and binding for all purposes and upon all persons, including,
without limitation, the
15
<PAGE> 19
Company, the shareholders of the Company, the Committee, and each of the
members thereof and the Optionees and their respective successors in interest.
7.2. Liability. No member of the Board or any Committee shall be
liable for anything done or omitted to be done by him or her or by any other
member of the Board or any Committee in connection with the Plan, except for
his or her own willful misconduct or gross negligence (unless the Company's
Articles of Incorporation or Bylaws, or any indemnification agreement between
the Company and such person, in each case in accordance with applicable law,
provides otherwise). The Board and any Committee shall have power to engage
outside consultants, auditors or other professional help to assist in the
fulfillment of the duties or the Board or any Committee under the Plan at the
Company's expense.
7.3. Determinations. In making its determinations concerning the
Optionees who shall receive Options as well as the number of shares to be
covered thereby and the time or times at which they shall be granted, the
Committee shall take into account the nature of the services rendered by the
respective Optionees, their past, present and potential contribution to the
Company's success and such other factors as the Committee may deem relevant.
The Committee shall determine the form of Option Agreements under the Plan and
the terms and conditions to be included therein, provided such terms and
conditions are not inconsistent with the terms of the Plan, the Company's
Articles of Incorporation or Bylaws. The Committee may waive any provisions of
any Option Agreement, provided such waiver is not inconsistent with the terms
of the Plan, the Company's Articles of Incorporation or Bylaws. The
determinations of the Committee under the Plan need not be uniform and may be
made by it selectively among persons who receive, or are eligible to receive,
Options under the Plan, whether or not such persons are similarly situated.
16
<PAGE> 20
ARTICLE VIII.
AMENDMENT AND TERMINATION OF PLAN
8.1. Amendment of Plan. The Plan may be amended at any time and
from time to time by the Board, but no amendment which (i) increases the
aggregate number of shares of Common Stock which may be issued pursuant to
Options granted under the Plan, (ii) decreases the minimum Option exercise
price provided in the Plan, (iii) extends the period during which Options may
be granted pursuant to the Plan, (iv) changes the class of individuals eligible
to be granted Options, or (v) has the effect of any of the above shall be
effective unless and until the same is approved by the affirmative vote of the
holders of a majority of the shares of Common Stock of the Company, or the
unanimous written consent of such holders, in accordance with the applicable
provisions of the Articles of Incorporation and Bylaws of the Company and
applicable state law. No amendment to the Plan shall, without the consent of
an Optionee, affect such Optionee's rights under an Option previously granted.
8.2. Termination. The Board may, at any time, terminate the Plan
as of any date specified in a resolution adopted by the Board. If not earlier
terminated, the Plan shall terminate on February 28, 2007. No Options may be
granted after the Plan has terminated but the Committee shall continue to
supervise the administration of Options previously granted.
8.3. Tax Status of Options. To the extent applicable, the Plan is
intended to permit the issuance of Options to Employees in accordance with the
provisions of Section 422 of the Code. Subject to the provision of Section 8.1
of the Plan, the Plan and Option Agreements may be modified or amended at any
time, both prospectively and retroactively, and in a manner that may affect
Options previously granted, if such amendment or modification is necessary for
the Plan and Options granted hereunder to qualify under said provision of the
Code. All Options granted under the Plan to Employees shall be intended to
qualify as incentive stock options under
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<PAGE> 21
Section 422 of the Code to the extent that any portion of the Options granted
meet the requirements of Section 422 of the Code. To the extent that any
portion of the Options granted under the Plan do not meet the requirements of
Section 422 of the Code, such Options shall be deemed to be Nonqualified
Options. Nothing in the Plan shall be deemed to prohibit the issuance of
Nonqualified Options to Employees under the Plan. Any Options issued to
Directors shall be Nonqualified Options.
ARTICLE IX.
MISCELLANEOUS PROVISIONS
9.1. Restrictions Upon Grant of Options. If the listing upon any
stock exchange or the registration or qualification under any federal or state
law of any shares of Common Stock to be issued on the exercise of Options
granted under the Plan (whether to permit the grant of Options the issuance of
shares of Common Stock to any permitted transferee or the resale or other
disposition of any such shares of Common Stock by or on behalf of the Optionees
receiving such shares) should be or become necessary or desirable, the Board in
its sole discretion may determine that delivery of the certificates for such
shares of Common Stock shall not be made until such listing, registration or
qualification shall have been completed. The Company agrees that it will use
its reasonable best efforts to effect any such listing, registration or
qualification; provided, however, that the Company shall not be required to use
its reasonable best efforts to effect such registration under the Securities
Act of 1933 other than on Form S-8 or such other forms as may be in effect from
time to time calling for information comparable to that presently required to
be furnished under Form S-8. In no event shall the Company be required to
register shares of Common Stock for issuance to a permitted transferee and any
requested exercise of Options by a permitted transferee shall be subject to any
applicable prior registration of the shares of Common Stock issuable upon such
exercise.
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<PAGE> 22
9.2. Restrictions Upon Resale of Unregistered Stock. Each Optionee
shall, if the Company deems it advisable, represent and agree in writing (i)
that any shares of Common Stock acquired by such Optionee pursuant to this Plan
will not be sold except pursuant to an effective registration statement under
the Securities Act of 1933 or pursuant to an exemption from registration under
said Act, (ii) that such Optionee is acquiring such shares of Common Stock for
his or her own account and not with a view to the distribution thereof and
(iii) to such other customary matters as the Company may request. In such
case, no shares of Common Stock shall be issued to such Optionee unless such
Optionee provides such representations and agreements and the Company is
reasonably satisfied that such representations and agreements are correct.
9.3. Repurchase by the Company. (a) The Company shall have the
right, exercisable within 60 days after the later of (i) the date of Optionee's
termination of employment with the Company or a Subsidiary or termination of
service as a Director or (ii) the date of the exercise by any person other than
Optionee of the Option pursuant to any provision of this Plan, to purchase any
shares of Common Stock (or securities into which any Common Stock has been
converted) that were acquired pursuant to the exercise of an Option under this
Plan ("Option Shares"). To the extent that an Optionee holds exercisable
Options at the time of termination of employment or termination of service as a
Director, the Company may elect to purchase such exercisable Options in the
same manner as the Option Shares at a price equal to the Repurchase Price (as
hereinafter defined) less the exercise price of such exercisable Options.
(b) The Repurchase Price for the purchase of the Option
Shares shall be determined as follows:
(i) if the Common Stock has been registered
pursuant to a registration statement filed under the
Securities Act of 1933, as amended, and the rules and
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<PAGE> 23
regulations of the Securities and Exchange Commission
thereunder (the "Act"), then the Repurchase Price per share
shall be equal to the average closing price per share of the
Common Stock for the 30 days preceding the date of termination
of employment by the Company or a Subsidiary as published in
the Wall Street Journal; or
(ii) if the Common Stock has not been registered
under the Act, then the price shall be the book value per
share of Common Stock as of the last day of the month during
which termination of employment with the Company or a
Subsidiary (or termination of service as a Director occurs) as
determined by the formula:
P = A-L
---
S
P = the purchase price (book value) per
Option Share,
A = the total assets of the Company and
its Subsidiaries (determined
pursuant to generally accepted
accounting principles) shown on the
Company's balance sheet for the most
recent fiscal year ended,
L = the total liabilities of the Company
and its Subsidiaries (determined
pursuant to generally accepted
accounting principles) shown on the
Company's balance sheet for the most
recent fiscal year ended,
S = the total number of shares of
capital stock of the Company
outstanding on a fully diluted basis
as shown on the Company's balance
sheet for the most recent fiscal
year ended and as adjusted for any
capital transactions, dividends, or
reclassification of stock subsequent
to such date.
(c) To the extent that the Company has the right to
purchase Option Shares, the Company may exercise such right by
delivery (upon or within sixty days after the later of Optionee's
termination of employment with the Company or a Subsidiary (or
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<PAGE> 24
termination of service as a Director) or exercise by a person other
than Optionee of the Option) of written notice to the Optionee (or
such other person exercising such Option) stating the full number of
Option Shares that the Company has elected to purchase, the purchase
price per Option Share, and the time of purchase (which time shall not
be earlier than 5 days from the date of notice). At the time of
purchase, the Optionee shall deliver the certificate or certificates
representing his Option Shares to the Company at its offices and shall
execute any stock powers or other instruments as may be necessary to
transfer full ownership of the Option Shares to the Company. At the
time of purchase, the Company shall issue its own check within 60 days
to the Optionee in an amount equal to the aggregate purchase price for
the Option Shares for which the Company has exercised its right to
purchase, less any amounts required to be withheld under applicable
laws. In the event of Optionee's death or disability, the Company's
right to purchase and the manner of purchase shall apply with regard
to the Optionee's estate, beneficiary, administrator or personal
representative.
9.4. Adjustments. The number of shares of Common Stock of the
Company authorized for issuance under the Plan, as well as the price to be paid
and the number of shares issued upon exercise of outstanding Options, shall be
subject to adjustment by the Committee, in its sole discretion, to reflect any
stock split, stock dividend, recapitalization, merger consolidation,
reorganization, combination or exchange of shares or other similar event.
9.5. Use of Proceeds. The proceeds from the sale of Common Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Company and may be used for such corporate purposes as the Company may
determine.
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<PAGE> 25
9.6. Substitution of Options.
(a) The Committee may, with the consent of the holder of
any Option granted under the Plan, cancel such Option and grant a new
Option in substitution therefor, provided that the Option as so
substituted shall satisfy all of the requirements of the Plan as of
the date such new Option is granted.
(b) Options may be granted under the Plan in substitution
for options held by individuals who are employees or directors of
another corporation and who become Employees or Directors of the
Company or any Subsidiary of the Company eligible to receive Options
pursuant to the Plan as a result of a merger, consolidation,
reorganization or similar event. The terms and conditions of any
Options so granted may vary from those set forth in the Plan to the
extent deemed appropriate by the Committee in order to conform the
provisions of Options granted pursuant to the Plan to the provisions
of the options in substitution for which they are granted.
9.7. Restrictive Legends.
(a) Certificates representing shares of Common Stock
delivered pursuant to the exercise of Options shall bear an
appropriate legend referring to the terms, conditions and restrictions
described in this Plan. Any attempt to dispose of any such shares of
Common Stock in contravention of the terms, conditions and
restrictions described in the Plan shall be ineffective, null and
void, and the Company shall not effect any such transfer on its books.
(b) Any shares of Common Stock of the Company received by
an Optionee (or his or her heirs, legatees, distributees or
representative) as a stock dividend on, or as a result of a stock
split, combination, exchange of shares, reorganization, merger,
consolidation or otherwise with respect to, shares of Common Stock
received pursuant
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<PAGE> 26
to the exercise of Options, shall be subject to the terms and
conditions of the Plan and bear the same legend as the shares received
pursuant to the exercise of Options.
9.8. Notices. Any notice required or permitted hereunder shall be
sufficiently given only if sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to the Company at its principal place of
business, and to the Optionee at the address on file with the Company at the
time of grant hereunder, or to such other address as either party may hereafter
designate in writing by notice similarly given by one party to the other.
9.9. Prior Option Agreements. Each Option Agreement entered into
prior to the effective date of this INSpire Insurance Solutions, Inc. Amended
and Restated 1997 Stock Option Plan is hereby amended to conform to the
provisions of the Plan.
9.10. Effective Dates. The Plan originally became effective on
March 12, 1997. The amendment and restatement effected hereby is effective
July 30, 1997, subject to any required shareholder approval.
IN WITNESS WHEREOF, upon authorization of the Board of Directors and
the Shareholders of the Company, the undersigned has caused the INSpire
Insurance Solutions, Inc. Amended and Restated 1997 Stock Option Plan to be
executed effective as of the 30th day of July 1997.
/s/ F. GEORGE DUNHAM, III
--------------------------------------
F. George Dunham, III
President and Chief Executive Officer
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<PAGE> 1
EXHIBIT 10.36
INSPIRE INSURANCE SOLUTIONS, INC.
1997 DIRECTOR STOCK OPTION PLAN
Section 1. Purpose. The purpose of the INSpire Insurance
Solutions, Inc. 1997 Director Stock Option Plan (the "Plan") is to promote the
interests of INSpire Insurance Solutions, Inc., a Texas corporation (the
"Company"), and the interests of the Company's shareholders by providing an
opportunity to nonemployee directors of the Company to purchase Common Stock of
the Company. By encouraging such stock ownership, the Company seeks to
attract, retain and motivate such nonemployee directors and to encourage them
to devote their best efforts to the business and financial success of the
Company. Under the Plan, the Committee shall automatically grant
"non-qualified stock options" as described in Treasury Regulation Section
1.83-7 or any successor regulation thereto to each nonemployee director of the
Company under the terms and conditions described below.
Section 2. Definitions. For purposes of the Plan, the following
terms used herein shall have the following meanings, unless a different meaning
is clearly required by the context.
2.1 "Board of Directors" shall mean the Board of Directors of the
Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.3 "Committee" shall mean the committee of the Board of Directors
referred to in Section 5 hereof.
2.4 "Common Stock" shall mean the Common Stock, $.01 par value, of
the Company.
2.5 "Nonemployee Director" shall mean any director of the Company
on the date of an award hereunder who is not an employee of the Company or an
employee of any Parent or Subsidiary of the Company.
2.6 "Non-Qualified Options" or "Options" shall mean options
granted to a Participant pursuant to the Plan that are intended to be, and
qualify as, "nonqualified stock options" as described in Treasury Regulation
Section 1.83-7 or any successor regulation thereto and that shall not
constitute nor be treated as an incentive stock options (as defined in Section
422(b) of the Code).
2.7 "Participant" shall mean any Nonemployee Director to whom any
Non-Qualified Options are granted under the Plan.
2.8 "Parent of the Company" shall have the meaning set forth in
Section 424(e) of the Code.
2.9 "Subsidiary of the Company" shall have the meaning set forth
in Section 424(f) of the Code.
<PAGE> 2
Section 3. Eligibility. Subject to the share limitations of
Section 4.1 hereof, each Nonemployee Director shall automatically receive
grants of Non-Qualified Options to purchase Common Stock as follows:
(a) each Nonemployee Director who serves as a director on the date
of adoption of the Plan shall be granted Non-Qualified Options
to purchase 2,500 shares of Common Stock on the date of the
initial public offering of the Common Stock at an exercise
price equal to the initial price to the public of the Common
Stock offered and sold by the Company in its initial public
offering;
(b) each Nonemployee Director who is first elected (or appointed
to fill a vacancy) as a director of the Company after the
initial public offering of Common Stock by the Company shall
be granted Non-Qualified Options to purchase 2,500 shares of
Common Stock on the day immediately after the date on which
such Nonemployee Director is first elected (or appointed) as a
director of the Company; and
(c) each Nonemployee Director who has previously been granted
Non-Qualified Options under the Plan shall be granted
additional Non-Qualified Options to purchase 250 shares of
Common Stock on the day immediately after each annual meeting
subsequent to 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.
Section 4. Common Stock Subject to the Plan.
4.1 Number of Shares. The total number of shares of Common Stock
for which Non-Qualified Options may be granted under the Plan shall not exceed
in the aggregate 50,000 shares of Common Stock (subject to adjustment as
provided in section 6 hereof). If on any date upon which Non-Qualified Options
are to be granted hereunder, the number of shares of Common Stock remaining
available for issuance under the Plan is insufficient for the grant of the
total number of Non-Qualified Options to all Nonemployee Directors otherwise
entitled thereto pursuant to Section 3 above, then each Nonemployee Director
shall receive Non-Qualified Options to purchase a proportionate number of the
available number of shares remaining (rounded down to the greatest number of
whole shares of Common Stock available).
4.2 Reissuance. The shares of Common Stock that may be subject to
Non-Qualified Options granted under the Plan may be either authorized and
unissued shares or shares reacquired at any time and now or hereafter held as
treasury stock as the Board of Directors may determine. In the event that any
outstanding Non-Qualified Options expire or are terminated for any reason, the
shares allocable to such Non-Qualified Options may again be subject to
Non-Qualified Options granted under the Plan.
Section 5. Administration of the Plan
5.1 Administration. The Plan shall be administered by the entire
Board of Directors or by a committee of the Board of Directors (the
"Committee") established by the Board of
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<PAGE> 3
Directors and consisting of no less than three Non-Employee Directors (as
defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended.) Any Committee shall be appointed from time to time by, and shall
serve at the pleasure of, the Board of Directors. To the extent that the Plan
is administered by the entire Board of Directors, the term "Committee" shall be
deemed to refer to the Board of Directors.
5.2 Grant of Non-Qualified Options. Upon each grant of
Non-Qualified Options hereunder, the Committee, on behalf of the Company, shall
enter into, execute, and deliver to the Participant a stock option agreement
("Non- Qualified Stock Option Agreement") relating to such Non-Qualified
Options, which agreement shall contain the following terms and conditions,
together with such other terms and conditions which are determined by the
Committee and are not inconsistent with any of the following terms and
conditions or with any other provision of the Plan:
(a) Such Non-Qualified Options shall expire on the tenth
anniversary of the date of grant thereof, or, if earlier, three (3) months
after the date the Participant ceases to be a director of the Company other
than by reason of death or disability, in which case the three (3) month period
shall be extended to one (1) year for the Participant or, in the case of his
death, his legal representative, legatee, or distributee.
(b) The exercise price of the Non-Qualified Options granted under
Section 3(a) of the Plan shall be the initial price to public of the Common
Stock sold by the Company in its initial public offering. The exercise price of
all other Non-Qualified Options granted under the Plan shall be equal to the
fair market value on the date of grant of such Non-Qualified Options. For
purposes of the Plan, the fair market value per share of Common Stock as of any
day shall be deemed to be the average of the daily closing prices per share of
Common Stock for the 30 consecutive trading days that such shares were traded
ending on the 15th day before such date. The closing price for each day shall
be the reported closing price on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading, or, if the
shares of Common Stock are not listed or admitted to trading on any national
securities exchange, on the National Association of Securities Dealers
Automated Quotation National Market (the "NASDAQ National Market"), or, if the
shares of Common Stock are not quoted on the NASDAQ National Market, the
average of the highest reported bid and the lowest reported asked prices as
furnished by the National Association of Securities Dealers, Inc. (the "NASD")
through NASDAQ, or, if not so reported through NASDAQ as reported through the
National Quotation Bureau, Incorporated ("NQBI") or a similar organization if
NASDAQ or NQBI is no longer reporting such information. If the Common Stock is
not reported or quoted by any such organization on any of the 30 consecutive
days ending on the 15th day before the date of grant, the fair market value of
the shares of Common Stock subject to Non-Qualified Options on the date the
Options are granted shall be the fair market value thereof determined in good
faith by the Board of Directors. The fair market value of Shares of Common
Stock subject to Options shall be determined without regard to any restriction
other than a restriction which, by its terms, will never lapse.
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<PAGE> 4
(c) The Non-Qualified Options granted hereunder shall be one
hundred percent (100%) vested and exercisable at all times on and after a
Registration Statement on Form S-8 has been filed with the Securities and
Exchange Commission with respect to the Plan and becomes effective.
(d) Subject to the prior consent of the Committee, Options granted
hereunder may be transferred by the Participant thereof to one or more
permitted transferees; provided that (i) there may be no consideration for such
transfer, (ii) the Participant (or such Participant's estate or representative)
shall remain obligated to satisfy all employment tax and other withholding tax
obligations associated with the exercise of the Options, (iii) the Participant
shall notify the Company in writing that such transfer has occurred, the
identity and address of the permitted transferee and the relationship of the
permitted transferee to the Participant and (iv) such transfer shall be
effected pursuant to transfer documents approved from time to time by the
Committee. To the extent an Option transferred pursuant to this Section 5.2(d)
is not fully exercisable as of the date of transfer thereof, the Participant
shall specify in the transfer document whether and to what extent the
transferred Options (if less than all of the options subject to the applicable
Non-Qualified Stock Option Agreement) are exercisable, subject to the
limitations on exercisability contained in the applicable Non-Qualified Stock
Option Agreement. Furthermore, to the extent the Participant transfers Options
that are not exercisable as of the date of transfer and such Options are less
than all of the Options subject to the applicable Non-Qualified Stock Option
Agreement, the Participant shall specify in the transfer documents, subject to
the limitations on exercisability contained in the applicable Non-Qualified
Stock Option Agreement, when the transferred Options become exercisable as
Options under the applicable Non-Qualified Stock Option Agreement generally
become exercisable subsequent to such transfer. Any permitted transferee may
not further assign or transfer the transferred Option otherwise than by will or
the laws of the descent and distribution. Following any permitted transfer,
any such Options shall continue to be subject to the same terms and conditions
as were applicable immediately prior to transfer; provided that for purposes of
Sections 5.2(e) and 8 hereof the term "Participant" shall be deemed to refer
also to each permitted transferee. The events of termination of relationship
in Section 5.2(a) hereof shall continue to be applied with respect to the
Participant, following which the Options shall be exercisable by the transferee
only to the extent, and for the periods specified in Section 5.2(a). The term
"permitted transferees" shall mean one or more of the following: (i) any member
of the Participant's immediate family; (ii) a trust established for the
exclusive benefit of one or more members of such immediate family; or (iii) a
partnership in which such immediate family members are the only partners. The
term "immediate family" is defined for such purpose as spouses, children,
stepchildren and grandchildren, including relationships arising from adoption..
(e) Shares of Common Stock purchased upon exercise of Options
shall at the time of purchase be paid for in full. The Company shall satisfy
its employment tax and other tax withholding obligations by requiring the
Participant (or such Participant's permitted transferee, estate or
representative) to pay the amount of employment tax and withholding tax, if
any, that must be paid under federal, state and local law due to the exercise
of the Option. To the extent that the right to purchase shares has accrued
hereunder, Options may be exercised from time to time by written notice to the
Company stating the full number of shares with respect to which the Option is
being exercised and the time of delivery thereof, which shall be at least
fifteen days after the giving of such notice unless an earlier date shall have
been mutually agreed upon by the Participant (or other person entitled to
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<PAGE> 5
exercise the Option) and the Company, accompanied by payment to the Company of
the purchase price in full and the amount of employment tax and withholding tax
due, if any, upon the exercise of the Option. Such payment shall be effected
(i) by certified or official bank check, (ii) if so permitted by the Company,
by the delivery of a number of shares of Common Stock (plus cash if necessary)
having a fair market value equal to the amount of such purchase price and
employment or withholding tax, or (iii) by delivery of the equivalent thereof
acceptable to the Company. The Company will, as soon as reasonably possible
notify the Participant (or such Participant's representative) of the amount of
employment tax and other withholding tax that must be paid under federal, state
and local law due to the exercise of the Option. At the time of delivery, the
Company shall, without transfer or issue tax to the Participant (or other
person entitled to exercise the Option), deliver to the Participant (or to such
other person) at the principal office of the Company, or such other place as
shall be mutually agreed upon, a certificate or certificates for the shares of
Common Stock, provided, however, that the time of delivery may be postponed by
the Company for such period as may be required for it with reasonable diligence
to comply with any requirements of law.
5.3 Interpretation. The Committee shall be authorized to
interpret the Plan and may, from time to time, adopt such rules and
regulations, not inconsistent with the provisions of the Plan, as it may deem
advisable to carry out the purposes of the Plan.
5.4 Finality. The interpretation and construction by the
Committee of any provisions of the Plan, any Options granted hereunder or any
agreement evidencing any such Options shall be final and conclusive upon all
parties.
5.5 Voting. Subject to Sections 3 and 5.2 hereof, members of the
Committee may vote on any matter affecting the administration of the Plan or
the granting of Options under the Plan.
5.6 Expenses, Etc. All expenses and liabilities incurred by the
Committee in the administration of the Plan shall be borne by the Company. The
Committee may employ attorneys, consultants, accountants or other persons in
connection with the administration of the Plan. The Company, and its officers
and directors, shall be entitled to rely upon the advice, opinions or
valuations of any such persons.
5.7 Indemnification. Neither the members of the Board of
Directors nor any member of the Committee shall be liable for any act,
omission, or determination taken or made in good faith with respect to the Plan
or any Options granted under it, and members of the Board of Directors and the
Committee shall be entitled to indemnification and reimbursement by the Company
in respect of any claim, loss, damage, or expense (including attorneys' fees,
the costs of settling any suit, provided such settlement is approved by
independent legal counsel selected by the Company, and amounts paid in
satisfaction of a judgment, except a judgment based on a finding of bad faith)
arising therefrom to the full extent permitted by law.
Section 6. Adjustments. In the event that, after the adoption
of the Plan by the Board of Directors, the outstanding shares of the Company's
Common Stock shall be changed into or exchanged for a different number or kind
of shares of stock or other securities of the Company or
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<PAGE> 6
of another corporation through reorganization, merger or consolidation,
recapitalization, reclassification, stock split, split-up, combination or
exchange of shares or increased because of any dividends paid in Common Stock,
the Board of Directors shall appropriately adjust (i) the number of shares of
Common Stock (and the exercise price per share) subject to any unexercised
Options (to the nearest possible full share); and (ii) the number of shares of
Common Stock for which Options may be granted under the Plan, as set forth in
Section 4.1 hereof, and such adjustments shall be effective and binding for all
purposes of the Plan.
Section 7. Effect of the Plan on Participant's Relationship with
the Company. Neither the Plan nor any Options granted hereunder to a
Participant shall be construed as conferring upon such Participant any right to
continue to serve as a director of (or otherwise provide services to) the
Company or limit in any respect the right of the Company to terminate such
Participant's relationship with the Company at any time. No person or entity
shall be entitled to vote, receive dividends, or be deemed for any purpose the
holder of any Shares until the Options granted with respect to such Shares
shall have been exercised in accordance with the provisions of the Plan.
Section 8. Amendment of the Plan.
(a) The Board of Directors may amend the Plan from time to time as
it deems desirable; provided, however, that, (1) no such amendment shall
deprive any Participant of any Options theretofore granted under the Plan,
without the consent of such Participant, or of any of his or her rights
thereunder or with respect thereto; and (2) without the approval of the holders
of a majority of the stock of the Company present, or represented, and entitled
to vote thereon at a meeting, the Board of Directors may not amend the Plan (i)
to increase (except for increases due to adjustments in accordance with Section
6 hereof) the aggregate number of shares of Common Stock for which Options may
be granted hereunder, or (ii) to make any other change requiring shareholder
approval under (A) any applicable rule, regulation, or procedure of any
national securities exchange or securities association upon which any
securities of the Company are listed (or any listing agreement with any such
securities exchange or securities association), or (B) Rule 16b-3 promulgated
under the Exchange Act.
(b) Notwithstanding anything to the contrary above, the Plan may
not be amended more than once every six (6) months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act of 1974
("ERISA"), or the rules thereunder.
Section 9. Termination of the Plan. The Board of Directors may
terminate the Plan at any time. Unless the Plan shall theretofore have been
terminated by the Board of Directors, the Plan shall terminate on December 31,
2007. No Options may be granted hereunder after termination of the Plan. The
termination of the Plan shall not alter or impair any rights or obligations
under any Options theretofore granted under the Plan.
Section 10. Effective Date of the Plan. The Plan is effective on
July 30, 1997, which was the date of its adoption by the Board of Directors of
the Company and its approval by the written consent of the sole shareholder of
the Company.
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<PAGE> 7
Section 11. Legal Restrictions. Nothing herein, in any agreement
entered into hereunder, or in any Options granted hereunder, shall require the
Company to sell or issue any Common Stock pursuant to an Option if such sale or
issuance would, in the opinion of counsel for the Company, constitute a
violation of the Securities Act of 1933, as amended, or any similar or
superseding statute or statutes, or any other applicable federal or state
statute, rule, or regulation, as then in effect. At the time of any grant or
exercise of any Options, or sale or issuance of common Stock pursuant thereto,
the Company may, as a condition precedent to the sale or issuance of such
Common Stock, require from the holder of the Options (or in the event of his
death, his legal representatives, legatees, or distributees) such written
representations, if any, concerning his (or the transferee's) intentions with
regard to the retention or disposition of the Common Stock being acquired
pursuant to such Options, and such written covenants and agreements, if any, as
to the manner of disposal of such Common Stock as, in the opinion of counsel to
the Company, may be necessary to ensure that any disposition by such holder (or
in the event of his death, his legal representatives, legatees, or
distributees) will not involve a violation of the Securities Act of 1933, as
amended, or any similar or superseding statute or statutes, or any other
applicable federal or state statute, rule, or regulation, as then in effect.
Certificates for Common Stock, when issued, shall have appropriate legends, or
statements of other applicable restrictions, endorsed thereon, and may or may
not be immediately transferable.
Section 12. Governing Law. All questions arising with respect to
the provisions of the Plan or any agreement entered into hereunder or any
Option shall be determined by application of the laws of the State of Texas
except to the extent Texas law is preempted by federal law.
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<PAGE> 1
EXHIBIT 10.37
INSPIRE INSURANCE SOLUTIONS, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
(1997 DIRECTOR STOCK OPTION PLAN)
This Non-Qualified Stock Option Agreement ("Agreement") is made and
entered into as of the Date of Grant indicated below by and between INSpire
Insurance Solutions, Inc., a Texas corporation (the "Company"), and the person
named below ("Participant").
WHEREAS, Participant is a non-employee director of the Company; and
WHEREAS, pursuant to the Company's 1997 Director Stock Option Plan (the
"Plan"), the Company hereby grants to Participant options to purchase shares of
the common stock, par value $.01 per share, of the Company (the "Shares), on
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the Company and Participant hereby agree as
follows:
1. GRANT OF OPTIONS; CERTAIN TERMS AND CONDITIONS. The Company
hereby grants to Participant, and Participant hereby accepts, as of the Date of
Grant, options to purchase the number of Shares indicated below (the "Options")
at the Exercise Price per Share indicated below. Subject to certain anti-
dilution adjustments, each Option entitles Participant to purchase one Share.
The Options shall expire at 5:00 o'clock p.m. (local time at the Company's
principal executive office) on the Expiration Date indicated below (unless
earlier terminated pursuant to Section 2 hereof), and shall be subject to all
of the terms and conditions set forth in this Agreement. The Options are fully
vested and exercisable at all times on and after the filing of a Registration
Statement on Form S-8 with respect to the Plan with the Securities and Exchange
Commission and the effectiveness thereof.
<TABLE>
<S> <C>
Participant:
----------------------------
Date of Grant:
----------------------------
Number of Shares purchasable:
----------------------------
Exercise Price per Share
----------------------------
Expiration Date:
----------------------------
</TABLE>
The Options are intended to be, and qualify as, "non-qualified stock
options" as described in Treasury Regulation Section 1.83-7 or any successor
regulation thereto ("Non-Qualified Options") and shall not constitute nor be
treated as incentive stock options as defined in Section 422(b) of the Internal
Revenue Code of 1986, as amended ("Code"). The exercise price of the Non-
Qualified Options granted under Section 3(a) of the Plan shall be the initial
price to public of the Common Stock sold by the Company in its initial public
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<PAGE> 2
offering. The exercise price of all other Options granted under the Plan is
equal to the fair market value on the Date of Grant of the Options. The Plan
defines the fair market value per share as of any day to be the average of the
daily closing prices per share for the 30 consecutive trading days that the
Shares were traded ending on the 15th day before the Date of Grant. The Plan
provides that the closing price for each day is the reported closing price on
the principal national securities exchange on which the Shares are listed or
admitted to trading, or, if the Shares are not so listed or admitted to
trading, on the National Association of Securities Dealers Automated Quotation
National Market (the "NASDAQ National Market"), or, if the shares are not
quoted on the NASDAQ National Market, the average of the highest reported bid
and the lowest reported asked prices as furnished by the National Association
of Securities Dealers, Inc. (the "NASD") through NASDAQ, or, if not so reported
through NASDAQ, as reported through the National Quotation Bureau, Incorporated
("NQBI") or a similar organization. If the Shares are not reported or quoted
by any of the above organizations on any of the 30 consecutive days ending on
the 15th day before the Date of Grant, the Board of Directors will determine
the fair market value per Share for the purposes of the Options granted under
the Plan.
Moreover, the Options shall not be transferable by Participant otherwise
than by will or the laws of descent and distribution, and shall be exercisable,
during Participant's lifetime, only by Participant.
2. EXPIRATION OF OPTIONS. The Options shall expire on the tenth
anniversary of the Date of Grant, or if earlier, three (3) months after the
date Participant ceases to be a non-employee director of the Company other than
by reason of death or disability. In case of death or disability, the three
(3) month period will be extended to one (1) year.
3. ADJUSTMENTS. If the Shares are changed into or exchanged for a
different number or kind of securities of the Company or of another corporation
through reorganization, merger, consolidation, or similar transaction, or
increased because of any dividends paid in Shares, the Board of Directors will
make appropriate and proportionate adjustments in the number of Shares subject
to any unexercised Options and the exercise price thereof.
4. EXERCISE. The Participant (or other person entitled to exercise
this Option) shall purchase Shares of stock of the Company subject hereto by
the payment to the Company of the purchase price in full and the amount of
employment tax and withholding tax due, if any, upon the exercise of the Option
(i) by certified or official bank check, (ii) by the delivery of a number of
Shares of Common Stock (plus cash if necessary) having a fair market value
equal to the amount of such purchase price and employment and withholding tax,
or (iii) by delivery of the equivalent thereof acceptable to the Company. Any
employment or withholding tax due upon exercise of this Option shall be, and
shall remain, the responsibility of the Participant (or such Participant's
estate or representative). The Options may be exercised from time to time by
written notice to the Company stating the full number of Shares to be purchased
and the time and delivery thereof, which shall be at least fifteen days after
the giving of notice unless an earlier date shall have been agreed upon between
the Participant (or other person entitled to exercise the Options) and the
Company, accompanied by full payment for the Shares as described in the first
sentence of this Section 4. The Company will, as soon as is reasonably
possible, notify the Participant (or such Participant's representative) of the
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<PAGE> 3
amount of employment tax and other withholding tax, if any, that must be paid
under federal, state and local law due to the exercise of the Options. The
Company shall have no obligation to deliver certificates for the Shares
purchased until the Participant (or such Participant's representative) pays to
the Company the purchase price in full and the amount of employment tax and
withholding tax specified in the Company's notice as described in this Section
4 by payment terms set forth in the first sentence of this Section 3. At the
time of delivery, the Company shall, without transfer or issue tax to the
Participant (or other person entitled to exercise the Options) deliver at the
principal office of the Company, or at such other place as shall be mutually
agreed upon, a certificate or certificates for such Shares, provided, however,
that the time of delivery may be postponed by the Company for such period as
may be required for it to comply with reasonable diligence with any
requirements of law.
5. STOCK EXCHANGE REQUIREMENT. Notwithstanding anything to the
contrary in this Agreement, no Shares purchased upon exercise of the Options,
and no certificate representing all or any part of such Shares, shall be issued
or delivered if (i) such Shares have not been admitted to listing upon official
notice of issuance on each stock exchange or the NASDAQ National Market upon
which the Shares are then listed, or (ii) in the opinion of counsel to the
Company, such issuance or delivery would cause the Company to be in violation
of or to incur liability under any federal, state or other securities law, or
any requirement of any listing agreement to which the Company is a party, or
any other requirement of law or of any administrative or regulatory body having
jurisdiction over the Company.
6. STATE OF RESIDENCE. Participant represents to the Company that
Participant is a bona fide resident of the State indicated in Participant's
address on the signature page hereof (the "State"). Notwithstanding anything
to the contrary herein, this Agreement shall not become effective until the
making of all applicable security filings under the laws of the State and the
effectiveness thereof. Participant shall promptly notify the Company in
writing if the Participant becomes a bona fide resident of any jurisdiction
other than the State.
7. ASSIGNABILITY. The Options hereby granted are transferable to
the extent permitted under the Plan.
8. SALE RESTRICTIONS. Except as otherwise permitted under Section
16 of the Exchange Act (including any Rules promulgated thereunder), no
Participant, if he or she is subject to liability under Section 16 of the
Exchange Act, may sell any Option Shares issued hereunder until the expiration
of the six (6) month period commencing on the Date of Grant, unless the same
would either not result in liability under said Section 16 or the Participant
consents to such liability and consents to disgorge any profits relating
thereto to the Company.
The Committee, in its sole discretion, may (i) impose such additional
conditions as may be required to comply with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (ii)
waive any of the restrictions in the event that either (A) the transaction
would not result in liability under Section 16(b) of the Exchange Act, or (B)
the Participant consents to liability thereunder and consents to disgorge any
profits relating thereto to the Company.
-3-
<PAGE> 4
9. PLAN. The Options are granted pursuant to the Plan, as in effect
on the Date of Grant, and are subject to all the terms and conditions of the
Plan, as the same may be amended from time to time; provided, however, that (a)
no such amendment shall deprive any Participant of any Options theretofore
granted under the plan without the consent of such Participant; and (b) without
the approval of a majority of the shareholders of the Company, the Board of
Directors may not amend the Plan to make any other change requiring shareholder
approval under (i) any applicable rule, regulation, or procedure of any
national securities exchange or securities association upon which any
securities of the Company are listed (or any listing agreement with any such
securities exchange or securities association), or (ii) Rule 16b-3 promulgated
under the Exchange Act. Notwithstanding anything to the contrary above, the
Company may not amend the Plan more than once every six (6) months, other than
to comport with changes in the Code, the Employee Retirement Income Security
Act ("ERISA"), or the rules thereunder.
The interpretation and construction by the Committee of the Plan, this
Agreement, the Options granted hereunder, and such rules and regulations as may
be adopted by the Committee for the purpose of administering the Plan, shall be
final and binding upon Participant. Until the Options shall expire, terminate,
or be exercised in full, the Company shall, upon written request therefor, send
a copy of the Plan, in its then-current form, to Participant or any other
person or entity then entitled to exercise the Options.
10. SHAREHOLDER RIGHTS. No person or entity shall be entitled to
vote, receive dividends, or be deemed for any purpose the holder of any Option
Shares until the Options shall have been duly exercised in accordance with the
provisions of this Agreement.
11. STATUS. No provision of this Agreement or of the Options granted
hereunder shall (a) confer upon Participant any right to continue in his or her
status (as director or otherwise) with the Company or any of its subsidiaries,
(b) affect the right of the Company and each of its subsidiaries to terminate
the status of Participant, with or without cause, or (c) confer upon
Participant any right to participate in any employee benefit plan or other
program of the Company other than the Plan.
12. NOTICES. Any notice to be given to the Company shall be
personally delivered to or addressed to the Secretary of the Company, at its
principal office, and any notice to be given to Participant shall be addressed
to him or her at the address given beneath his or her signature hereto, or at
such other address as Participant may hereafter designate in writing to the
Company. Any notice to the Company is deemed given when received by the
Company. Any notice to Participant is deemed given when enclosed in a properly
sealed envelope addressed as aforesaid, and deposited, postage prepaid, in a
post office or branch post office regularly maintained by the United States of
America.
13. SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the Company and Participant, Participant's
beneficiaries, heirs, executors, and administrators, and the Company's
successors and assigns.
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<PAGE> 5
14. GOVERNING LAW. The LAWS OF THE STATE OF TEXAS SHALL GOVERN THIS
AGREEMENT AND THE OPTIONS GRANTED HEREUNDER, EXCEPT TO THE EXTENT THAT THE
FEDERAL LAW OF THE UNITED STATES OF AMERICA PREEMPTS SUCH LAW, IN WHICH CASE
SUCH FEDERAL LAW SHALL APPLY.
IN WITNESS WHEREOF, the Company and Participant have duly executed and
delivered this Agreement effective as of the Date of Grant.
INSpire Insurance Solutions, Inc.
By:
-------------------------
Name:
-----------------------
Title:
----------------------
----------------------------
Participant
----------------------------
Social Security Number
----------------------------
Address
----------------------------
----------------------------
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<PAGE> 1
EXHIBIT 10.38
INSPIRE INSURANCE SOLUTIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I. PURPOSE
1.01 Purpose. The INSpire Insurance Solutions, Inc. Employee Stock
Purchase Plan is intended to provide a method whereby employees of INSpire
Insurance Solutions, Inc. and its subsidiary corporations (hereinafter referred
to, unless the context otherwise requires, as the "Company") will have an
opportunity to acquire a proprietary interest in the Company through the
purchase of shares of the Common Stock, par value $0.01 (the "Common Stock") of
the Company. It is the intention of the Company to have the Plan qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). The provisions of the Plan shall be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
ARTICLE II. DEFINITIONS
2.01 Base Pay. The term "base pay" shall mean regular straight-
time earnings excluding payments for overtime, shift premium, bonuses,
severance pay and other special payments, commissions and other marketing
incentive payments.
2.02 Committee. The term "Committee" shall mean the individuals
described in Article XI.
2.03 Employee. The term "employee" means any person who is
customarily employed on a full-time or part-time basis by the Company or a
Subsidiary Corporation and is regularly scheduled to work more than 20 hours
per week.
2.04 Subsidiary. The term "Subsidiary Corporation" shall mean any
present or future corporation which (i) would be a "subsidiary corporation" of
Company as that term is defined in Section 424 of the Code and (ii) is
designated as a participating company in the Plan by the Committee.
ARTICLE III. ELIGIBILITY AND PARTICIPATION
3.01 Initial Eligibility. Any employee who shall have completed
ninety (90) days' employment and shall be employed by the Company on the date
his participation in the Plan is to become effective shall be eligible to
participate in offerings under the Plan which commence on or after such ninety
day period has concluded.
3.02 Leave of Absence. For purposes of participation in the Plan, a
person on leave of absence shall be deemed to be an employee for the first 90
days of such leave of absence and such employee's employment shall be deemed to
have terminated at the close of business on the 90th day of such leave of
absence unless such employee shall have returned to regular full-time or
part-time employment (as the case may be) prior to the close of business on
such 90th day. Termination by the Company of any employee's leave of absence,
other than termination of such leave of absence on return to full-time or
part-time employment, shall terminate an employee's employment for all purposes
of the Plan and shall
<PAGE> 2
terminate such employee's participation in the Plan and right to exercise any
option.
3.03 Restrictions in Participation. Notwithstanding any provisions of
the Plan to the contrary, no employee shall be granted an option to participate
in the Plan:
(a) if, immediately after the grant, such employee would own
stock, and/or hold outstanding options to purchase stock, possessing 5%
or more of the total combined voting power or value of all classes of
stock of the Company (for purposes of this paragraph, the rules of
Section 424(d) of the Code shall apply in determining stock ownership of
any employee); or
(b) which permits his rights to purchase stock under all
employee stock purchase plans of the Company to accrue at a rate which
exceeds $25,000 in fair market value of the stock (determined at the
time such option is granted) for each calendar year in which such option
is outstanding.
3.04 Commencement of Participation. An eligible employee may become a
participant by completing an authorization for a payroll deduction on the form
provided by the Company and filing it with the office of the Treasurer of the
Company on or before the date set therefor by the Committee, which date shall
be prior to the Offering Commencement Date for the Offering (as such terms are
defined below). Payroll deductions for a participant shall commence on the
applicable Offering Commencement Date when his authorization for a payroll
deduction becomes effective and shall end on the Offering Termination Date of
the Offering to which such authorization is applicable unless sooner terminated
by the participant as provided in Article VIII.
ARTICLE IV. OFFERINGS
4.01 Initial Offering. The Plan will be implemented by an initial
offering of the Company's Common Stock (the "Initial Offering") beginning on
the 1st day of October, 1997 and terminating on December 31, 1997. The maximum
number of shares available for purchase during the Initial Offering shall be
25,000.
4.02 Annual Offerings. The Plan will be further implemented by four
annual offerings of the Company's Common Stock (the "Annual Offerings")
beginning on the 1st day of January in each of the years 1998, 1999, 2000, and
2001, each Annual Offering terminating on December 31 of such year, provided,
however, that each Annual Offering may, in the discretion of the Committee
exercised prior to the commencement thereof, be divided into two six-month
offerings (the "Six-Month Offerings") commencing, respectively, on January 1
and July 1 of such year and terminating on June 30 and December 31 of such
year, respectively. The maximum number of shares issuable in the respective
years shall be:
o From January 1, 1998 to December 31, 1998: 100,000 shares.
o From January 1, 1999 to December 31, 1999: 100,000 shares plus
unissued shares from the prior Offerings.
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<PAGE> 3
o From January 1, 2000 to December 31, 2000: 100,000 shares plus
unissued shares from the prior Offerings.
o From January 1, 2001 to December 31, 2001: 100,000 shares plus
unissued shares from the prior Offerings.
If a Six-Month Offering is made, the maximum number of shares to be
issued shall be one-half of the number of shares set forth for the annual
period in which the Six-Month Offering falls, plus, if the Six-Month Offering
is a July 1 to December 31 Six Month Offering, unissued shares from the
immediately preceding Six-Month Offering. As used in the Plan, "Offering
Commencement Date" means October 1, 1997 with respect to the Initial Offering
or the January 1 or July 1, as the case may be, on which the particular Annual
Offering or Six-Month Offering begins and "Offering Termination Date" means
December 31, 1997 with respect to the Initial Offering or the December 31 or
June 30 as the case may be, on which the particular Annual Offering or Six-
Month Offering terminates. The Initial Offering, an Annual Offering and a Six-
Month Offering are herein collectively referred to as an "Offering."
ARTICLE V. PAYROLL DEDUCTIONS
5.01 Amount of Deduction. At the time a participant files his
authorization for payroll deduction, he shall elect to have deductions made
from his pay on each payday during the time he is a participant in an Offering
at the rate of 1, 2, 3, 4, 5, 6, 7, 8, 9 or 10% of his base pay in effect at
the Offering Commencement Date of such Offering. In the case of a part-time
hourly employee, such employee's base pay during the Offering shall be
determined by multiplying such employee's hourly rate of pay in effect on the
Offering Commencement Date by the number of regularly scheduled hours of work
for such employee during such Offering.
5.02 Participant's Account. All payroll deductions made for a
participant shall be credited to his account under the Plan. A participant may
not make any separate cash payment into such account except when on leave of
absence and then only as provided in Section 5.04.
5.03 Changes in Payroll Deductions. A participant may discontinue his
participation in the Plan as provided in Article VIII, but no other change can
be made during an Offering and, specifically, a participant may not alter the
amount of his payroll deductions for that Offering.
5.04 Leave of Absence. If a participant goes on a leave of absence,
such participant shall have the right to elect: (a) to withdraw the balance in
his or her account pursuant to Section 7.02, (b) to discontinue contributions
to the Plan but remain a participant in the Plan, or remain a participant in
the Plan during such leave of absence, authorizing deductions to be made from
payments by the Company to the participant during such leave of absence and
undertaking to make cash payments to the Plan at the end of each payroll period
to the extent that amounts payable by the Company to such participant are
insufficient to meet such participant's authorized Plan deductions.
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<PAGE> 4
ARTICLE VI. GRANTING OF OPTION
6.01 Number of Option Shares. On the Commencement Date of each
Offering, a participating employee shall be deemed to have been granted an
option to purchase a maximum number of shares of stock of the Company equal to
an amount determined as follows: an amount equal to (i) that percentage of the
employee's base pay which he has elected to have withheld (but not in any case
in excess of 10%) multiplied by (ii) the employee's base pay during the period
of the Offering (iii) divided by the lower of (a) 85% of the fair market value
of a share of Common Stock on the applicable Offering Commencement Date or (b)
85% of the fair market value of a share of Common Stock on the applicable
Offering Termination Date as determined as provided in paragraphs (a) and (b )
of Section 6.02 below, as applicable. An employee's base pay during the period
of an Offering shall be determined by multiplying, in the case of an Annual
Offering, his normal weekly rate of pay (as in effect on the last day prior to
the Commencement Date of the particular offering) by 52 or the hourly rate by
2,080 or, in the case of a Six-Month Offering, by 26 or 1040, or in the case of
the Initial Offering, by 13 or 520, as the case may be, provided that, in the
case of a part-time hourly employee, the employee's base pay during the period
of an Offering shall be determined by multiplying such employee's hourly rate
by the number of regularly scheduled hours of work for such employee during
such Offering.
6.02 Option Price. The option price of each share of Common Stock
purchased with payroll deductions made during such Offering for a participant
therein shall be the lower of:
(a) 85% of the fair market value of a share of Common Stock,
as determined below, on the Offering Commencement Date or, if
applicable, the nearest prior trading day; or
(b) 85% of the fair market value of a share of Common Stock on
the Offering Termination Date or the nearest prior trading day.
Fair market value shall be the closing price of the Common Stock on the
NASDAQ National Market or any national exchange on which the Common Stock is
traded. Provided, however, if the Common Stock of the Company is not admitted
to trading on any of the aforesaid dates for which closing prices of the Common
Stock are to be determined, then reference shall be made to the fair market
value of the Common Stock on that date, as reasonably determined in good faith
on such basis as shall be established or specified for the purpose by the
Committee.
ARTICLE VII. EXERCISE OF OPTION
7.01 Automatic Exercise. Unless a participant gives written notice to
the Company as hereinafter provided, his option for the purpose of stock with
payroll deductions made during any Offering will 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 stock which the
accumulated payroll deductions in his account at that time will purchase at the
applicable option price (but not in excess of the number of shares for which
options have been granted to the employee pursuant to Section 6.01), and any
excess in his account at that time will be returned to him.
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<PAGE> 5
7.02 Withdrawal of Account. By written notice to the Treasurer of the
Company, at any time prior to the Offering Termination Date applicable to any
Offering, a participant may, as further provided in Article VIII, elect to
withdraw all the accumulated payroll deductions in his account at such time.
7.03 Fractional Shares. Fractional shares will not be issued under
the Plan and any accumulated payroll deductions which would have been used to
purchase fractional shares will be returned to any employee promptly following
the termination of an Offering, without interest.
7.04 Transferability of Option. During a participant's lifetime,
options held by such participant shall be exercisable only by that participant.
7.05 Delivery of Stock. As promptly as practicable after the Offering
Termination Date of each Offering, the Company will deliver to each
participant, as appropriate, the stock purchased upon exercise of his option.
ARTICLE VIII. WITHDRAWAL
8.01 In General. As indicated in Section 7.02, a participant may
withdraw payroll deductions credited to his account under the Plan at any time
by giving written notice to the Treasurer of the Company. All of the
participant's payroll deductions credited to his account will be paid to him
promptly after receipt of his notice of withdrawal, and no further payroll
deductions will be made from his pay during such Offering. The Company may, at
its option, treat any attempt to borrow by an employee on the security of his
accumulated payroll deductions as an election, under Section 3.02, to withdraw
such deductions.
8.02 Effect on Subsequent Participation. A participant's withdrawal
from any Offering will not have any effect upon his eligibility to participant
in any succeeding Offering or in any similar plan which may hereafter be
adopted by the Company.
8.03 Termination of Employment. Upon termination of the participant's
employment for any reason, including retirement (but excluding death while in
the employ of the Company or continuation of a leave of absence for a period
beyond 90 days), the payroll deductions credited to his account will be
returned to him, or, in the case of his death subsequent to the termination of
his employment, to the person or persons entitled thereto under Section 12.01.
8.04 Termination of Employment Due to Death. Upon termination of the
participant's employment because of his death, his beneficiary (as defined in
Section 12.01) shall have the right to elect, by written notice given to the
Treasurer of the Company prior to the earlier of the Offering Termination Date
or the expiration of a period of sixty (60) days commencing with the date of
the death of the participant, either:
(a) to withdraw all of the payroll deductions credited to the
participant's account under the Plan, or
- 5 -
<PAGE> 6
(b) to exercise the participant's option for the purchase of
stock on the Offering Termination Date next following the date of the
participant's death for the purchase of the number of full shares of
stock which the accumulated payroll deductions in the participant's
account at the date of the participant's will purchase at the applicable
option price, and any excess in such account will be returned to said
beneficiary, without interest.
In the event that no such written notice of election shall be duly
received by the office of the Treasurer of the Company, the beneficiary shall
automatically be deemed to have elected, pursuant to paragraph (b), to exercise
the participant's option.
8.05 Leave of Absence. A participant on leave of absence shall,
subject to the election made by such participant in the Plan so long as such
participant is on continuous leave of absence. A participant who has been on
leave of absence for more than 90 days and who therefore is not an employee for
the purpose of the Plan shall not be entitled to participate in any offering
commencing after the 90th day of such leave of absence. Notwithstanding any
other provisions of the Plan, unless a participant on leave of absence returns
to regular full-time or part-time employment with the Company at the earlier
of: (a) the termination of such leave of absence or (b) three months from the
90th day of such leave of absence, such participant's participation in the Plan
shall terminate on whichever of such dates first occurs.
ARTICLE IX. INTEREST
9.01 Payment of Interest. No interest will be paid or allowed on any
money paid into the Plan or credited to the account of any participant
employee.
ARTICLE X. STOCK
10.01 Maximum Shares. The maximum number of shares which shall be
issued under the Plan, subject to adjustment upon changes in capitalization of
the Company as provided in Section 12.04 shall be 25,000 shares in the Initial
Offering, 100,000 shares in each Annual Offering (50,000 shares in each
Six-Month Offering) plus in each Offering all unissued shares from prior
Offerings, whether offered or not, not to exceed 425,000 shares for all
Offerings. If the total number of shares for which options are exercised on
any Offering Termination Date in accordance with Article VI exceeds the maximum
number of shares for the applicable offering, the Company shall make a pro rata
allocation of the shares available for delivery and distribution in a nearly
uniform manner as shall be practicable and as it shall determine to be
equitable, and the balance of payroll deductions credited to the account of
each participant under the Plan shall be returned to him as promptly as
possible.
10.02 Participant's Interest in Option Stock. The participant will
have no interest in stock covered by his option until such option has been
exercised.
10.03 Registration of Stock. Stock to be delivered to a participant
under the Plan will be registered only in the name of the participant.
10.04 Restrictions on Exercise. The Board of Directors may, in its
discretion, require as conditions to the exercise of any option that the shares
of Common Stock reserved for
- 6 -
<PAGE> 7
issuance upon the exercise of the option shall have been duly listed, upon
official notice of issuance, upon a stock exchange, and that either:
(a) a Registration Statement under the Securities Act of 1933,
as amended, with respect to said shares shall be effective, or
(b) the participant shall have represented at the time of
purchase, in form and substance satisfactory to the Company, that it is
his intention to purchase the shares for investment and not for resale
or distribution.
ARTICLE XI. ADMINISTRATION
11.01 Appointment of Committee. The Board of Directors shall appoint a
committee (the "Committee") to administer the Plan, which shall consist of no
fewer that three members of the Board of Directors.
11.02 Authority of Committee. Subject to the express provisions of the
Plan, the Committee shall have plenary authority in its discretion to interpret
and construe any and all provisions of the Plan, to adopt rules and regulations
for administering the Plan, and to make all other determinations deemed
necessary or advisable for administering the Plan. The Committee's
determination on the foregoing matters shall be conclusive.
11.03 Rules Governing the Administration of the Committee. The Board
of Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. The Committee may select one of
its members as its Chairman and shall hold its meetings at such times and
places as it shall deem advisable and may hold telephonic meetings. A majority
of its members shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members. The Committee may correct any
defect or omission or reconcile any inconsistency in the Plan, in the manner
and to the extent it shall deem desirable. Any decision or determination
reduced to writing and signed by a majority of the members of the Committee
shall be as fully effective as if it had been made by a majority vote at a
meeting duly called and held. The Committee may appoint a secretary and shall
make such rules and regulations for the conduct of its business as it shall
deem advisable.
ARTICLE XII. MISCELLANEOUS
12.01 Designation of Beneficiary. A participant may file a written
designation of a beneficiary who is to receive any stock and/or cash. Such
designation of beneficiary may be changed by the participant at any time by
written notice to the Treasurer of the Company. Upon the death of a
participant and upon receipt by the Company of proof of identity and existence
at the participant's death of a beneficiary validly designated by him under the
Plan, the Company shall deliver such stock and/or cash to such beneficiary. In
the event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the company shall deliver such stock and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such stock and/or cash to the
spouse or to any one or more dependents
- 7 -
<PAGE> 8
of the participant as the Company may designate. No beneficiary shall, prior
to the death of the participant by whom he has been designated, acquire any
interest in the stock or cash credited to the participant under the Plan.
12.02 Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option
or to receive stock under the Plan may be assigned, transferred, pledged, or
otherwise disposed of in any way by the participant other than by will or the
laws of descent and distribution. Any such attempted assignment, transfer,
pledge or other disposition shall be without effect, except that the Company
may treat such act as an election to withdraw funds in accordance with Section
7.02.
12.03 Use of Funds. All payroll deductions received or held by the
Company under this Plan may be used by the Company for any corporate purpose
and the Company shall not be obligated to segregate such payroll deductions.
12.04 Stock Subject to Plan. The stock purchasable under the Plan
shall be shares of authorized but unissued or reacquired Common Stock,
including shares of Common Stock purchased on the open market.
12.05 Adjustments Upon Changes in Capitalization.
(a) If, while any options are outstanding, the outstanding
shares of Common Stock of the Company have increased, decreased, changed
into, or been exchanged for a different number or kind of shares or
securities of the Company through reorganization, merger,
recapitalization, reclassification, stock split, reverse stock split or
similar transaction, appropriate and proportionate adjustments may be
made by the Committee in the number and/or kind of shares which are
subject to purchase under outstanding options and on the option exercise
price or prices applicable to such outstanding options. In addition, in
any such event, the number and/or kind of shares which may be offered in
the Offerings described in Article IV hereof shall also be
proportionately adjusted. No adjustments shall be made for stock
dividends. For the purposes of this paragraph, any distribution of
shares to shareholders in an amount aggregating 20% or more of the
outstanding shares shall be deemed a stock split and any distributions
of shares aggregating less than 20% of the outstanding shares shall be
deemed a stock dividend.
(b) Upon the dissolution or liquidation of the Company, or
upon a reorganization, merger or consolidation of the Company with one
or more corporations as a result of which the Company is not the
surviving corporation, or upon a sale of substantially all of the
property or stock of the Company to another corporation, the holder of
each option then outstanding under the Plan will thereafter be entitled
to receive at the next Offering Termination Date upon the exercise of
such option for each share as to which such option shall be exercised,
as nearly as reasonably may be determined, the cash, securities and/or
property which a holder of one share of the Common Stock was entitled to
receive upon and at the time of such transaction. The Board of
Directors shall take such steps in connection with such transactions as
the Board shall deem necessary to assure that the provision of this
Section 12.04 shall thereafter be applicable, as nearly as reasonably
may be determined, in relation to the said cash,
- 8 -
<PAGE> 9
securities and/or property as to which such holder of such option might
thereafter be entitled to receive.
12.06 Amendment and Termination. The Board of Directors shall have
complete power and authority to terminate and amend the Plan; provided,
however, that the Board of Directors shall not, without the approval of the
stockholders of the Corporation (i) increase the maximum number of shares which
may be issued under any Offering (except pursuant to Section 12.04); (ii) amend
the requirements as to the class of employees eligible to purchase stock under
the Plan. No termination, modification, or amendment of the Plan may, without
the consent of an employee then having an option under the Plan to purchase
stock, adversely affect the rights of such employee under such option.
12.07 Effective Date. The Plan shall become effective as of October 1,
1997, subject to approval by the holders of the majority of the Common Stock
present and represented at a special or annual meeting of the shareholders held
on or before September 30, 1997. If the Plan is not so approved, the Plan
shall not become effective.
12.08 Plan Termination. Unless sooner terminated by the Board of
Directors, the Plan shall terminate upon the earliest of: (a) the last business
day in December 2001, (b) the date on which all shares available for issuance
under the Plan shall have been sold pursuant to purchase rights exercised under
the Plan, or (c) the date on which all purchase rights are exercised in
connection with a corporate transaction, pursuant to Section 12.05(b). No
further purchase rights shall be granted for or exercised, and no further
payroll deductions shall be collected, under the Plan following its
termination; however, any remaining administrative matters provided for herein
shall be carried out.
12.09 No Employment Rights. The Plan does not, directly or indirectly,
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company,
and it shall not be deemed to interfere in any way with the Company's right to
terminate, or otherwise modify, an employee's employment at any time.
12.10 Effect of Plan. The provisions of the Plan shall, in accordance
with its terms, be binding upon, and inure to the benefit of, all successors of
each employee participating in the Plan, including, without limitation, such
employee's estate and the executors, administrators or trustees thereof, heirs
and legatees, and any receiver, trustee in bankruptcy or representative of
creditors of such employee.
12.11 Governing Law. The law of the State of Texas will govern all
matters relating to his Plan except to the extent it is superseded by the laws
of the United States.
- 9 -
<PAGE> 1
EXHIBIT 10.39
SPECIALTY PERSONAL LINES
SUN COAST GENERAL INSURANCE AGENCY
CLAIMS ADMINISTRATION AGREEMENT
DRAFT #1 - APRIL 11, 1997
<PAGE> 2
CLAIMS ADMINISTRATION AGREEMENT
This agreement is effective April 1, 1997 and is entered into by and between
Millers Group Specialty Personal Lines Division ("SPL Division") and MiliRisk
("Administrator").
1. APPLICABLE TYPES OF BUSINESS
This agreement shall apply to any losses reported under policies issued
by Sun Coast General Insurance Agency.
2. STANDARDS
Administrator shall report, investigate, adjust, and compromise the
claims on behalf of Millers Group Specialty Personal Lines in accordance
with the requirements of this agreement. All claims will be
investigated and handled by administrator in accordance with applicable
law and standards set forth in this agreement, Exhibit I.
3. CLAIMS AUTHORITY
Administrator will establish loss reserves on claims relating to Sun
Coast General Insurance Agency business. Administrator will settle
claims and issue loss payments and expense payments in accordance with
the terms of this agreement.
4. CLAIM FILE CONTENTS
It is agreed that administrator will maintain a separate file for each
loss. Each claim file will contain the following:
a. original documents or legible copies of all correspondence
related to the claim.
b. copies of all investigative reports, file notes and other
material.
c. copies of all lawsuits filed in connection with the claim.
d. copies of all bills or invoices paid and copies of all payments
issued.
e. a history of all loss and expense reserve, loss and expense
payments and all amounts recovered.
NOTE: Employees of the SPL Division shall have access to these files
for review in performance of their duties. Files may not be
removed from the Administrator's control without express
permission.
<PAGE> 3
5. RECOVERIES
Administrator will develop and pursue reasonable subrogation and/or
salvage recoveries.
6. MONTHLY REPORTS
It is agreed that administrator will provide to the Specialty Personal
Lines Division, by the third (3rd) business day of each month, a report
showing all claims open at any one time during the period month, a
separate monthly report showing all closed claims, an inventory of all
open claims by examiner, a separate report on reserve changes for the
month, an inventory of all open subrogation and salvage files, and an
inventory of all files in suite. The report will consist of a printout
showing the following information for each claim:
Claim number, policy number, insured, claimant (s), date of loss, loss
payments, expense payment, loss reserves, expense reserves, all amounts
recovered, and total incurred losses (all payments and outstanding
reserves for loss and expense, less any recoverables).
7. AD HOC REPORTS
In the event that a claim meets any of the following criteria,
administrator will notify the Specialty Personal Lines Division and Sun
Coast General Insurance Agency as soon a practicable using as reporting
format as agreed by the parties:
a. any claim which has a potential to exceed $25,000 a Large Loss
report form will be submitted.
b. any claim which involves a coverage dispute
c. any claim involving death, brain injury resulting in physical or
intellectual impairment, serious spinal injury, paraplegia or
quadriplegia, serious sensory impairment (sight or hearing), loss
of or loss of us of a major limb, loss f or loss of use of vital
organs, severe burns causing serious disfigurement or scarring of
the body, cosmetic deformities, sever injuries which are life
threatening or may result in long term impairment.
d. Reinsurance loss information will be reported by administrator in
a format prescribed by Millers Group Reinsurers.
e. Any claims involving extra contractual allegations or allegation
of bad faith claim handling.
f. Any loss in excess of policy limits.
g. Any claim involving fraud or suspected fraudulent activity.
<PAGE> 4
h. Any adverse underwriting information developed by the Adjuster or
Administrator shall be reported to the Sun Coast General
Insurance Agency underwriting department immediately.
8. INSURANCE DEPARTMENTS
Administrator will promptly notify the Specialty Personal Lines Division
of each complaint or written grievance received from an insured's
complaint, governmental official or authority including, but not limited
to, state insurance departments or other agencies. Administrator will
submit appropriate responses, on a timely basis, to any claim related
complaints or inquiries, with copies of such inquiries and responses
thereto, contemporaneously provided to the Specialty Personal Lines
Divisions.
9. COMPENSATION AND EXPENSES
Administrator shall receive as full compensation for its services, fees
and other compensation as outlined in Exhibit II.
10. LICENSES AND STATE INSURANCE CODE COMPLIANCE
Administrator warrants that its adjusters, investigators and
subcontractors hold proper licenses as required by the states in which
their business in conducted. Administrator further agrees to conduct
its services in compliance with all applicable statutes, regulations and
Attorney General opinions regarding the servicing of claims or losses.
11. CHANGES
It is agreed that any changes or addition to this agreement, other than
those previously referenced herein, shall be made in writing and signed
by all parties.
12. ENTIRE AGREEMENT
This agreement and its exhibit are the entire agreement among the
parties relating to the subject matter hereof. This agreement may only
be modified or amended by mutual agreement of the parties in a writing
which specifically refers to this agreement and is signed by all such
persons or entities.
<PAGE> 5
In witness whereof, the parties hereto have executive this agreement in
duplicate counterparts to be effective as of the date first above written.
By , Millers Specialty Personal Lines
----------------------------------- Division
Name
---------------------------------
Title
--------------------------------
Date
---------------------------------
By , MiliRisk Claims Department
-----------------------------------
Name
---------------------------------
Title
--------------------------------
Date
---------------------------------
<PAGE> 6
EXHIBIT I
SERVICE STANDARDS
I. CUSTOMER COMMUNICATION
a. Contact
1. Immediate phone contact of insured and/or claimants will
be attempted. If after three (3) attempts within one (1)
full business day, contact has not been made, a contact
mailer will be immediately sent. If the claim has been
reported as a bodily injury claim, phone contact will be
attempted at least once per business day until contact is
made.
b. Acknowledgment
1. Advice to Sun Coast General Insurance Agency within 24
hours of receipt of loss notice.
2. Telephone messages should receive a return call response
within one business day.
II. SERVICES
a. Coverage will be verified on all losses.
b. MiliRisk will administer the appraisal/assessment process and
will use in this endeavor a combination of staff, vendor,
adjuster and appraiser.
c. Perform all reasonable and necessary administrative and clerical
work in connection with claim or loss reports.
d. Establish and maintain a claim file for each reported claim or
loss which shall be reviewable at any and all reasonable times by
the customer.
e. Provide the customer with litigation management. MiliRisk will
no abandon files to the control and handling by defense counsel.
MiliRisk will work with counsel to determine the best course of
action within a reasonable budget and will continue to do all
claims adjusting/investigation activities that it can do.
f. Provide the customer with monthly reports on all claims activity.
g. Issue payments on behalf of the customer.
h. MiliRisk will aggressively pursue recovery through both salvage
and subrogation on behalf of the customer.
<PAGE> 7
i. MiliRisk will report monthly on salvage/subrogation receipts and
open subrogation/salvage files as requested in #6 above.
j. MiliRisk will maintain a contract relationships with mutually
agreed to Glass Company(s) and notify Sun Coast General Insurance
Agency on claims where this service has not been utilized because
of actions by the insured or agent.
k. MiliRisk will maintain a contract relationship with a mutually
agreed to Automobile Rental Company(s) and notify Sun Coast
General Insurance Agency on claims where this service has not
been utilized because of actions by the insured or agent.
l. MiliRisk will maintain a contract relationship with a mutually
agreed to Automobile Salvage Company(s) and notify Sun Coast
General Insurance Agency on claims where this service has not
been utilized because of actions by the insured or agent.
m. All material damage appraisals issued by either a body shop or a
third party independent appraiser, shall be validated through
either the ADP system or by American Computer Estimating Company
or similar service. Results of this "audit" shall be kept in the
claim file.
<PAGE> 8
EXHIBIT II
SERVICE FEES AND RATES
MiliRisk will provide claims services as follows;
1. Claim administration services, including all LAE but excluding
legal expense and catastrophe, 7.00% of earned premium.
2. Catastrophes (any single event given rise to more than 100 new
features will be defined as a catastrophe). Fee of $175.00 per
claim plus appraisal costs.
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ------------------
1995 1996 1996 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding................................. 7,000 7,000 7,000 7,000
Net effect of dilutive stock options based on the treasury
method using average market price assuming all stock
options issued within one year prior to filing of
registration statement deemed outstanding pursuant to
Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D................................................. 658 658 658 658
------- ------- ------- -------
Total ..................................................... 7,658 7,658 7,658 7,658
======= ======= ======= =======
Net loss .................................................. $(1,262) $ (515) (273) (2,856)
======= ======= ======= =======
Per share amount .......................................... $ (0.16) $ (0.07) (0.04) (0.37)
======= ======= ======= =======
Fully diluted
Average shares outstanding .............................. 7,000 7,000 7,000 7,000
Net effect of dilutive stock options based on the
treasury stock method using the period-end market
price, if higher than average market price assuming all
stock options issued within one year prior to filing of
registration statement deemed outstanding pursuant to
Securities and Exchange Commission Staff Accounting Bulletin
Topic 4D................................................. 658 658 658 658
------- ------- ------- -------
Total ..................................................... 7,658 7,658 7,658 7,658
======= ======= ======= =======
Net loss ................................................ $(1,262) $ (515) (273) (2,856)
======= ======= ======= =======
Per share amount ........................................ $ (0.16) $ (0.07) (0.04) (0.37)
======= ======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-31173 of INSpire Insurance Solutions, Inc. (formerly Millers Integrated
Claims Resources, Inc. and MiliRisk, Inc.) of our report dated July 18, 1997 on
the consolidated financial statements of INSpire Insurance Solutions, Inc. and
subsidiary, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 30, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-31173 of INSpire Insurance Solutions, Inc. (formerly Millers Integrated
Claims Resources, Inc. and MiliRisk, Inc.) of our report dated July 18, 1997 on
the consolidated financial statements of Strategic Data Systems, Inc. and
subsidiary, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
July 30, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED BALANCE SHEETS OF INSPIRE
INSURANCE SOLUTIONS, INC. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND AS
OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 363 451
<SECURITIES> 0 0
<RECEIVABLES> 1,168 6,628
<ALLOWANCES> 0 212
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,012 9,324
<PP&E> 4,492 13,965
<DEPRECIATION> 1,272 7,687
<TOTAL-ASSETS> 5,232 30,888
<CURRENT-LIABILITIES> 4,562 11,901
<BONDS> 0 5,625
0 0
0 0
<COMMON> 0 70
<OTHER-SE> 606 9,488
<TOTAL-LIABILITY-AND-EQUITY> 5,232 30,888
<SALES> 0 0
<TOTAL-REVENUES> 13,653 23,259
<CGS> 0 0
<TOTAL-COSTS> 14,430 27,668
<OTHER-EXPENSES> 0 21
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2 212
<INCOME-PRETAX> (779) (4,568)
<INCOME-TAX> (264) (1,712)
<INCOME-CONTINUING> (515) (2,856)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (515) (2,856)
<EPS-PRIMARY> (0.07) (.37)
<EPS-DILUTED> (0.07) (.37)
</TABLE>