<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-1097283
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3760 River Run Drive, 35243
Birmingham, AL
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(205) 970-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $.01 Par 925391104 New York Stock Exchange
Value
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF March 3, 1997: $527,444,758
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF March
3, 1997 is 18,568,083
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE VESTA INSURANCE GROUP, INC. PROXY STATEMENT FOR ITS 1997
ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF.
<PAGE>
PART I
BUSINESS
Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property/casualty insurance companies ("Vesta Group"),
including Vesta Fire Insurance Corporation ("Vesta Fire"), which offers treaty
reinsurance and primary insurance on personal and commercial risks. In both
its reinsurance and primary insurance operations, the Company focuses
primarily on property coverages. Gross premiums written by the Company in 1996
totalled $769.6 million. At December 31, 1996, the Company's stockholders'
equity was $318.7 million.
The Company provides treaty reinsurance, principally through reinsurance
intermediaries, to small and medium-sized regional insurance companies located
primarily in the southwestern, midwestern and northeastern United States. The
reinsurance of personal (including auto physical damage) and commercial
property risks accounted for approximately 90% of the Company's gross
reinsurance premiums written in 1996. The principal lines of business
reinsured by the Company include homeowner and commercial property coverages,
non-standard automobile insurance and collateral protection insurance.
In its primary insurance operations, the Company has developed insurance
products and programs to meet particular market needs. Primary insurance
products offered by the Company include a variety of homeowner and dwelling
insurance products, specialty commercial transportation products, commercial
business coverages and certain financial services products designed to protect
the interests of financial institutions in real and personal property
collateral. Primary insurance products are distributed through independent
agents and brokers, with the exception of certain financial services products,
which are distributed through specialist agents and two managing agents.
In June of 1995, Vesta Fire acquired all of the issued and outstanding
capital stock of The Hawaiian Insurance & Guaranty Company, Limited ("HIG"), a
provider of personal lines products in the State of Hawaii. HIG began business
as a property and casualty insurance company in 1915. Since its reorganization
in 1993, HIG has written only personal lines business, focusing primarily on
homeowner's insurance. During 1996, HIG contributed $41.8 million in gross
written premiums to the Company's personal lines business.
The combined ratio is a standard measure in the property and casualty
insurance industry of a company's performance in managing its losses and
expenses. Underwriting results are generally considered profitable when the
combined ratio is less than 100%. A comparison of statutory combined ratios
indicates that the Company has experienced more favorable results than the
insurance industry generally over the past three years.
The following table sets forth statutory combined ratios for the Company and
the statutory combined ratios for the property and casualty insurance industry
as a whole for the preceding three calendar years.
COMBINED RATIO (STATUTORY BASIS)
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
The Company(1)................................... 89.4% 90.6% 89.7%
Property and Casualty Industry................... 108.3%(2) 106.4%(2) 107.0%(3)
</TABLE>
1
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- --------
(1) Data has been derived from the financial statements of the Company
prepared in accordance with statutory accounting practices ("SAP") and filed
with insurance regulatory authorities.
(2) The statutory industry data is taken from the A.M. Best Company, Aggregate
and Averages, 1996 Edition.
(3) 1996 estimate by the A.M. Best Company, Review and Preview, January 1997
Edition.
While the industry combined ratios are the generally accepted measure for
comparing results within the property and casualty insurance industry, these
combined ratios do not distinguish between property and casualty companies
based upon their mix of business. Unlike many property and casualty companies,
the Company focuses primarily on short-tail property coverages and writes a
very limited amount of longer tail casualty coverages. Long-tail insurance
coverages often produce higher losses relative to the premiums charged than
short-tail property insurance; however, because ultimate claim losses for
longer tail coverages are slower to be reported and finally paid, companies
writing a significant amount of long-tail insurance coverages may be able to
derive investment income from the use of premiums paid to mitigate their
higher losses.
The Company's insurance subsidiaries are currently rated "A" (Excellent) by
A.M. Best, which is A.M. Best's third highest rating category. A.M. Best
ratings are based upon factors of concern to policyholders and are not
directed toward the protection of investors. No assurance can be given that in
the future, A.M. Best will not reduce or withdraw the ratings of the Company's
insurance subsidiaries because of factors, including material losses, that may
or may not be within the Company's control. See "Business--A.M. Best Rating"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company was incorporated in Delaware on July 9, 1993 to be the holding
company for the property and casualty insurance subsidiaries of Torchmark
Corporation ("Torchmark"). Prior to its initial public offering of common
stock in November 1993, the Company was a wholly owned subsidiary of
Torchmark. As of December 31, 1996, Torchmark held approximately 27% of the
outstanding common stock of the Company. The Company's principal property and
casualty subsidiary is Vesta Fire. The Company's principal executive offices
are at 3760 River Run Drive, Birmingham, Alabama 35243, and its telephone
number is (205) 970-7000.
BUSINESS STRATEGY
The Company's strategy is to focus principally on property coverages in all
of its lines of business while adjusting the mix and volume of its writings
and retentions to respond to changes in market prices and to manage its risk
exposures. The Company contributed a majority of the proceeds from its initial
public offering in November 1993 and the sale of $100 million of its 8.75%
Senior Debentures due 2025 in July 1995 to the capital and surplus of its
insurance subsidiaries. By increasing the surplus of its insurance
subsidiaries, the Company has continued to increase its sales of insurance and
reinsurance. In particular, the Company has significantly increased its
writings of pro rata reinsurance to capitalize on the increased demand for
such reinsurance in recent years. In addition, since the end of 1992, the
Company has been able to maintain its writings of catastrophe risks. The
Company is also increasing its writings of selected primary insurance lines.
Historically, the Company has made substantial use of reinsurance and
retrocessional arrangements to reduce its exposure to risks and the
variability of its earnings. The Company plans to continue to cede a portion
of its insurance risks while using its increased capital base to increase
selectively its retentions of certain property risks based on market
conditions. In addition, the Company will continue its strategy to balance the
geographic concentration of the risks of its primary insurance and reinsurance
business. While the Company's primary insurance operations are focused
principally in southeastern and southwestern states and Hawaii, its
reinsurance business is principally regional insurance companies operating
outside of these areas.
LINES OF BUSINESS
The following table provides selected historical information on a GAAP basis
concerning the business written by the Company and the associated underwriting
results. This data should be read in
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conjunction with the Company's Consolidated Financial Statements and related
notes thereto. For additional information on the Company's business segments,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note M to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
REINSURANCE
Gross Premiums Written(1).... $ 84,007 $126,332 $242,030 $422,711 $615,352
Net Premiums Written......... 61,686 96,181 193,136 358,289 446,062
Net Premiums Earned.......... 54,491 89,356 191,700 290,657 415,028
Loss Ratio................... 50.0% 50.1% 50.5% 58.9% 59.8%
PRIMARY INSURANCE
Personal
Gross Premiums Written....... $ 51,555 $ 64,300 $ 63,658 $105,643 $109,661
Net Premiums Written......... 30,608 42,580 28,626 52,157 69,769
Net Premiums Earned.......... 24,696 36,316 39,223 44,796 63,207
Commercial
Gross Premiums Written....... 30,672 34,796 49,018 58,428 44,573
Net Premiums Written......... 17,775 20,192 37,948 48,782 24,801
Net Premiums Earned.......... 19,196 18,138 29,028 46,349 33,677
Total Primary
Gross Premiums Written....... 81,827 99,096 112,676 164,071 154,234
Net Premiums Written......... 48,383 62,772 66,574 100,939 94,570
Net Premiums Earned.......... 43,892 54,454 68,252 91,145 96,884
Loss Ratio................... 52.5% 56.2% 63.7% 52.6% 48.28%
COMBINED
Gross Premiums Written....... $165,834 $225,428 $354,706 $586,782 $769,586
Net Premiums Written......... 110,069 158,953 259,710 459,228 540,632
Net Premiums Earned.......... 98,383 143,810 259,952 381,802 511,912
Loss Ratio................... 51.1% 52.4% 53.9% 57.4% 57.6%
Expense Ratio................ 45.2% 40.5% 34.0% 29.3% 30.2%
Combined Ratio............... 96.3% 92.9% 87.9% 86.7% 87.8%
</TABLE>
(1) Reinsurance gross premium written excludes less than $1.5 million of
assumed reinsurance per year which is treated as primary business in this
table and in the following discussion.
REINSURANCE
Reinsurance is a contractual arrangement under which one insurer (the ceding
company) transfers to another insurer (the reinsurer) all or a portion of a
risk or risks that the ceding company has assumed under the insurance policy
or policies it has issued. A ceding company may purchase reinsurance for any
number of reasons including, to obtain, through the reduction of its
liabilities, greater underwriting capacity than its own capital resources
would support, to stabilize its underwriting results, to protect against
catastrophic loss, to withdraw from a line of business, and to manage risk
when entering a line of business.
Reinsurance can be written on either a pro rata or excess of loss basis.
Under pro rata reinsurance, the reinsurer, in return for a predetermined
portion or share of the insurance premium charged by the ceding company,
indemnifies the ceding company against a predetermined portion or share of the
losses and loss adjustment expenses ("LAE") of the ceding company under the
covered primary policy or policies. Under excess of loss reinsurance, the
reinsurer indemnifies the ceding company against all or a specified portion of
losses and LAE on underlying insurance policies in excess of a specified
dollar amount, known as the ceding company's retention, subject to a
negotiated policy limit. Catastrophe reinsurance is a form of excess of loss
reinsurance which indemnifies the ceding company for losses resulting from a
particular catastrophic event. Excess of loss reinsurance
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is often written in layers, with one or a group of reinsurers taking the risk
from the ceding company's retention layer up to a specified amount, at which
point either another reinsurer or a group of reinsurers takes the excess
liability or it remains with the ceding company. The reinsurer acquiring the
risk immediately above the ceding company's retention layer is said to write
working or low layer reinsurance. A loss that reaches just beyond the primary
insurer's retention layer will create a loss for the working layer reinsurer,
but not for the reinsurers on the higher layers.
Premiums that the ceding company pays to the reinsurer for excess of loss
coverage are not directly proportional to the premiums that the ceding company
receives because the reinsurer does not assume a proportionate risk. Excess of
loss coverage is priced separately and distinctly from the pricing employed by
the ceding company in connection with its risk since the probability of loss
is different for the reinsurer than the ceding company. Accordingly, excess of
loss contracts may increase flexibility to determine premiums for reinsurance.
In contrast, in pro rata reinsurance, premiums that the ceding company pays to
the reinsurer are proportional to the premiums that the ceding company
receives, consistent with the proportional sharing of risk, and the reinsurer
generally pays the ceding company a ceding commission. Generally, the ceding
commission is based upon the ceding company's cost of obtaining the business
being reinsured (i.e., commissions, premium taxes, assessments and
miscellaneous administrative expenses).
There are two basic types of reinsurance agreements, treaties and
facultative certificates. Facultative reinsurance involves the reinsuring of
an individual risk while treaty reinsurance is automatic reinsurance (which
may be written pro rata or excess of loss), whereby the ceding company is
obligated to cede and the reinsurer is obligated to accept from the ceding
company certain risks or classes of risks. Occurrence catastrophe reinsurance
is a form of treaty reinsurance.
Substantially all of the reinsurance that the Company currently writes is on
personal (including automobile) and commercial property risks. Management
believes there are certain advantages in emphasizing the writing of property
reinsurance over casualty reinsurance, the most significant of which is that
ultimate property claims losses generally can be determined more quickly than
ultimate casualty claims losses. Long-tail reinsurance, such as certain
casualty coverages, frequently are slower to be reported and finally
determined. However, the earnings of property insurers are affected by
unpredictable catastrophic events. In addition, a continuing increase in the
severity of catastrophic losses as well as various other market forces could
affect the Company's ability to buy adequate retrocessional coverage and
thereby necessitate a reduction of the Company's reinsurance business to a
level appropriate for the retrocessional protection available.
The Company's mix of reinsurance business on a gross premiums written basis
is set forth in the following table for the periods indicated:
DISTRIBUTION OF REINSURANCE PREMIUMS WRITTEN
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
TYPE OF
REINSURANCE 1993 1994 1995 1996
- ----------- -------------- -------------- --------------- -------------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property Reinsurance
Pro Rata............... $ 93,730 74.2% $181,777 75.1% $330,486 78.2% $502,463 81.7%
Catastrophe............ 23,995 19.0 43,982 18.2 38,417 9.1 45,721 7.4
Excess Risk............ 2,378 1.9 4,203 1.7 2,454 0.6 2,888 .5
-------- ----- -------- ----- -------- ----- -------- ----
Total Property.......... 120,103 95.1 229,962 95.0 371,357 87.9 551,072 89.6
Casualty Reinsurance....
Auto Liability......... 5,001 4.0 9,450 3.9 49,118 11.6 60,912 9.9
Other Casualty(1)...... 1,228 0.9 2,618 1.1 2,236 0.5 3,368 .5
-------- ----- -------- ----- -------- ----- -------- ----
Total Casualty.......... 6,229 4.9 12,068 5.0 51,354 12.1 64,280 10.4
-------- ----- -------- ----- -------- ----- -------- ----
Total Reinsurance...... $126,332 100.0% $242,030 100.0% $422,711 100.0% $615,352 100%
======== ===== ======== ===== ======== ===== ======== ====
</TABLE>
- --------
(1) Estimated casualty portion of total reinsurance excluding Auto Liability.
4
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The Company seeks to adjust its reinsurance activities in response to
changing conditions in the reinsurance markets. The Company significantly
increased the writings of pro rata reinsurance during the year ended December
31, 1996, principally for smaller companies seeking to obtain additional
underwriting capacity and protection against catastrophic loss. In addition,
the Company's current strategy is to maintain its writings of property
catastrophe reinsurance to take advantage of continuing attractive pricing of
occurrence catastrophe reinsurance resulting from the unusual level of
catastrophic losses experienced between 1989 and 1996, which included
hurricanes, earthquakes, numerous severe winter storms and several severe hail
storms.
The principal lines of business reinsured by the Company include homeowner
and commercial property coverages, non-standard automobile insurance and
collateral protection insurance. For 1996, homeowner and commercial business
comprised approximately 58% of gross reinsurance premiums written, non-
standard automobile insurance comprised approximately 37% of gross reinsurance
premiums written, and collateral protection insurance comprised approximately
5% of gross reinsurance premiums written. The Company writes a small amount of
casualty reinsurance for certain of its property reinsurance clients. Casualty
reinsurance risks assumed by the Company consist largely of non-standard
automobile liability insurance as well as liability coverages provided under
homeowner and commercial multi-peril policies.
Marketing. The Company provides reinsurance to small and medium-sized
regional insurance companies located primarily in the southwestern, midwestern
and northeastern United States. Most of the Company's reinsurance business is
produced through major reinsurance intermediaries in the United States. In
1996 the Company began writing international reinsurance business with an
emphasis on catastrophe reinsurance. This was enhanced in September 1996 with
the establishment of a branch office in Copenhagen, Denmark which improved
access to the European reinsurance market. The Company's reinsurance division
currently does business through approximately 30 intermediaries, five of which
were responsible for approximately 73% of the division's premium volume during
1996.
Underwriting. Management's underwriting strategy is to practice strict
discipline in carrying out its major operating functions, risk selection and
retention. For selecting and managing its portfolio of reinsurance contracts,
the authority to bind the Company is limited to five employees whose duties
are concentrated primarily on identifying and accessing desirable business.
The Company utilizes computers and analytical software to assist underwriters
in evaluating and selecting risks and determining appropriate retention
levels. It is the Company's practice to have direct contact, either by
underwriting audits or periodic visits of a more general nature, with ceding
companies with whom the Company has working layer relationships, both to
enhance the quality of its underwriting process and to develop and retain its
business relationships.
PRIMARY INSURANCE BUSINESS
In its primary insurance operations, the Company has sought to identify
market opportunities and develop insurance products to meet particular market
needs. The Company's primary insurance operations are focused primarily on
selected personal and commercial insurance lines as well as on financial
services products consisting of certain collateral protection insurance
policies for financial institutions. As in its reinsurance operations, the
Company emphasizes property coverages, although the Company generally provides
comprehensive personal liability coverage as part of its homeowner products
and general liability coverage as part of its business owners and commercial
package policies for small to medium-sized businesses.
The Company's independent agents may bind insurance coverages only in
accordance with guidelines established by the Company. The Company promptly
reviews all coverages bound by its agents and a decision is made as to whether
to continue such coverages. Because of the broad base of the Company's
independent agency force, the contractual limitation on their authority to
bind coverage and the Company's review procedures, the Company does not
believe that the authority of its agents to bind the Company presents any
material risk to the Company and its operations.
5
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Personal Lines
The Company's personal lines business relates primarily to the insurance of
residential properties and their contents. The Company offers insurance
products for a wide range of homes, but (excluding HIG which writes dwellings
valued up to $750,000) emphasizes lower value dwellings (dwellings valued up
to $50,000) and standard dwellings (dwellings valued from $50,000 to $150,000)
that typically yield higher profit margins.
The Company also provides specialty products protecting collateral and
repossessed property of financial institutions. Certain of these products are
designed to protect the interests of financial institutions against physical
damage to private passenger automobiles and other personal property in those
cases where the borrower fails to insure the collateral in accordance with a
loan agreement. The Company also has mortgage security products that are
designed to protect the interest of the mortgagee and mortgagor (borrower)
caused by the mortgagor's failure to obtain property insurance on the
mortgaged property. Coverage is also provided for properties that are in the
process of foreclosure.
On December 31, 1996, the Company cancelled the 75% pro rata reinsurance
contract on its homeowners and dwelling lines of business (excluding HIG)
produced through independent agents and also on its homeowners and dwelling
lines of business in the financial services business.
It has been the Company's policy generally not to underwrite personal lines
business within one hundred miles of a coastline (except for Florida which is
10 miles, and Hawaii) in order to limit its exposure to typical coastal
occurrences such as hurricanes and other types of storms. The Company
continually monitors and controls its business in order to prudently manage
its risk in areas with significant exposure to natural disasters. See
"Business--Regulation."
Marketing. The Company currently markets its insurance products for personal
lines through approximately 870 independent agents. The Company believes its
marketing of its personal lines products has benefited from the Company's "A"
A.M. Best rating. See "Business--A.M. Best Rating" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Within certain parameters, the agents of the Company are authorized to write
policies without approval from the Company. However, all policies are reviewed
by Company underwriting staff upon receipt of the application by the Company.
The following table sets forth the principal geographic distribution of the
Company's gross premiums written in its personal lines business for the three
years indicated. The states listed below comprise the five states with the
largest gross premiums written for 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Hawaii............................. $ 0 0.0% $30,828 29.2% $41,927 38.5%
Alabama............................ 15,730 24.7 14,868 14.1 15,348 14.1
Georgia............................ 3,975 6.2 5,980 5.7 6,258 5.8
Florida............................ 9,152 14.4 6,411 6.0 5,428 5.0
Texas.............................. 8,605 13.5 6,360 6.0 4,588 4.2
All Other.......................... 26,196 41.2 41,196 39.0 35,291 32.4
------- ----- ------- ----- ------- -----
Total............................. $63,658 100.0% 105,643 100.0 108,840 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
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The Company has offered homeowner and dwelling policies through independent
agents since 1988. The Company is currently marketing such policies through
independent agents in 14 southern states and Hawaii and plans to introduce
these products in certain additional states in order to broaden the
geographical spread of its business. The Company employs marketing
representatives to maintain and expand its agency relationships in its
personal lines business. In addition, the Company pays what it believes to be
competitive commission rates to its agents and has established a profit
sharing plan for agencies, which is based on volume of premiums and loss
ratios for risks written.
The Company's financial services products are sold to financial
institutions. Most of the financial services products written by the Company
are marketed and serviced through Overby-Seawell Company, a managing general
agency located in Atlanta, Georgia ("Overby-Seawell"). The Company and Overby-
Seawell entered into an Agency Agreement as of July 27, 1990 (the "Agency
Agreement"), pursuant to which Overby-Seawell was appointed as a
representative for the marketing and underwriting of the Company's financial
services products. Under the Agency Agreement, Overby-Seawell has the
authority to collect premiums and is responsible for the supervision,
adjustment and payment of all claims arising under contracts governed by the
Agency Agreement. In addition, Overby-Seawell has certain limited authority to
issue and execute financial services insurance contracts on behalf of the
Company without obtaining the Company's prior approval.
Until recently, the Company marketed lower value personal dwelling insurance
in six states through agents of Liberty National Life Insurance Company
("LNL"), a subsidiary of Torchmark, pursuant to a written marketing agreement
with LNL. However, effective May 1, 1995, LNL terminated this agreement and
will no longer market these products through its agents, although it will
continue to service the inforce business. In 1996, these industrial fire
products comprised approximately 12.2% of the Company's gross premiums written
in its personal lines business.
Underwriting. Underwriting of personal lines business is centralized and
performed by the Company's underwriting staff in accordance with specific
underwriting authority related to the acceptability of each risk for the
appropriate program profile. Management information reports are utilized to
measure risk selection and pricing in order to control underwriting
performance. The principal underwriting criteria for personal property
coverages is a financially stable owner with a well-maintained property. Rates
for lower valued properties are surcharged to reflect risk characteristics.
Within certain parameters, the agents of the Company are authorized to write
policies without approval from the Company.
Commercial Lines
The Company provides commercial insurance products covering selected
commercial business and transportation risks. While the commercial business
and transportation products offered by the Company include a liability
component, the Company's commercial lines products are focused predominantly
on property and physical damage coverages.
The Company offers property insurance protection for shopping centers, food
stores, general retail outlets, apartment buildings and motorcycle
dealerships. The Company also provides business owners policies, primarily to
small and medium-sized businesses, which provide comprehensive coverage under
one policy, including coverage for vehicles used in business, property
insurance for buildings, equipment, inventory and contents, and general
liability insurance for risks associated with business premises.
The Company has designed a complementary group of insurance products for the
trucking industry. These products are offered to independent owner-operators
of trucks and small fleets to cover physical damage, non-trucking liability
and cargo risks. Physical damage protection is the principal product written
by the Company in this line of business. The Company offers non-trucking
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<PAGE>
liability (which insures non-business use of the vehicle by owner-operators)
and cargo insurance as supplementary products to physical damage coverages.
Marketing. The Company's commercial lines products are offered in 47 states.
The Company uses marketing representatives to market its commercial lines
products to independent agents and brokers. These marketing representatives
are employees of the Company and are located in areas in which the Company
operates and targets business development. Commercial business products are
marketed directly through approximately 1000 independent agencies and brokers.
Transportation products are marketed through approximately 60 agencies which
specialize in this line of business. The Company believes that its "A" A.M.
Best rating and the commissions and profit sharing arrangements it provides to
contracted agents have been important factors in the Company's ability to
access and maintain profitable commercial property-casualty and transportation
business. See "Business--A.M. Best Rating" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The following table sets forth the principal geographic distribution of the
Company's gross premiums written in its commercial lines business for the
years indicated. The states listed below comprise the five states with the
largest gross premiums written for 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Texas.............................. $12,981 26.5% $14,771 25.3% $11,035 24.8%
Missouri........................... 4,720 9.6 6,124 10.5 6,554 14.7
Louisiana.......................... 6,383 13.0 5,432 9.3 3,790 8.5
Alabama............................ 2,652 5.4 3,649 6.2 2,276 5.1
Kentucky........................... 1,092 2.2 1,823 3.1 1,787 4.0
All Other.......................... 21,190 43.3 26,629 45.6 19,131 42.9
------- ----- ------- ----- ------- -----
Total............................. $49,018 100.0% $58,428 100.0% $44,573 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
Underwriting. Underwriting of the Company's commercial business and
transportation products is centralized and performed by the Company's
underwriting staff in accordance with specific underwriting authority based
upon the experience and knowledge level of each underwriter. Risks that are
perceived to be more difficult and complex risk exposures are underwritten by
the more experienced staff and reviewed by management.
Many underwriting factors are examined for the commercial business line,
such as quality of construction, occupancy and protection against fire and
other hazards. Additionally, a critical underwriting element is the financial
condition of the owners.
Transportation underwriting is heavily concentrated on a review of the
driver, including the driver's record and experience. However, other factors
are also considered, such as, in the case of cargo insurance, damageability
and theft exposure.
Limited binding authority is provided to contracted agents, but only for
risks which have been underwritten, priced and accepted by an authorized
underwriter of the Company or risks which qualify under specific and pre-set
guidelines and rate parameters established for a specified class of products.
REINSURANCE CEDED
The Company seeks to manage its risk exposure through the purchase of
reinsurance, including retrocessional placements for its reinsurance business.
The Company obtains reinsurance principally to reduce its net liability on
individual risks and to provide protection for individual loss occurrences,
including catastrophic losses, and to stabilize its underwriting results. In
exchange for reinsurance, the
8
<PAGE>
Company pays to its reinsurers a portion of the premiums received under the
reinsured policies. While the assuming reinsurer is liable for losses to the
extent of the coverage ceded, reinsurance does not legally discharge the
Company from primary liability for the full amount of the policies ceded.
The Company purchases reinsurance separately for its primary insurance
business lines and its reinsurance business. Gross written premiums ceded for
1995 were $127.6 million, which constituted 21.7% of the gross premiums
written, and for 1996, were $229.0 million, which constituted 29.8% of the
gross premiums written. The increase in 1996 was primarily due to a pro rata
reinsurance facility covering substantially all primary and assumed business
entered into by Vesta Fire. While the Company seeks to reinsure a signficant
portion of its property catastrophe risks, there can be no assurance that
losses experienced by the Company will be within the coverage limits of the
Company's reinsurance and retrocessional programs.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing in this business has weakened slightly due to increased availability
of reinsurance market capacity.
The Company seeks to evaluate the credit quality of the reinsurers and
retrocessionaires to which it cedes business. No assurance can be given
regarding the future ability of any of the Company's reinsurers to meet their
obligations. Among the insurers to which the Company cedes reinsurance is
Underwriters at Lloyd's, London, a collection of underwriters, known as
"Names," who group together annually to form syndicates. In recent years
Lloyd's has reported substantial losses which have had deleterious effects on
Lloyd's in general, and on certain syndicates in particular. In addition,
there has been a decrease in underwriting capacity of Lloyd's syndicates in
recent years. The substantial losses and other adverse developments could
affect the ability of certain syndicates to continue to trade and the ability
of insureds to continue to place business with particular syndicates. It is
not possible to predict what effects the circumstances described above may
have on Lloyd's and the Company's contractual relationship with Lloyd's
syndicates in future years.
CLAIMS
Claims arising under the policies and treaties issued or reinsured by the
Company are managed by the Company's Claims Department. When the Company
receives notice of a loss, its claims personnel open a claim file and
establish a reserve with respect to the loss. All claims are reviewed and all
payments are made by the Company's employees, with the exception of claims on
certain collateral protection products, which are adjusted by a managing
general agency and periodically audited by the Company's claims personnel.
Most personal lines claims are adjusted and paid by staff claims adjusters
located throughout the southeastern and southwestern United States and Hawaii.
Management believes that utilizing the Company's trained employee adjusters
permits faster, more efficient service at a lower cost.
Claims settlement authority levels are established for each adjuster or
manager based upon such employee's ability and level of experience. Upon
receipt, each claim is reviewed and assigned to an adjuster or manager based
upon the type of claim. Claims-related litigation is monitored by a home
office litigation supervisor. The Company emphasizes prompt, fair and
equitable settlement of meritorious claims, adequate reserving for claims and
controlling of claims adjustment and legal expenses.
RESERVES
The Company's insurance subsidiaries are required to maintain reserves to
cover their estimated ultimate liability for losses and loss adjustment
expenses with respect to reported and unreported
9
<PAGE>
claims incurred. To the extent that reserves prove to be inadequate in the
future, the Company would have to increase such reserves and incur a charge to
earnings in the period such reserves are increased which could have a material
adverse effect on the Company's results of operations and financial condition.
The establishment of appropriate reserves is an inherently uncertain process
and there can be no assurance that ultimate losses will not materially exceed
the Company's loss reserves. Reserves are estimates involving actuarial and
statistical projections at a given time of what the Company expects to be the
cost of the ultimate settlement and administration of claims based on facts
and circumstances then known, estimates of future trends in claims severity
and other variable factors such as inflation. The inherent uncertainties of
estimating reserves generally are greater with respect to reinsurance
liabilities due to the diversity of development patterns among different types
of reinsurance contracts, the necessary reliance on ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies.
With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking
into account the circumstances surrounding each claim and policy provision
relating to the type of loss. Loss reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
For incurred but not reported ("IBNR") losses, a variety of methods have
been developed in the insurance industry for determining estimates of loss
reserves. One common method of actuarial evaluation, which is used by the
Company, is the loss development method. This method uses the pattern by which
losses have been reported over time and assumes that each accident year's
experience will develop in the same pattern as the historical loss
development. The Company also relies on industry data to provide the basis for
reserve analysis on newer lines of business (lines written less than 3 years).
Provisions for inflation are implicitly considered in the reserving process.
For GAAP purposes, the Company's reserves are carried at the total estimate
for ultimate expected loss without any discount to reflect the time value of
money.
Reserves are computed by the Company based upon actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management, and, as required by
state law, the Company periodically engages an independent actuary to render
an opinion as to the adequacy of statutory reserves established by management,
which opinions are filed with the various jurisdictions in which the Company
is licensed. Based upon the practice and procedures employed by the Company,
without regard to independent actuarial opinions, management believes that the
Company's reserves are adequate.
The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Losses and LAE reserves at beginning of year....... $ 78,285 $120,980 $199,314
Losses and LAE incurred:
Provision for losses and LAE for claims occurring
in current year.................................. 139,253 217,293 291,812
Increase (decrease) in reserves for claims occur-
ring in prior years.............................. 1,028 1,798 3,109
-------- -------- --------
Total............................................ 140,281 219,091 294,921
Losses and LAE payments for claims incurred:
Current year...................................... 78,907 92,924 158,408
Prior years....................................... 18,679 47,833 88,603
-------- -------- --------
Total............................................ 97,586 140,757 247,011
-------- -------- --------
Losses and LAE reserve liability at end of year.... $120,980 $199,314 $247,224
======== ======== ========
</TABLE>
10
<PAGE>
The reconciliation between statutory basis and GAAP basis reserves for each
of the three years in the period ended December 31, 1996 is shown on the
following page:
RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE FROM STATUTORY BASIS TO
GAAP BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory reserves............................... $ 79,176 $150,818 $189,309
Adjustments for salvage and subrogation.......... (1,845) (1,273) (2,376)
Gross-up of amounts netted against reinsurance
recoverable..................................... 43,649 49,769 60,291
-------- -------- --------
Reserves on a GAAP basis......................... $120,980 $199,314 $247,224
======== ======== ========
</TABLE>
The following table shows the development of the reserves for unpaid losses
and loss adjustment expenses from 1986 through 1996 for the Company's
insurance subsidiaries on a GAAP basis excluding amounts netted against
reinsurance recoverable. The top line of the table shows the liabilities at
the balance sheet date for each of the indicated years. This reflects the
estimated amounts of losses and loss adjustment expenses for claims arising in
that year and all prior years that are unpaid at the balance sheet date,
including losses incurred but not yet reported to the Company. The upper
portion of the table shows the cumulative amounts subsequently paid as of
successive years with respect to the liability. The lower portion of the table
shows the reestimated amount of the previously recorded liability based on
experience as of the end of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundance (deficiency) exists when the reestimated
liability at each December 31 is less (greater) than the prior liability
estimate. The "cumulative redundance (deficiency)" depicted in the table, for
any particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE.......... $43,885 $44,597 $40,837 $32,861 $27,823 $21,919 $21,976 $34,647 $77,331 $149,545 $186,933
Paid (cumulative) as of
One year later.......... 16,868 7,706 19,730 19,611 11,864 11,890 10,216 18,679 48,007 88,603
Two years later......... 22,899 22,139 28,475 24,063 16,078 13,968 13,712 24,153 62,834
Three years later....... 26,628 30,405 32,443 27,692 17,062 15,362 14,074 25,428
Four years later........ 32,181 32,783 34,549 28,699 17,829 15,671 14,365
Five years later........ 33,826 34,704 35,564 29,265 18,047 15,741
Six years later......... 35,640 35,513 36,073 29,366 18,123
Seven years later....... 36,415 36,033 36,449 29,390
Eight years later....... 37,110 36,361 36,470
Nine years later........ 37,427 36,400
Ten years later......... 37,456
Liability reestimated as
of
End of year............ 43,885 44,597 40,837 32,861 27,823 21,919 21,976 34,647 77,331 149,545 186,933
One year later.......... 43,757 43,721 42,097 34,078 28,779 21,853 22,595 35,714 79,128 152,654
Two year later.......... 42,782 43,869 42,702 33,304 29,431 21,273 22,341 35,310 81,850
Three years later....... 43,042 44,541 42,665 33,851 28,467 20,902 22,068 35,153
Four years later........ 43,165 44,181 42,493 33,663 28,316 20,537 21,991
Five years later........ 43,745 43,170 42,149 33,444 28,027 20,385
Six years later......... 43,619 42,987 42,330 33,113 27,886
Seven years later....... 43,431 42,901 42,090 32,921
Eight years later....... 43,497 42,847 41,903
Nine years later........ 43,471 42,675
Ten years later......... 43,310
Cumulative
redundance/(deficiency). 575 1,922 (1,066) (60) (63) 1,534 (15) (506) (4,519) (3,109)
</TABLE>
As the table above indicates, due to the short tail nature of the Company's
business, its claim payout pattern closely tracks increases and decreases in
its premium volume.
11
<PAGE>
The Company reinsured a number of casualty risks in the early 1980's which
could result in claims for coverage of asbestos related and other
environmental impairment liabilities to the extent that such liabilities were
not excluded from the underlying policies. The attachment points in
reinsurance treaties relating to these risks are relatively high, and the
Company's percentage participation in the layers of reinsurance in which it
participates is relatively low. In addition, the Company carries reinsurance
which would mitigate the effect of any losses under these treaties. While
there exists a possibility that the Company could suffer material loss in the
event of a high number of large losses under these treaties, this is unlikely
in management's judgement. Management's judgement is based upon, among other
things, its experience in the property insurance industry generally, the
length of time that has elapsed since these particular treaties were entered
into, and the fact that, to management's knowledge, the Company has received
no notices of any material environmental claims under these treaties.
INVESTMENTS
The Company's investment portfolio consists primarily of investment grade
fixed income securities. Waddell & Reed Asset Management Company ("WRAMCO"), a
subsidiary of Torchmark, provides investment advisory services to the Company
subject to investment policies and guidelines established by management. The
Company's investments at December 31, 1996 totaled approximately $427.3
million and were classified as follows:
<TABLE>
<CAPTION>
AMOUNT AT WHICH % OF
TYPE OF INVESTMENT SHOWN ON BALANCE SHEET PORTFOLIO
- ------------------ ---------------------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and short-term investments................ $110,051 25.8%
United States Government securities............ 37,576 8.8
Mortgage-backed securities..................... 7,682 1.8
Corporate bonds................................ 104,011 24.3
Foreign government............................. 2,006 0.5
Municipal bonds................................ 157,623 36.9
Equity securities.............................. 8,327 1.9
-------- -----
Total........................................ $427,276 100.0%
======== =====
</TABLE>
The value of the fixed maturities portfolio, classified by category, as of
December 31, 1996, was as follows:
<TABLE>
<CAPTION>
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
United States Government.............................. $ 37,398 $ 37,576
Mortgage-backed securities............................ 7,760 7,682
Municipal............................................. 155,966 157,623
Foreign government.................................... 2,000 2,006
Corporate............................................. 102,902 104,011
-------- --------
Total............................................... $306,026 $308,898
======== ========
</TABLE>
The composition of the fixed maturities portfolio, classified by Moody's
rating as of December 31, 1996 was as follows:
<TABLE>
<CAPTION>
AMORTIZED COST % OF TOTAL
-------------- ----------
(IN THOUSANDS)
<S> <C> <C>
Aaa................................................... $135,873 44.4%
Aa.................................................... 33,076 10.8
A..................................................... 129,566 42.3
Baa................................................... 7,511 2.5
Nonrated.............................................. 0 0
-------- -----
Total............................................... $306,026 100.0%
======== =====
</TABLE>
12
<PAGE>
The NAIC has a bond rating system that assigns securities to classes called
"NAIC designations" that are used by insurers when preparing their annual
statutory financial statements. The NAIC assigns designations to publicly-
traded as well as privately-placed securities. The designations assigned by
the NAIC range from class 1 to class 6, with a rating in class 1 being of the
highest quality. As of December 31, 1996, all of the Company's fixed
maturities portfolio, measured on a statutory carrying value basis, was
invested in securities rated in class 1 by the NAIC, which are considered
investment grade. The weighted average maturity of the Company's portfolio at
December 31, 1996 was 2.8 years.
As of December 31, 1996, none of the Company's fixed maturities portfolio
was invested in securities that were rated below investment grade. Less than
1% of the Company's assets were invested in real estate and equity securities,
and less than 1% of the Company's assets were invested in collateralized
mortgage obligations secured by residential mortgages.
REGULATION
The Company's insurance companies are subject to regulation by government
agencies in the states in which they do business. The nature and extent of
such regulation vary from jurisdiction to jurisdiction, but typically involve
prior approval of the acquisition of control of an insurance company or of any
company controlling an insurance company, regulation of certain transactions
entered into by an insurance company with any of its affiliates, approval of
premium rates for many lines of insurance, standards of solvency and minimum
amounts of capital and surplus which must be maintained, limitations on types
and amounts of investments, restrictions on the size of risks which may be
insured by a single company, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, and reports with respect to
financial condition and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies. Such regulation is
generally intended for the protection of policyholders rather than security
holders.
In addition to the regulatory supervision of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Alabama,
Hawaii and Texas Insurance Holding Company System Regulatory Acts (the
"Holding Company Acts"). The Holding Company Acts contain certain reporting
requirements including those requiring the Company, as the ultimate parent
company, to file information relating to its capital structure, ownership, and
financial condition and general business operations of its insurance
subsidiaries. The Holding Company Acts contain special reporting and prior
approval requirements with respect to transactions among affiliates. The
Alabama Holding Company Act is generally the most significant to the Company
since it governs the Company's relationship with Vesta Fire, the Company's
principal insurance subsidiary.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.
These include redefinitions of risk exposure in areas such as products
liability, environmental damage and employee benefits, including pensions,
workers' compensation and disability benefits. In addition, individual state
insurance departments may prevent premium rates for some classes of insureds
from reflecting the level of risk assumed by the insurer for those classes.
Such developments may adversely affect the profitability of various lines of
insurance. In some cases, these adverse effects on profitability can be
minimized through repricing of coverages, if permitted by applicable
regulations, or limitation or cessation of the affected business.
Restrictions on Dividends to Stockholders. The Company's insurance
subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The restrictions are generally based on
certain levels of surplus, investment income
13
<PAGE>
and operating income, as determined under statutory accounting practices.
Alabama and Texas law permits dividends in any year which, together with other
dividends or distributions made within the preceding 12 months, do not exceed
the greater of (i) 10% of statutory surplus as of the end of the preceding
year or (ii) the net income for the preceding year, with larger dividends
payable only after receipt of prior regulatory approval. Hawaii law limits
dividends to the lesser of (i) and (ii) without prior approval. Certain other
extraordinary transactions between an insurance company and its affiliates,
also are subject to prior approval by the Department of Insurance. Future
dividends from the Company's subsidiaries may be limited by business and
regulatory considerations. However, based upon restrictions presently in
effect, the maximum amount available for payment of dividends to the Company
by its insurance subsidiaries in 1996 without prior approval of regulatory
authorities is approximately $50.7 million.
Insurance Regulation Concerning Change or Acquisition of Control. Certain
subsidiaries of the Company are domestic property and casualty insurance
companies organized under the insurance codes of Alabama, Hawaii and Texas
(the "Insurance Codes"). The Insurance Codes contain a provision to the effect
that the acquisition or change of "control" of a domestic insurer or of any
person that controls a domestic insurer cannot be consummated without the
prior approval of the relevant insurance regulatory authority. A person
seeking to acquire control, directly or indirectly, of a domestic insurance
company or of any person controlling a domestic insurance company must
generally file with the relevant insurance regulatory authority an application
for change of control (commonly known as a "Form A") containing certain
information required by statute and published regulations and provide a copy
of such Form A to the domestic insurer. In Alabama, control is presumed to
exist if any person, directly or indirectly, owns, controls, holds with the
power to vote or holds proxies representing 5% or more of the voting
securities of any other person. In Texas and Hawaii, control is presumed to
exist if any person, directly or indirectly, or with members of the person's
immediate family, owns, controls, or holds with the power to vote, or if any
person other than a corporate officer or director of a person holds proxies
representing, 10% or more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a non-
domestic admitted insurance company in that state. While such prenotification
statutes do not authorize the state agency to disapprove the change of
control, such statutes do authorize issuance of a cease and desist order with
respect to the non-domestic admitted insurer if certain conditions exist such
as undue market concentration.
Any future transactions that would constitute a change in control of the
Company would also generally require prior approval by the Insurance
Department of Alabama, Hawaii and Texas and would require preacquisition
notification in those states which have adopted preacquisition notification
provisions and wherein the insurers are admitted to transact business. Such
requirements may deter, delay or prevent certain transactions affecting the
control of the Company or the ownership of the Company's common stock,
including transactions that could be advantageous to the stockholders of the
Company.
Membership in Insolvency Funds and Associations; Mandatory Pools. Most
states require property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of an insurer writing insurance in the state. Members of the fund
or association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premiums written by a member in that state.
The Company is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. Among the pools in which the Company
14
<PAGE>
participates are those established in coastal states to provide windstorm and
other similar types of property coverage. These pools typically require all
companies writing property insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are not covered by the Company's reinsurance
treaties, they may have an adverse effect on the Company.
Total assessments from insolvency funds, associations and mandatory pools
were $748,309, $998,555 and $531,380 for 1994, 1995 and 1996, respectively.
Some of these payments are recoverable through future policy surcharges and
premium tax reductions.
Various states in which the Company is doing business have established
certain shared market facilities with respect to the coverage of windstorm and
hurricane losses in the state. The Company is subject to assessments under
these facilities up to certain prescribed limits (which are generally based on
its share of the property insurance market in the state) if funds in the state
facility are inadequate to pay such losses on insured risks. The Company
believes that such assessments generally would be treated as a catastrophic
loss under the Company's catastrophe reinsurance programs.
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity
and pricing. These regulations include (i) the creation of "markets assistance
plans" under which insurers are induced to provide certain coverages, (ii)
restrictions on the ability of insurers to cancel certain policies in mid-
term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted
to be charged.
Risk-Basked Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the risk-based capital levels for each of
the Company's insurance subsidiaries did not trigger regulatory attention.
Effect of Federal Legislation. Although the federal government does not
directly regulate the business of insurance, federal initiatives often affect
the insurance business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include federal
government participation in asbestos and other product liability claims,
pension regulation (ERISA), examination of the taxation of insurers and
reinsurers, minimum levels of liability insurance and automobile safety
regulations.
NAIC-IRIS Ratios. The NAIC has developed its Insurance Regulatory
Information System ("IRIS") to assist state insurance departments in
identifying significant changes in the operations of an insurance company,
such as changes in its product mix, large reinsurance transactions, increases
or decreases in premiums received and certain other changes in operations.
Such changes may not result from any problems with an insurance company but
merely indicate changes in certain ratios outside ranges defined as normal by
the NAIC. When an insurance company has four or more ratios falling outside
"normal ranges," state regulators may investigate to determine the reasons for
the variance and whether corrective action is warranted.
15
<PAGE>
In 1995, Vesta Fire had two ratios which varied unfavorably from the "usual
value" range as follows:
<TABLE>
<CAPTION>
VESTA
RATIO USUAL RANGE FIRE RATIO
- ----- ----------- ----------
<S> <C> <C>
Change in Net Writings................................... 33 to (33) 81
Change in Surplus........................................ 50 to (10) 57
</TABLE>
The Change in Writings Ratio was impacted by Vesta Fire Group's increase in
net premiums written from approximately $260 million in 1994 to $460 million
in 1995, resulting in a ratio outside the usual range. Additionally, the
change in Vesta Fire's surplus ratio was impacted by a $90 million capital
contribution from its parent company.
ACQUISITIONS
Effective December 31, 1996, Vesta Insurance Group, Inc. (the "Company")
acquired control of Ranger County Mutual Insurance Company ("Ranger County"),
through its acquisition of all of the issued and outstanding capital stock of
Ranger General Agency, Inc. from Ranger Insurance Company ("Ranger"), Houston,
Texas, for $7.5 million in cash. The purchase price was funded with available
cash. Due to immateriality, the effect of this acquisition has not been
reflected in the 1996 financial statements.
Ranger County is a mutual company organized under Chapter 17 of the Texas
Insurance Code, and, as such, enjoys certain regulatory advantages, including
the ability to establish rates without the approval of the Texas Insurance
Commission. Vesta Fire Insurance Corporation ("Vesta Fire"), the Company's
principal insurance subsidiary, currently writes certain automobile and
associated lines of business in Texas through a similar mutual company for
which it pays commissions. Vesta Fire will now write these lines of business
through Ranger County and, by doing so, will recognize significant savings as
a result of the Company's control of Ranger County.
Ranger County has moved its operations to Dallas, and changed its name to
Vesta County Mutual Insurance Company. All of Ranger County's existing
business, as well as certain additional business which the Company will permit
Ranger to write through Ranger County for a period of two years, will be
reinsured 100% by Ranger, and the Company will not assume any risk associated
with this business.
COMPETITION
The property and casualty insurance industry is highly competitive on the
basis of both price and service. The Company competes for direct business with
other stock companies, specialty insurance organizations, mutual insurance
companies and other underwriting organizations, some of which are
substantially larger and have greater financial resources than the Company.
The Company also faces competition from foreign insurance companies and from
"captive" insurance companies and "risk retention" groups (i.e., those
established by insureds to provide insurance for themselves.) In the future,
the industry, including the Company, may face increasing insurance
underwriting competition from banks and other financial institutions.
The property and casualty reinsurance business is also highly competitive.
Competition in the types of reinsurance in which the Company is engaged is
based on many factors, including the perceived overall financial strength of
the reinsurer, premiums charged, contract terms and conditions, services
offered, speed of claims payment, reputation and experience. Competitors
include independent reinsurance companies, subsidiaries or affiliates of
established domestic or worldwide insurance companies, reinsurance departments
of certain primary insurance companies and underwriting syndicates.
RELATIONSHIP WITH TORCHMARK
Prior to the initial public offering of its common stock in November 1993,
the Company was a wholly owned subsidiary of Torchmark. As of December 31,
1996, Torchmark owned approximately 27% of the issued and outstanding common
stock of the Company. R.K. Richey, the Chairman and
16
<PAGE>
Chief Executive Officer of Torchmark, serves as a director and the Chairman of
the Board of the Company and Keith A. Tucker, Vice Chairman of Torchmark,
serves as a director of the Company. Prior to its initial public offering, the
Company entered into several agreements with Torchmark and certain of its
subsidiaries regarding the future relationship of the Company and Torchmark.
Among these are a lease agreement, pursuant to which the Company leases its
headquarters building, and an investment services agreement, pursuant to which
the Company receives investment advice and services in connection with the
management of the Company's investment portfolio. Until recently, the Company
marketed lower value personal dwelling insurance in six states through agents
of LNL, pursuant to a written marketing agreement between the Company and LNL.
However, LNL terminated this agreement in 1995 and will no longer market these
products through its agents.
EMPLOYEES
As of December 31, 1996, the Company employed 220 persons. The Company
believes that its employee relations are good and no employee lawsuits are
currently pending. The Company's employees are neither represented by labor
unions nor are they subject to any collective bargaining agreements.
Management knows of no current efforts to establish labor unions or collective
bargaining agreements.
A.M. BEST RATING
The Company's insurance subsidiaries are rated "A" (Excellent, the third
highest rating category) by A.M. Best, which rates insurance companies based
upon factors of concern to policyholders.
ITEM 2. PROPERTIES
The Company leases approximately 45,091 square feet for its home office at
3760 River Run Drive, Birmingham, Alabama under a long-term operating lease
from Torchmark Development Corporation, a wholly owned subsidiary of Torchmark
Corporation. The Company considers the office facilities to be suitable and
adequate for its current and anticipated level of operations.
HIG leases approximately 24,755 square feet for its operations at 1001
Bishop Street Pacific Tower, Honolulu, Hawaii under a long-term operating
lease. The Company considers the office facilities to be suitable and adequate
for HIG's current and anticipated level of operations.
ITEM 3. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
(a) Market Information
Since November 11, 1993, the Common Stock has been traded on the New York
Stock Exchange under the symbol "VTA". Prior to November 11, 1993, there was
no established public trading market for the Common Stock. The stock began
trading on November 11, 1993, at $16.67 per share. The amounts in the table
below have been adjusted for the 3-for-2 stock split paid on January 22, 1996.
17
<PAGE>
Quarterly high and low market prices of the Company's common stock in 1995
were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------ ------
<S> <C> <C>
March 31.................................................... $21.67 $18.42
June 30..................................................... 22.92 20.00
September 30................................................ 26.42 22.17
December 31................................................. 37.00 22.32
</TABLE>
Quarterly high and low market prices of the Company's common stock in 1996
were as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------ ------
<S> <C> <C>
March 31.................................................... $35.50 $28.25
June 30..................................................... 36.88 28.13
September 30................................................ 39.75 33.50
December 31................................................. 38.75 25.63
</TABLE>
(b) Number of Holders of Common Stock
There were 110 shareholders of record on January 15, 1997 including
shareholder accounts held in nominee form.
(c) Dividend History and Restrictions
The Company's Board of Directors has established a policy of declaring
regular quarterly cash dividends on the Company's common stock. The
declaration and payment of dividends will be at the discretion of the
Company's Board of Directors and will depend upon many factors, including the
Company's financial condition and earnings, the capital requirements of the
Company's operating subsidiaries, legal requirements and regulatory
constraints. Accordingly, there is no requirement or assurance that dividends
will be declared or paid.
The dividends paid by the Company on its common stock for the past two years
were as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER 1995 1996
------- ----- ----
<S> <C> <C>
First............................ $ 628 $708
Second........................... -0- 709
Third............................ 1,256 704
Fourth........................... 628 715
</TABLE>
Alabama, Hawaii and Texas impose restrictions on the payment of dividends to
the Company by the Company's insurance subsidiaries in excess of certain
amounts without prior regulatory approval. The Company does not currently
expect that regulatory constraints or other restrictions will affect its
ability to declare and pay the quarterly dividends contemplated by the
Company's dividend policy described above.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K.
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Gross Premiums Written.. $165,834 $225,428 $354,830 $586,782 $769,586
Net Premiums Written.... 110,069 158,953 259,710 459,228 540,632
Net Premiums Earned..... 98,383 143,810 259,952 381,802 511,912
Net Investment Income... 7,389 8,949 12,999 17,972 23,148
Investment Gains 505 (2) (695) 276 32
(Losses).................
Other................... 576 368 100 216 188
-------- -------- -------- -------- ---------
Total Revenues.......... 106,853 153,125 272,356 400,266 535,280
-------- -------- -------- -------- ---------
Losses and LAE Incurred. 50,279 75,369 140,281 219,091 294,920
Policy Acquisition and 44,503 58,281 88,295 111,806 154,598
Other Underwriting
Expenses.................
Amortization of -- -- -- 264 484
Goodwill.................
Interest Expense........ -- -- 1,708 5,273 10,059
-------- -------- -------- -------- ---------
Total Losses and 94,782 133,650 230,284 336,434 460,061
Expenses.................
-------- -------- -------- -------- ---------
Income From Operations 12,071 19,475 42,072 63,832 75,219
Before Income Tax........
Income Tax.............. 3,805 6,531 12,843 21,133 24,982
Change in Accounting -- 1,939 -- -- --
(1)......................
-------- -------- -------- -------- ---------
Net Income.............. $ 8,266 $ 14,883 $ 29,229 $ 42,699 $ 50,237
======== ======== ======== ======== =========
Earnings Per Share, 0.67 0.91 1.55 2.27 2.66
Before Change in
Accounting(6)............
Earnings Per Share(6)... 0.67 1.05 1.55 2.27 2.66
Shares used in per share 12,450 14,268 18,812 18,842 18,860
calculation(6)...........
BALANCE SHEET DATA (AT
END OF PERIOD)
Total Investments and $101,167 $250,948 $300,186 $422,516 $427,276
Cash.....................
Total Assets (2)........ 169,992 405,691 510,290 817,624 1,013,581
Reserves For Losses and 21,976 78,285 120,980 199,314 247,224
LAE (2)..................
Long Term Debt.......... -- 28,000 28,000 98,163 98,279
Total Liabilities (2)... 78,378 196,588 276,415 537,005 694,878
Stockholders' Equity.... 91,614 209,103 233,875 280,619 318,703
CERTAIN FINANCIAL RATIOS
AND OTHER DATA
GAAP
Loss and LAE Ratio...... 51.1% 52.4% 53.9% 57.4% 57.6%
Underwriting Expense 45.2 40.5 34.0 29.3 30.2
Ratio....................
-------- -------- -------- -------- ---------
Combined Ratio.......... 96.3% 92.9% 87.9% 86.7% 87.8%
======== ======== ======== ======== =========
SAP (3)
Loss and LAE Ratio...... 52.6% 51.7% 54.0% 57.2% 57.9%
Underwriting Expense 45.0 40.1 35.4 33.4 31.8
Ratio....................
-------- -------- -------- -------- ---------
Combined Ratio.......... 97.6% 91.8% 89.4% 90.6% 89.7%
======== ======== ======== ======== =========
Net Premiums Written to 1.61x .79x 1.18x 1.44x 1.53x
Surplus Ratio............
Surplus................. $ 68,159 $201,752 $212,507 $318,997 $ 352,695
STATUTORY INDUSTRY DATA
(4)
Combined Ratio for 115.8% 106.9% 108.3% 106.4% 107.0%(5)
Property and Casualty
Insurers.................
</TABLE>
- --------
(1) During the first quarter of 1993, Vesta adopted FASB Statement Number 109,
which resulted in a one-time addition to after-tax earnings of $2,321,000.
Vesta also adopted FASB Statement No. 106 which resulted in a one-time
after tax charge to earnings of $382,000. The implementation of these
standards is not expected to have a material impact on future earnings.
(2) Effective as of January 1, 1993, the Company adopted FASB Statement Number
113. The prior periods have not been restated. See Note J of Notes to
Consolidated Financial Statements.
(3) Statutory data have been derived from the financial statements of the
Company prepared in accordance with SAP and filed with insurance
regulatory authorities.
(4) The statutory industry data are taken from the A. M. Best Company,
Aggregates and Averages, 1996 Edition.
(5) 1996 estimate by A. M. Best, Reviews and Previews, January 1997 Edition.
(6) Restated for 3-for-2 stock split paid on January 22, 1996.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company writes treaty reinsurance and primary insurance on selected
personal and commercial lines risks. In both its reinsurance and primary
insurance operations, the Company focuses principally on property coverages,
for which ultimate losses generally can be more promptly determined than on
casualty risks. The Company's revenues from operations are derived primarily
from net premiums earned on risks written and reinsured by the Company,
investment income and investment gains or losses, while expenses consist
primarily of payments for claims losses and underwriting expenses, including
agents' commissions and operating expenses.
Significant factors influencing results of operations include the supply and
demand for property and casualty insurance and reinsurance, as well as the
number and magnitude of catastrophic losses such as hurricanes, windstorms,
fires and severely cold weather. Premium rate levels are affected by the
availability of insurance coverage which is influenced by levels of surplus in
the industry and other factors. Increases in surplus have generally been
accompanied by increased price competition among property and casualty
insurers. Pricing in this business has weakened slightly due to increased
availability of reinsurance market capacity.
The Company seeks to manage its risk exposure by adjusting the mix and
volume of business written in response to changes in price, balancing the
geographic distribution of its risks, maintaining extensive reinsurance and
retrocessional programs and applying the Company's knowledge of primary
insurance markets to its reinsurance business. Management believes that this
strategy accounts, in part, for combined ratios that are lower than the
property and casualty industry average.
The Company has historically followed a practice of maintaining low
retentions in its primary and reinsurance business to reduce the variability
of its earnings. As a result of this practice and the Company's focus on
short-tail property coverages, the Company's loss reserve levels historically
have remained relatively stable from year to year despite changes in premium
volume. The Company is continuing to cede portions of insurance risks while
using its capital base to gradually increase, on a selective basis, its
retention of certain property risks.
Because catastrophe loss events are by their nature unpredictable,
historical results of operations may not be indicative of expected results of
future operations. The Company markets its primary personal insurance products
principally in the southeastern United States and Hawaii, an area known for
hurricane risk. While the Company seeks to reduce its exposure to catastrophic
events through the purchase of reinsurance, the occurrence of one or more
major catastrophes in any given period could have a material adverse impact on
the Company's results of operations and financial condition and result in
substantial outflows of cash as losses are paid. In addition, the increased
underwritings of catastrophe related reinsurance, and potential residual
market assessments may also lead to increased variability in the Company's
loss ratio.
On December 31, 1996 the Company terminated the 75% pro rata reinsurance
contract on its homeowners and dwelling lines of business (excluding HIG)
produced through independent agents and also on its homeowners and dwelling
lines of business in the financial services business. The cancellation enables
the Company to increase its net writings in the personal lines of business.
20
<PAGE>
In July of 1996, Vesta Fire entered into a pro-rata reinsurance facility
covering substantially all primary and assumed business in order to provide
capital flexibility to take advantage of growth opportunities in the future.
This reinsurance facility had the effect of reducing net premiums written in
the second half of 1996 by $98.0 million.
COMPARISON OF THE FISCAL YEAR 1996 TO THE FISCAL YEAR 1995
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased by $182.8 million, or 31.2%, to $769.6 million for
the year ended December 31, 1996, from $586.8 million for the year ended
December 31, 1995, as gross premiums written on reinsurance risks increased by
$192.7 million and gross premiums written on primary insurance risks decreased
by $9.9 million. Net premiums written increased by $81.4 million, or 17.7%, to
$540.6 million for the year ended December 31, 1996, from $459.2 million for
the year ended December 31, 1995.
Gross premiums written for reinsurance increased by $192.7 million, or
45.6%, to $615.4 million for the year ended December 31, 1996, from $422.7
million for the year ended December 31, 1995. This growth was largely
attributable to an increase in gross premiums written on pro rata business.
The growth in pro-rata reinsurance gross premiums written was largely due to
growth in existing accounts as well as the addition of new accounts in the
1996 period as compared to the 1995 period. Net premiums written for
reinsurance increased $87.8 million, or 24.5%, to $446.1 million for the year
ended December 31, 1996, from $358.3 million for the year ended December 31,
1995.
Gross premiums written for primary insurance decreased by $9.9 million, or
6.0%, to $154.2 million for the year ended December 31, 1996, from $164.1
million for the year ended December 31, 1995, due to a $13.9 million decrease
in commercial lines premiums and a $4.0 million increase in personal lines
premiums. Gross premiums written for commercial products decreased 23.6%, to
$44.6 million for the year ended December 31, 1996, compared to $58.4 million
for the year ended December 31, 1995, due primarily to the Company's re-
underwriting of its book of business in an effort to increase profitability in
commercial lines. Gross premiums on personal lines rose 3.8% from $105.6
million for the year ended December 31, 1995 to $109.6 million for the year
ended December 31, 1996. The increase was primarily attributable to the
acquisition of HIG in June of 1995.
Net premiums written for primary insurance decreased by $6.3 million, or
6.2%, to $94.6 million for the year ended December 31, 1996, from $100.9
million for the year ended December 31, 1995. The decrease in net premiums
written was largely attributable to a pro-rata reinsurance facility entered
into by Vesta Fire Insurance Corporation ("Vesta Fire") to provide capital
flexibility to take advantage of growth opportunities.
Net premiums earned increased by $130.1 million, or 34.1%, to $511.9 million
for the year ended December 31, 1996, from $381.8 million for the year ended
December 31, 1995. The increase in net premiums earned is primarily
attributable to the increase in net written premiums for the year ended
December 31, 1996.
Net Investment Income. Net investment income increased by $5.1 million, or
28.3%, to $23.1 million for the year ended December 31, 1996, from $18.0
million for the year ended December 31, 1995. The weighted average yield on
invested assets (excluding realized and unrealized gains) was 5.6 % for the
year ended December 31, 1996, compared with 5.8% for the year ended December
31, 1995. The increase in net investment income is primarily attributable to
an increase in average invested assets relating to the receipt of proceeds
from the sale by the Company of $100 million of its 8.75% Senior Debentures
due 2025 and operating cash flow.
Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") increased by $76.0 million, or 34.7%, to $295.0 million for
the year ended December 31, 1996, from $219.0 million for the year ended
December 31, 1995. The dollar amount of loss and loss adjustment expenses
incurred increased during 1996 due to the growth in premiums earned. The loss
and LAE ratio for the year ended December 31, 1996 was 57.6% as compared to
57.4% for the year ended December 31, 1995.
21
<PAGE>
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses increased by $42.8 million, or 38.3%, to $154.6
million for the year ended December 31, 1996, from $111.8 million for the year
ended December 31, 1995. The underwriting expense ratio for the year ended
December 31, 1996, was 30.2%, as compared to 29.3% for the year ended
December 31, 1995. The increase in the underwriting expenses was primarily due
to the growth in premiums written.
Federal Income Taxes. Federal income taxes increased by $3.9 million, or
18.5%, to $25.0 million for the year ended December 31, 1996. The effective
rate on pre-tax income increased only slightly from 33.1% to 33.2 % for the
year ended December 31, 1996.
Net Income. For the reasons discussed above, net income increased by $7.5
million, or 17.6%, to $50.2 million for the year ended December 31, 1996, from
$42.7 million for the year ended December 31, 1995.
COMPARISON OF FISCAL YEAR 1995 TO FISCAL YEAR 1994
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased by $231.9 million, or 65.4%, to $586.8 million for
the year ended December 31, 1995, from $354.8 million for the year ended
December 31, 1994, as gross premiums written on reinsurance risks increased by
$180.7 million and gross premiums written on primary insurance risks increased
by $51.2 million. Net premiums written increased by $199.5 million, or 76.8%,
to $459.2 million for the year ended December 31, 1995, from $259.7 million
for the year ended December 31, 1994.
Gross premiums written for reinsurance increased by $180.7 million, or
74.7%, to $422.7 million for the year ended December 31, 1995, from $242.0
million for the year ended December 31, 1994. This growth was attributable to
an increase in gross premiums written on pro rata business. The growth in pro-
rata reinsurance gross premiums written was due to growth in existing accounts
as well as the addition of new accounts in the 1995 period as compared to the
1994 period. Net premiums written for reinsurance increased $165.2 million, or
85.6%, to $358.3 million for the year ended December 31, 1995, from $193.1
million for the year ended December 31, 1994.
Gross premiums written for primary insurance increased by $51.4 million, or
45.6%, to $164.1 million for the year ended December 31, 1995, from $112.7
million for the year ended December 31, 1994, due to a $9.4 million increase
in commercial lines premiums and a $41.9 million increase in personal lines
premiums. Gross premiums written for commercial products increased 19.2%, to
$58.4 million for the year ended December 31, 1995, compared to $49.0 million
for the year ended December 31, 1994, due primarily to increased sales of
property casualty products to a certain class of accounts and an increase in
transportation business. Gross premiums on personal lines rose 65.9%, from
$63.7 million for the year ended December 31, 1994 to $105.6 million for the
year ended December 31, 1995. The increase was primarily attributable to the
acquisition of HIG in June of 1995.
Net premiums written for primary insurance increased by $34.3 million, or
51.5%, to $100.9 million for the year ended December 31, 1995, from $66.6
million for the year ended December 31, 1994.
Net premiums earned increased by $121.8 million, or 46.9%, to $381.8 million
for the year ended December 31, 1995, from $260.0 million for the year ended
December 31, 1994. The increase in net premiums earned is primarily
attributable to the increase in net written premiums for the year ended
December 31, 1995.
Net Investment Income. Net investment income increased by $5.0 million, or
38.3%, to $18.0 million for the year ended December 31, 1995, from $13.0
million for the year ended December 31, 1994. The weighted average yield on
invested assets (excluding realized and unrealized gains) was 5.8% for the
year ended December 31, 1995, compared with 5.3% for the year ended December
31,
22
<PAGE>
1994. The increase in net investment income is primarily attributable to an
increase in average invested assets relating to the receipt of proceeds from
the sale by the Company of $100 million of its 8.75% Senior Debentures due
2025, operating cash flow, and the increase in yield on invested assets.
Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") increased by $78.8 million, or 56.2%, to $219.0 million for
the year ended December 31, 1995, from $140.2 million for the year ended
December 31, 1994. The loss and LAE ratio for the year ended December 31, 1995
was 57.4% as compared to 53.9% for the year ended December 31, 1994. This
increased loss and LAE ratio for 1995 period was due principally to an
increased frequency of losses and the effect of a greater percentage of pro-
rata business in the mix of reinsurance written by the Company. Pro-rata
business tends to carry lower, but more stable margins than excess
reinsurance.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses increased by $23.5 million, or 26.6%, to $111.8
million for the year ended December 31, 1995, from $88.3 million for the year
ended December 31, 1994. The underwriting expense ratio for the year ended
December 31, 1995 was 29.3%, as compared to 34.0% for the year ended December
31, 1994. The decrease in the underwriting expense ratio resulted principally
from the stability of fixed operating expenses relative to increases in net
premiums earned and, to a lesser extent, from a decline in contingent
commissions paid to agents and ceding reinsurers.
Federal Income Taxes. Federal income taxes increased by $8.3 million, or
64.8%, to $21.1 million for the year ended December 31, 1995. The effective
rate on pre-tax income increased from 30.5% to 33.1% for the year ended
December 31, 1995. This increase was due primarily to a smaller portion of
income from tax free municipal bonds in the 1995 period versus the 1994
period.
Net Income. For the reasons discussed above, net income increased by $13.5
million, or 46.1%, to $42.7 million for the year ended December 31, 1995, from
$29.2 million for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly owned property and casualty insurance companies including Vesta Fire.
The several insurance company subsidiaries comprising Vesta Group are
individually supervised by state insurance regulators. Vesta Fire is the
principal operating subsidiary of the Company.
As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire to meet its cash requirements
(including its debt service) and to pay dividends to its stockholders.
Transactions between Vesta Fire and the Company, including the payment of
dividends by Vesta Fire, are subject to certain limitations under the
insurance laws of Alabama. Specifically, Alabama and Texas law permits the
payment of dividends in any year which, together with other dividends or
distributions made within the preceding 12 months, do not exceed the greater
of 10% of statutory surplus as of the end of the preceding year or the net
income for the preceding year, with larger dividends payable only after
receipt of prior regulatory approval. Hawaii law limits dividends to the
lesser of 10% of statutory surplus as of the end of the preceding year or the
net income for the preceding year without prior approval. Based upon
restrictions presently in effect, the maximum amount available for payment of
dividends to the Company by its insurance subsidiaries in 1997 without prior
approval of regulatory authorities is approximately $50.7 million.
The principal uses of funds at the holding company level are to pay
operating expenses, interest on outstanding indebtedness and dividends to
stockholders. During the last three years, the insurance subsidiaries of the
Company have produced operating results sufficient to fund the needs of the
Company. There can be no assurance as to the ability of the Company's
insurance subsidiaries to continue to pay dividends at current levels.
However, the Company is not aware of any demands or
23
<PAGE>
commitments of the insurance subsidiaries that would prevent the payment of
dividends to the Company sufficient to meet the anticipated needs (including
debt service) of the Company over the next twelve months. See "Business--
Regulation."
During 1996, the Company paid approximately $2.8 million in dividends on its
common stock, and it is expected that the Company will pay approximately $2.8
million in 1997. The Company is also required to make semi-annual interest
payments of $4.4 million on its $100 million of 8.75% Senior Debentures due
2025, and semi-annual interest payments of $4.3 million on its $100 million of
8.525% Junior Subordinated Deferrable Interest Debentures issued to Vesta
Capital Trust I in connection with its sale of $100 million of 8.525% Capital
Securities.
In order to provide further liquidity, the Company replaced its $40 million
line of credit with a new $100 million line of credit. The line of credit is
with a group of domestic banks pursuant to a Credit Agreement dated September
24, 1996 (the "Credit Agreement"). The Credit Agreement relating to this line
of credit contains certain covenants that require, among other things, the
Company to maintain a certain consolidated net worth, maintain a certain
amount of investment income available for the payment of interest expense,
cause each insurance subsidiary to maintain a certain total adjusted capital
and which limit the amount of indebtedness the Company can have. The Company
is in compliance with these covenants.
The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. On a consolidated
basis, net cash provided from (used in) operations for the year ended December
31, 1996 and 1995, was $13.8 million and $19.9 million, respectively. Net cash
provided from operations in 1996 and 1995 was due principally to the large
increase in premiums written. Cash flow during 1996 was adversely affected by
the settlement of the unearned premium portfolio transfer on the Company's pro
rata reinsuance facility.
As of December 31, 1996, the Company's investment portfolio consisted of
cash and short-term investments (25.8%), U.S. Government securities (8.8%),
mortgage-backed securities (1.8%), corporate bonds (24.3%), foreign government
securities (0.5%), municipal bonds (36.9%) and equity securities (1.9%).
According to Moody's, 97.6% of the Company's portfolio is rated A or better.
The Company expects current cash flow to be sufficient to meet operating
needs, although invested assets have been categorized as available for sale in
the event short-term cash needs exceed available resources. The Company
adjusts its holdings of cash, short-term investments and invested assets
available for sale according to its seasonal cash flow needs. Beginning in
June of each year, the Company begins to increase its holdings of cash and
short-term investments. This practice facilitates the Company's ability to
meet its higher short-term cash needs during the hurricane season. See
"Business--Investments."
On November 1, 1996, the Company instituted a stock repurchase program under
which the Company may purchase up to two million shares of its common stock in
the open market at prevailing prices or in privately negotiated transactions,
depending on market conditions, stock price and other factors. As of December
31, 1996, the Company had purchased a total of 375,000 shares of its common
stock under this program for an aggregate purchase price of $10.2 million
(average cost of $27.31 per share). Purchases to date have been funded from
available working capital and the repurchased shares are being held in
treasury to be used for ongoing stock issuances such as issuances under the
Company's incentive compensation and stock option programs.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Capital Securities.
These securities have a 30 year maturity and are not redeemable except in
certain limited circumstances. These securities were sold in a private
24
<PAGE>
placement transaction to qualified institutional buyers under Rule 144A and
were not registered under the Securities Act of 1933. A portion of the
proceeds from the sale of these capital securities were used to repay
indebtedness under the Company's existing lines of credit and the remainder
will be used for general corporate purposes.
INFLATION
The Company does not believe its results have been materially affected by
inflation due in part to the predominantly short-tail nature of its business.
The potential adverse impacts of inflation include: (i) a decline in the
market value of the Company's fixed maturity investment portfolio; (ii) an
increase in the ultimate cost of settling claims which remain unresolved for a
significant period of time; and (iii) an increase in the Company's operating
expenses. Historically, the effect of inflation on the Company's reserves has
not been material.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report of Form 10-K. If any of these
assumptions or opinions prove incorrect, any forward-looking statements made
on the basis of such assumptions or opinions may also prove materially
incorrect in one or more respects.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. 26
Consolidated Balance Sheets at December 31, 1995 and 1996................. 27
Consolidated Statements of Operations for each of the years in the three-
year period
ended December 31, 1996.................................................. 28
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period
ended December 31, 1996.................................................. 29
Consolidated Statements of Cash Flows for each of the years in the three-
year period
ended December 31, 1996.................................................. 30
Notes to Consolidated Financial Statements................................ 31
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Vesta Insurance Group, Inc.
Birmingham, Alabama:
We have audited the consolidated financial statements of Vesta Insurance
Group, Inc. and subsidiaries as listed in Item 8 and the supporting schedules
as listed in Item 14(a)(2). These financial statements and financial statement
schedules are the responsibility of Vesta's management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedules 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 and
financial statement schedules 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vesta
Insurance Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
January 30, 1997, except for Note Q
which is as of January 31, 1997.
26
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1995 1996
-------- ----------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1995--$311,157; 1996--$306,026)............... $316,551 $ 308,898
Equity securities--at fair value: (cost: 1995--$595;
1996--$4,365)............................................ 3,208 8,326
Short-term investments................................. 95,927 105,415
-------- ----------
Total investments..................................... 415,686 422,639
Cash.................................................... 6,832 4,637
Accrued investment income............................... 5,548 5,392
Premiums in course of collection (net of allowances for
losses of
$70 in 1995 and $70 in 1996)........................... 184,717 259,275
Reinsurance balances receivable......................... 74,153 115,768
Reinsurance recoverable on paid losses.................. 44,335 69,698
Deferred policy acquisition costs....................... 67,831 75,532
Property and equipment.................................. 3,682 3,920
Other assets............................................ 7,318 49,381
Goodwill................................................ 7,522 7,339
-------- ----------
Total assets.......................................... $817,624 $1,013,581
======== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses.................... 199,314 247,224
Unearned premiums...................................... 168,512 228,325
-------- ----------
367,826 475,549
Accrued income taxes.................................... 15,969 21,463
Reinsurance balances payable............................ 27,748 51,162
Other liabilities....................................... 12,299 26,425
Short term debt......................................... 15,000 22,000
Long term debt.......................................... 98,163 98,279
-------- ----------
Total liabilities..................................... 537,005 694,878
Commitments and contingencies
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none
issued................................................... -- --
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1995--18,878,190 shares; 1996--18,970,695
shares................................................. 189 190
Additional paid-in capital.............................. 159,449 161,037
Unrealized investment gains, net of applicable taxes.... 5,205 4,442
Retained earnings....................................... 119,458 166,795
Receivable from issuance of restricted stock............ (3,162) (3,207)
Treasury stock.......................................... (520) (10,554)
-------- ----------
Total stockholders' equity............................ 280,619 318,703
-------- ----------
Total liabilities and stockholders' equity............ $817,624 $1,013,581
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
27
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Net premiums written............................. $259,710 $459,228 $540,632
(Increase) decrease in unearned premiums......... 242 (77,426) (28,720)
-------- -------- --------
Net premiums earned.............................. 259,952 381,802 511,912
Net investment income............................ 12,999 17,972 23,148
Realized investment gains (losses)............... (695) 276 32
Other............................................ 100 216 188
-------- -------- --------
Total revenues................................. 272,356 400,266 535,280
Expenses:
Losses incurred.................................. 132,048 206,513 273,090
Loss adjustment expenses incurred................ 8,233 12,578 21,830
Policy acquisition expenses...................... 69,009 87,022 127,503
Operating expenses............................... 15,779 18,747 21,167
Premium taxes and fees........................... 3,507 6,037 5,928
Interest on debt................................. 1,708 5,273 10,059
Goodwill amortization............................ -- 264 484
-------- -------- --------
Total expenses................................. 230,284 336,434 460,061
Net income before income taxes.................... 42,072 63,832 75,219
Income taxes...................................... 12,843 21,133 24,982
-------- -------- --------
Net income..................................... $ 29,229 $ 42,699 $ 50,237
======== ======== ========
Net income per common share.................... $ 1.55 $ 2.27 $ 2.66
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLE
ADDITIONAL FROM
PREFERRED COMMON PAID-IN UNREALIZED RETAINED TREASURY RESTRICTED
STOCK STOCK CAPITAL GAINS/(LOSSES) EARNINGS STOCK STOCK
--------- ------ ---------- -------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993.................. -- 188 156,916 2,575 51,923 -- (2,499)
Net income.............. -- -- -- -- 29,229 -- --
Issuance of stock (1)... -- -- 1,135 -- -- -- (1,135)
Change in restricted
stock receivable....... -- -- -- -- -- -- 257
Common dividends
declared ($.20 per
share)................. -- -- -- -- (1,881) -- --
Net change in unrealized
gains.................. -- -- -- (2,833) -- -- --
----- --- ------- ------ ------- ------- ------
Balance, December 31,
1994.................. -- 188 158,051 (258) 79,271 -- (3,377)
Net income.............. -- -- -- -- 42,699 -- --
Issuance of stock (1)... -- 1 1,297 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- 215
Treasury stock
transactions........... -- -- -- -- -- (520) --
Common dividends
declared
(0.20 per share)....... -- -- -- -- (2,512) -- --
Net change in unrealized
gains.................. -- -- -- 5,463 -- -- --
Tax Benefit from
exercise of stock
options................ -- -- 101 -- -- -- --
----- --- ------- ------ ------- ------- ------
Balance, December
31,1995............... -- 189 159,449 5,205 119,458 (520) (3,162)
Net income.............. -- -- -- -- 50,237 -- --
Issuance of stock(1).... -- 1 1,188 -- -- 563 --
Change in restricted
stock receivable....... -- -- -- -- -- -- (45)
Treasury stock
transactions........... -- -- 63 -- (64) (10,597) --
Common dividends
declared (0.15 per
share)................. -- -- -- -- (2,836) -- --
Net change in unrealized
gains.................. -- -- -- (763) -- -- --
Tax benefit from
exercise of stock
options................ -- -- 337 -- -- -- --
----- --- ------- ------ ------- ------- ------
Balance, December
31,1996............... -- 190 161,037 4,442 166,795 (10,554) (3,207)
===== === ======= ====== ======= ======= ======
</TABLE>
- --------
(1) See Note O.
See accompanying Notes to Consolidated Financial Statements
29
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
-------- --------- -------
<S> <C> <C> <C>
Operating Activities:
Net income...................................... $ 29,229 $ 42,699 $50,237
Adjustments to reconcile net income to cash
provided from operations:
Changes in:
Loss and LAE reserves......................... 42,684 63,986 47,910
Unearned premium reserves..................... (240) 67,514 59,813
Accrued income taxes.......................... 2,823 5,887 3,794
Reinsurance balances payable.................. 7,873 (214) (18,201)
Other liabilities............................. (2,489) 3,868 14,126
Premiums in course of collection.............. (10,207) (110,088) (74,558)
Reinsurance recoverable on paid losses........ (12,463) (16,295) (25,363)
Other assets.................................. 3,233 (5,195) (39,632)
Policy acquisition costs deferred.............. (29,057) (73,466) (60,797)
Policy acquisition costs amortized............. 23,826 38,419 53,096
Investment (gains) losses...................... 695 (276) (32)
Amortization and depreciation.................. 2,585 3,229 3,562
Loss on disposition of property, plant, -- (213) (115)
equipment........................................
-------- --------- -------
Net cash provided from operations............. 58,492 19,855 13,840
Investing Activities:
Investments sold or matured:
Fixed maturities held to maturity--matured, 10,992 18,316 --
called......................................
Fixed maturities available for sale--sold....... 13,752 7,664 --
Fixed maturities available for sale--matured, 7,134 46,940 43,811
called......................................
Equity securities............................... -- 2,738 --
Real estate..................................... -- 554 --
Investments acquired:
Fixed maturities held to maturity............... (55,747) -- --
Fixed maturities available for sale............. (52,651) (138,680) (37,239)
Equity securities............................... -- (82) (7,326)
Net cash paid for acquisition(1)................ -- (35,974) --
Net (increase) decrease in short-term 37,610 (17,571) (9,490)
investments......................................
Additions to property and equipment............. (829) (2,604) (1,754)
Dispositions of property and equipment.......... 130 533 236
-------- --------- -------
Net cash used in investing activities......... (39,609) (118,166) (11,762)
Financing Activities:
Long-term borrowing............................. -- (28,000) --
Issuance of long & short term debt.............. -- 113,162 7,116
Acquisition of treasury stock................... -- (520) (10,034)
Dividends paid.................................. (1,881) (2,512) (2,836)
Capital contributions........................... -- 1,614 1,481
-------- --------- -------
Net cash provided from (used in) financing (1,881) 83,744 (4,273)
activities.......................................
-------- --------- -------
Increase (decrease) in cash...................... 17,002 (14,567) (2,195)
Cash at beginning year........................... 4,397 21,399 6,832
-------- --------- -------
Cash at end of year.............................. $ 21,399 $ 6,832 $ 4,637
======== ========= =======
</TABLE>
- --------
(1) Vesta acquired The Hawaiian Insurance & Guaranty Company, Limited on June
19, 1995.
See accompanying Notes to Consolidated Financial Statements.
30
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta) was
incorporated by Torchmark Corporation on July 9, 1993 and capitalized on July
16, 1993 with a $50 million contribution from Torchmark and the contribution
from Torchmark of all of the outstanding common stock of J. Gordon Gaines,
Inc., Liberty National Reinsurance Company, Ltd, and Vesta Fire Insurance
Corporation and its wholly-owned subsidiaries. On November 18, 1993, the
Company completed an initial public offering of common stock which resulted in
proceeds to the Company of approximately $51 million. At year-end 1996,
Torchmark held approximately 27% of the outstanding common stock of the
Company with the balance publicly traded.
Nature of Operations: The Company is a holding company for a group of
property and casualty insurance companies (the "Vesta Group") that offer
treaty reinsurance and primary insurance on personal and commercial risks. The
lead insurer in the Vesta Group is Vesta Fire Insurance Corporation ("Vesta
Fire"). In both its reinsurance and primary insurance operations, the Company
focuses primarily on property coverages. Gross premiums written by the Company
in 1996 totalled $769.6 million. Gross premiums written in the reinsurance
line were $615.4 million in 1996, substantially all of which were on personal
(including automobile) risks and commercial property risks. Also, property
(including auto physical damage) risks accounted for approximately 89% of the
Company's gross premiums written in all lines in 1996.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing in this business has weakened slightly due to increased availability
of reinsurance market capacity.
Use of Estimates in the Preparation of the Financial Statements: 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. These estimates and
assumptions are particularly important in determining the premiums in course
of collection, reserves for losses and loss adjustment expenses and deferred
policy acquisition costs.
Investments: Investment securities are classified in three categories at
date of purchase and accounted for as follows: (i) Debt securities which are
purchased with the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost; (ii) Debt and
equity securities which are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and (iii) Debt and equity securities which are not classified as either held-
to-maturity or trading securities are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity.
Short-term investments are carried at cost and include investments in
certificates of deposit and other interest-bearing time deposits with original
maturities of one year or less. If an investment becomes permanently impaired,
such impairment is treated as a realized loss and the investment is adjusted
to net realizable value.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses realized on the disposition of investments are recognized as
revenues and are determined on a specific identification basis. Unrealized
gains and losses on equity securities and fixed maturities available for sale,
net of deferred income taxes, are reflected directly in stockholders' equity.
Determination of Fair Values of Financial Instruments: Fair values for cash,
short-term investments, short-term debt, receivables and payables approximate
their carrying value. Fair values for investment securities and long-term debt
are based on quoted market prices where available. Otherwise, fair values are
based on quoted market prices of comparable instruments.
Cash: Cash consists of balances on hand and on deposit in banks and financial
institutions.
Recognition of Premium Revenue: Earned premiums are generally recognized as
revenue on a pro rata basis over the policy term.
Losses and Loss Adjustment Expenses: The liability for losses and loss
adjustment expenses includes an amount determined from loss reports and
individual cases. It also includes an amount for losses incurred but not
reported which is based on past experience. Such liabilities are necessarily
based on estimates and, while management believes that the amount is adequate,
the ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting
liabilities are continually reviewed, and any adjustments are reflected in
earnings currently. These reserves are established on an undiscounted basis and
are reduced for estimates of salvage and subrogation.
Deferred Acquisition Costs: Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they relate. Anticipated investment income is
considered in determining recoverability of deferred acquisition costs on
certain lines.
Reinsurance: Reinsurance enables an insurance company, by assuming or ceding
reinsurance, to diversify its risk and limit its financial exposure to risk and
catastrophic events. However, reinsurance does not ordinarily relieve the
primary insurer from its obligations to the insured. In the ordinary course of
business, Vesta assumes business from other insurance organizations and also
reinsures certain risks with other insurance organizations. The Company accrues
premiums not yet reported based on historical experience.
Income Taxes: Vesta accounts for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the straight
line method over the estimated useful lives of these assets which range from 2
to 5 years for equipment. Ordinary maintenance and repairs are charged to
income as incurred.
Goodwill: The company amortizes goodwill straight-line over a period of 15
years.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
stockholders' equity or net income during the period involved.
Stock Split: On January 22, 1996 Vesta distributed one share for every two
shares owned by shareholders of record as of January 5, 1996 in the form of a
stock dividend. All prior year share and per share data has been restated to
give effect for the dividend.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Per Share: Net income per share is calculated by dividing net income
by the weighted average number of common share and common equivalent shares
outstanding. The weighted average number of common shares and common
equivalent shares outstanding for each period was 18,810,752, 18,841,756 and
18,860,427 for 1994, 1995 and 1996, respectively.
NOTE B--STATUTORY ACCOUNTING
Insurance subsidiaries of Vesta are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP.
Consolidated net income and stockholders' equity on a statutory basis for the
insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Net income..................................... $ 26,991 $ 14,745 $ 46,745
Stockholders' equity........................... 212,507 318,997 352,695
</TABLE>
The excess, if any, of stockholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to its stockholders without regulatory approval.
A reconciliation of Vesta's insurance subsidiaries' statutory net income to
Vesta's consolidated GAAP net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory net income....................... $ 26,991 $ 14,745 $ 46,745
Deferral of acquisition costs.............. 29,057 73,466 60,797
Amortization of acquisition costs.......... (23,826) (38,419) (53,096)
Differences in insurance policy 38 (571) 1,104
liabilities................................
Deferred income taxes...................... (1,415) (6,609) (5,499)
Income (loss) of non-insurance entities.... (1,616) 3 670
Investment gains........................... -- 348 --
Goodwill amortization...................... -- (263) (484)
-------- -------- --------
GAAP net income............................ $ 29,229 $ 42,699 $ 50,237
======== ======== ========
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE B--STATUTORY ACCOUNTING (CONTINUED)
A reconciliation of Vesta's insurance subsidiaries' statutory stockholders'
equity to Vesta's consolidated GAAP stockholders' equity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory stockholder's equity............. $212,507 $318,997 $352,695
Differences in insurance policy 1,845 1,273 2,376
liabilities................................
Deferred acquisition costs................. 32,784 67,831 75,532
Deferred income taxes...................... (6,878) (16,089) (21,463)
Nonadmitted assets......................... 11,570 6,411 8,606
Net liabilities of non-insurance entities.. (15,945) (103,198) (101,915)
Unrealized gain (loss) on investments...... (2,008) 5,394 2,872
-------- -------- --------
GAAP stockholders' equity.................. $233,875 $280,619 $318,703
======== ======== ========
</TABLE>
NOTE C--INVESTMENT OPERATIONS
Investment income is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Fixed maturities............................... $11,533 $13,839 $16,668
Equity securities.............................. 90 108 199
Short-term investments......................... 1,759 4,566 6,982
------- ------- -------
13,382 18,513 23,849
Less investment expense........................ (383) (541) (701)
------- ------- -------
Net investment income.......................... $12,999 $17,972 $23,148
======= ======= =======
</TABLE>
An analysis of gains (losses) from investments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- ------- -------
<S> <C> <C> <C>
Realized investment gains (losses) from:
Fixed maturities............................ $ (695) $ (78) $ (139)
Real estate................................. -- 300 --
Equity securities........................... -- 54 171
-------- ------- -------
(695) 276 32
======== ======= =======
Net change in unrealized investment gains
(losses) on:
Fixed maturities available for sale......... $ (4,186) $ 7,402 $(2,523)
Equity securities available for sale........ (172) 1,001 1,349
Applicable tax.............................. 1,525 (2,940) 411
-------- ------- -------
Net change in unrealized gains (losses)...... $ (2,833) $ 5,463 $ (763)
======== ======= =======
Net increase (decrease) in fair value
relative to amortized cost of fixed
maturities during the year.................. $(10,417) $12,985 $(2,523)
======== ======= =======
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities and equity securities by amortized cost and
estimated fair value at December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1995: COST GAINS LOSSES VALUE
- ----- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 33,265 $ 774 $ 0 $ 34,039
States, municipalities and political
subdivisions........................ 171,507 2,074 75 173,507
Foreign governments.................. 2,000 29 0 2,029
Corporate............................ 94,553 2,698 130 97,121
Mortgage-backed securities, GNMA
collateral.......................... 9,832 27 4 9,855
-------- ------ ---- --------
Total Fixed Maturities.............. 311,157 5,602 209 316,551
Equity securities..................... 595 2,614 0 3,208
-------- ------ ---- --------
Total portfolio..................... $311,752 $8,216 $209 $319,759
======== ====== ==== ========
<CAPTION>
1996:
- -----
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 37,398 $ 246 $ 69 $ 37,576
States, municipalities and political
subdivisions........................ 155,966 1,705 48 157,623
Foreign governments.................. 2,000 6 0 2,006
Corporate............................ 102,902 1,187 78 104,011
Mortgage-backed securities, GNMA
collateral.......................... 7,760 13 91 7,682
-------- ------ ---- --------
Total Fixed Maturities.............. 306,026 3,157 286 308,898
Equity securities..................... 4,365 3,961 0 8,326
-------- ------ ---- --------
Total portfolio..................... $310,391 $7,118 $286 $317,224
======== ====== ==== ========
</TABLE>
A schedule of fixed maturities held for investment by contractual maturity
at December 31, 1996 is shown below on an amortized cost basis and on a fair
value basis. Actual maturities could differ from contractual maturities due to
call or prepayment provisions.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $ 46,852 $ 46,934
Due from one to five years............................. 193,998 195,570
Due from five to ten years............................. 57,416 58,712
-------- --------
298,266 301,216
Mortgage backed securities, including
GNMA's and GNMA collateral............................ 7,760 7,682
-------- --------
Total.................................................. $306,026 $308,898
======== ========
</TABLE>
Proceeds from sales of fixed maturities were $14 million in 1994, $8 million
in 1995 and $40 million in 1996. Gross gains realized on those sales were $0
in 1994, $273 thousand in 1995, and $23 thousand in 1996. Gross losses on
those sales were $695 thousand in 1994, $351 thousand in 1995, and $161
thousand in 1996.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE D--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------- -------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Data processing equipment......... $2,323 $1,608 $2,610 $1,990
Furniture and office equipment.... 2,533 1,126 3,099 1,467
Other............................. 1,834 274 2,035 367
------ ------ ------ ------
$6,690 $3,008 $7,744 $3,824
====== ====== ====== ======
</TABLE>
Depreciation expense on property and equipment used in the business was $706
thousand, $1,037 thousand, and $1,415 thousand in each of the years 1994,
1995, 1996.
NOTE E--DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs for the years ended December 31, 1994 1995
and 1996 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................ $ 27,553 $ 32,784 $ 67,831
Deferred during period...................... 29,057 73,466 60,797
Amortized during period..................... (23,826) (38,419) (53,096)
-------- -------- --------
Balance at end of year...................... $ 32,784 $ 67,831 $ 75,532
======== ======== ========
</TABLE>
Commissions comprise the majority of the additions to deferred policy
acquisition costs in each year.
NOTE F--RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The table below presents a reconciliation of beginning and ending loss and
loss adjustment expense reserves for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Losses and LAE reserves at beginning of $ 78,285 $120,980 $ 199,314
year........................................
Increases (decreases) in provision for
losses and LAE for claims incurred:
Current year............................... 139,253 217,293 291,812
Prior year................................. 1,028 1,798 3,109
Losses and LAE payments for claims incurred:
Current year............................... (78,907) (92,924) (158,408)
Prior year................................. (18,679) (47,833) (88,603)
-------- -------- ---------
Gross loss and LAE reserves................. $120,980 $199,314 $ 247,224
======== ======== =========
</TABLE>
NOTE G--RELATED PARTY TRANSACTIONS
Vesta leases office space from Torchmark Development Corporation, a wholly
owned subsidiary of Torchmark. Rent expense of $439 thousand, $494 thousand
and $566 thousand was charged to operations for the years ended December 31,
1994, 1995 and 1996, respectively, related to this lease agreement.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
Waddell & Reed Asset Management Company, a wholly owned subsidiary of
Torchmark ("WRAMCO"), provides investment advice and services to the Company
and its subsidiaries in connection with the management of their respective
portfolios pursuant to an Investment Services Agreement. The Company paid $127
thousand, $222 thousand and $409 thousand in fees to WRAMCO pursuant to the
Investment Services Agreement in 1994, 1995 and 1996, respectively.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned
subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance
Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered
into a Marketing and Administrative Services Agreement, pursuant to which
Vesta Fire marketed certain of its industrial fire insurance products through
agents of Liberty National. Under this agreement, Liberty National pays to
Vesta Fire an amount equal to all premiums collected by Liberty National after
deducting all expenses incurred by Liberty National which are directly
attributable to the industrial fire insurance products and after deducting a
fee for administrative services. Such fee for 1994, 1995 and 1996 was $2,849
thousand, $2,305 thousand and $1,702 thousand, respectively. This agreement
was terminated effective April 30, 1995, and these products are no longer
marketed through Liberty National agents. However, Liberty National continues
to service the existing business.
NOTE H--COMMITMENTS AND CONTINGENCIES
Litigation: The Company, through its subsidiaries, is routinely a party to
pending or threatened legal proceedings and arbitrations. These proceedings
involve alleged breaches of contract, torts, including bad faith and fraud
claims and miscellaneous other causes of action. These lawsuits may include
claims for punitive damages in addition to other specified relief. Based upon
information presently available, and in light of legal and other defenses
available to the Company and its subsidiaries, management does not consider
liability from any threatened or pending litigation to be material.
Leases: The Company leases office space for its home office and HIG under
operating lease arrangements. These leases contain various renewal options and
escalation clauses. Rental expense for operating leases was $439 thousand,
$706 thousand, and $1,014 thousand, for the years ending December 31, 1994,
1995, and 1996, respectively. Future minimum rental commitments required under
these leases are approximately $1.0 million per year.
Restrictions on Dividends: Vesta relies on dividends from its subsidiaries
to meet its cash requirements and to pay dividends to its stockholders. The
payment of dividends by Vesta's insurance subsidiaries are subject to certain
limitations imposed by the insurance laws of the States of Alabama, Hawaii and
Texas. The restrictions are generally based on certain levels of surplus,
investment income and operating income, as determined under statutory
accounting practices. Alabama, Texas and most other states that regulate
Vesta's operations permit dividends in any year which together with other
dividends or distributions made within the preceding 12 months, do not exceed
the greater of (i) 10% of statutory surplus as of the end of the preceding
year or (ii) the net income for the preceding year, with larger dividends
payable only upon prior regulatory approval. Hawaii law limits dividends to
the lesser of (i) and (ii) without prior approval. Certain other extraordinary
transactions between an insurance company and its affiliates, including sales,
loans or investments which in any twelve-month period aggregate at least 3% of
its admitted assets or 25% of its statutory capital and surplus, also are
subject to prior approval by the Department of Insurance. Based upon
restrictions presently in effect, the maximum amount available for payment of
dividends to the Company by its insurance subsidiaries in 1997 without prior
approval of regulatory authorities is approximately $50.7 million.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the risk-based capital levels for each of
the Company's insurance subsidiaries did not trigger regulatory attention.
Concentrations of Credit Risk: Vesta maintains a highly-diversified
investment portfolio with limited concentrations in any given region,
industry, or economic characteristic. At December 31, 1996, the investment
portfolio consisted of securities of the U.S. government or U.S. government
backed securities (9%); mortgage backed securities, GNMA collateral (2%);
investment grade corporate bonds (24%); cash and short-term investments (26%);
securities of state and municipal governments (36%); securities of foreign
governments (1%); and corporate common stocks (2%). Corporate equity and debt
investments are made in a wide range of industries. All of Vesta's investments
at year-end 1996 were rated investment-grade.
At December 31, 1996, the Company has unsecured reinsurance recoverables
from two reinsurers that are in excess of 2% of statutory surplus, the largest
of which is $15 million.
NOTE I--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Vesta's non-cash transactions, which are not
reflected on the Statement of Cash Flow, as required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- --------- -------
<S> <C> <C> <C>
Paid in capital from tax benefit of stock option $ -- $ 101 $ 337
exercises.........................................
Transfer of fixed maturities from held to maturity
to available for sale............................ $ -- $121,627 $ --
</TABLE>
The following table summarizes certain amounts paid during the period as
required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C> <C>
Interest paid.................................. $ 1,708 $ 5,253 $ 9,494
Income taxes paid.............................. $10,701 $14,989 $21,500
</TABLE>
NOTE J--REINSURANCE
Vesta engages in reinsurance ceded transactions as part of its overall
underwriting and risk management strategy. Vesta's reinsurance ceded programs
include coverages which limit the amount of individual claims to a fixed
amount or percentage and which limit the amount of claims related to
catastrophes.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE J--REINSURANCE (CONTINUED)
The effect on premiums earned and losses and loss adjustment expenses
incurred of all reinsurance ceded transactions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Reinsurance ceded:
Premiums ceded.................................. $86,805 $117,654 $195,202
Losses and loss adjustment expenses recovered
and recoverable................................ 83,890 90,522 134,756
</TABLE>
The amounts deducted from reserves for unpaid losses and loss adjustment
expenses and unearned premiums that Vesta would remain liable for should
reinsuring companies be unable to meet their obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Losses and loss adjustment expense................ $ 49,769 $ 60,343
Unearned premiums................................. 24,384 55,477
</TABLE>
Vesta engages in assumed reinsurance transactions as part of its overall
business strategy. The effect on premiums earned and losses and loss
adjustment expenses of all assumed reinsurance transactions, including
involuntary pools, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Premiums assumed................................ $240,567 $359,546 $545,290
Losses and loss adjustment expenses assumed..... 145,697 201,152 331,972
</TABLE>
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------ ------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $111,601 $106,190 $163,005 $139,910 $153,413 $161,824
Assumed................. 243,229 240,567 423,997 359,546 616,173 545,290
Ceded................... (95,120) (86,805) (127,554) (117,654) (228,954) (195,202)
-------- -------- -------- -------- -------- --------
Net premiums.......... 259,710 259,952 459,228 381,802 540,632 511,912
======== ======== ======== ======== ======== ========
</TABLE>
NOTE K--INCOME TAXES
Income tax expense for the years ended December, 1994, 1995 and 1996 was
allocated as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
Operating income..................................... $12,842 $21,133 $24,982
<S> <C> <C> <C>
Stockholder's equity, for unrealized gains........... (1,525) 2,941 (413)
Stockholder's equity, for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes........................ -- 101 337
------- ------- -------
$11,317 $24,175 $24,906
======= ======= =======
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE K--INCOME TAXES (CONTINUED)
Income tax expense attributable to income from operations consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current tax expense................................ $11,428 $13,406 $19,483
Deferred tax expense............................... 1,415 7,727 5,499
------- ------- -------
Total............................................. $12,843 $21,133 $24,982
======= ======= =======
</TABLE>
Vesta's effective income tax rate differed from the statutory income tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate. $14,725 35% $22,433 35% $26,496 35%
Increases (reductions) in tax
resulting from:
Tax exempt investment income..... (1,816) (4) (1,974) (3) (2,240) (3)
Other............................ (66) 0 674 1 726 1
------- --- ------- --- ------- ---
$12,843 31% $21,133 33% $24,982 33%
======= === ======= === ======= ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities included in
other liabilities at December 31, 1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
------- -------
Deferred tax assets:
<S> <C> <C>
Unearned and advance premiums............................ $10,089 $12,099
Discounted unpaid losses................................. 3,220 4,325
Other.................................................... 629 --
------- -------
Total gross deferred tax assets........................... $13,938 $16,424
======= =======
Deferred tax liabilities:
Deferred acquisition costs............................... $23,741 $26,436
Contingent commissions................................... 3,338 8,010
Unrealized gains......................................... 2,803 2,390
Other.................................................... 145 1,051
------- -------
Total gross deferred tax liabilities...................... $30,027 $37,887
------- -------
Net deferred tax liability................................ $16,089 $21,463
======= =======
</TABLE>
A valuation allowance for deferred tax assets, as of December 31, 1995 and
1996, was not necessary.
NOTE L--RETIREMENT PLANS
Vesta has a defined contribution retirement and savings plan and a
supplemental executive retirement plan. These plans are fully funded at year-
end 1996. Vesta's total cost for benefits under these plans since the Offering
date was $250,391 for 1994, $319,337 for 1995 and $348,125 for 1996.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE M--SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Revenues
Reinsurance Operations
Net premiums earned........................... $191,700 $290,657 $ 415,028
Net investment income......................... 9,503 13,682 18,767
Investment gains (losses)..................... (512) 210 26
-------- -------- ----------
Total reinsurance............................ 200,691 304,549 433,821
Primary insurance operations
Net premiums earned........................... 68,252 91,145 96,884
Net investment income......................... 3,496 4,290 4,381
Investment gains (losses)..................... (183) 66 6
-------- -------- ----------
Total primary................................ 71,565 95,501 101,271
Other operations revenues...................... 100 216 188
-------- -------- ----------
Total revenues............................... $272,356 $400,266 $ 535,280
======== ======== ==========
Total pretax income (loss) from operations
Reinsurance Operations
Underwriting gain (loss)...................... $ 41,666 $ 35,786 $ 55,712
Net investment income......................... 9,503 13,682 18,767
Investment gains (losses)..................... (512) 210 26
-------- -------- ----------
Total reinsurance............................ 50,657 49,678 74,505
Primary insurance operations
Underwriting gain (loss)...................... (10,290) 15,119 6,682
Net investment income......................... 3,496 4,290 4,381
Investment gains (losses)..................... (183) 66 6
Goodwill...................................... -- (264) (484)
-------- -------- ----------
Total primary................................ (6,977) 19,211 10,585
Other operations
Other income.................................. 100 216 188
Interest expense.............................. (1,708) (5,273) (10,059)
-------- -------- ----------
Total other income (expense)................. (1,608) (5,057) (9,871)
-------- -------- ----------
Total pretax income from operations.......... $ 42,072 $ 63,832 $ 75,219
======== ======== ==========
Total identifiable assets
Reinsurance operations........................ $366,914 $614,708 $ 815,052
Primary operations............................ 143,376 202,916 197,529
-------- -------- ----------
Total identifiable assets.................... $510,290 $817,624 $1,013,581
======== ======== ==========
</TABLE>
NOTE N--DEBT
On July 19, 1995, the Company issued $100 million of its 8.75% Senior
Debentures due July 15, 2025. The Debentures are not subject to redemption or
any sinking fund prior to maturity. The Debentures are unsecured and rank on
parity with all of its other unsecured and unsurbordinated indebtedness. The
Debentures contain covenants that limit the ability of the Company or its
subsidiaries to issue, sell or otherwise dispose of shares of voting common
stock of any Restricted Subsidiary and limit the ability of the Company or its
subsidiaries to pledge the shares of capital stock of any subsidiary. The
Debentures also place certain limitations on the Company's ability to
consolidate or merge with or sell its assets substantially as an entirety. The
Company used the proceeds from the sale to repay the $28,000,000 loan from
United Investors Management Company,
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE N--DEBT (CONTINUED)
a subsidiary of Torchmark and to increase the capital and surplus of its
principal insurance subsidiary, Vesta Fire Insurance Corporation.
Vesta has a $100 million line of credit. The line of credit is with a group
of domestic banks pursuant to a Credit Agreement dated September 24, 1996 (the
"Credit Agreement"). The interest charge is either (i) the London Interbank
Rate plus 0.25% or (ii) the higher of the prime rate and the Federal Funds
rate plus 0.5%, at the Company's discretion. At December 31, 1996 the London
Interbank three month rate was 5.5625% and the Federal Funds rate was
5.25%.There was a balance of $22 million under this line of credit at December
31, 1996. The line of credit contains covenants which (1) restricts the
Company from incurring consolidated indebtedness greater than 42.5% of the sum
of the Company's consolidated indebtedness and consolidated net worth, (2)
requires the Company to maintain consolidated net worth to be equal to or
greater than $250,000,000 plus 50% of the aggregate of consolidated net income
for each fiscal quarter ending after September 30, 1996 up to and including
the fiscal quarter then ending minus the aggregate amount of all dividends
paid with respect to the Company's equity securities at any time after
September 30, 1996, (3) requires the Company to maintain a ratio of
consolidated income before interest and taxes to consolidated interest expense
of 3.0 to 1.0, and (4) requires the Company to maintain total adjusted capital
(within the meaning of Risk-Based Capital for Insurers Model Act ("Model
Act")) of Vesta Fire to be equal to or greater than 150% of the applicable
"Company Action Level RBC" (within the meaning of the model act).
NOTE O--STOCK OPTIONS
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, Accounting for Stock-Based Compensation ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the
intrinsic valued based accounting method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has continued to use this method to account for its stock options. However,
FAS 123 requires entities electing to remain with the intrinsic method of
accounting to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as well
as other disclosures about the Company's stock-based employee compensation
plans. Information about the Company's stock option plans and the related
required disclosures follow.
Prior to completion of the Company's initial public offering, the Company's
stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan
("Plan"), which provided for grants to the Company's executive officers of
restricted stock, stock options, stock appreciation rights, and deferred stock
awards, and in certain instances grants of options to directors. The Company's
stockholders approved certain amendments to the Plan effective May 16, 1995,
including an amendment to increase the shares of the Company's common stock
available for awards under the Plan from 1,091,400 shares to 2,221,998 shares
and an amendment to delete the provision for the grant of options to non-
employee directors. The Company's stockholders also approved the Vesta
Insurance Group, Inc. Non-Employee Director Stock Plan ("Director Plan")
effective May 16, 1995, which provides for grants to the Company's non-
employee directors of stock options and restricted stock.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively; risk-free interest rates of 6.33
percent and 6.37 percent; dividend yields of 0.37 percent for both years;
volatility factor of the expected market price of the Company's common stock
of 0.34 for both years; and a weighted-average expected life of the options of
ten years for both years.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
The Company's actual and pro forma information follows (in thousands except
for earnings per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
---------------
1995 1996
------- -------
<S> <C> <C>
NET INCOME:
As reported............................................. $42,699 $50,237
Pro forma............................................... 41,417 47,444
NET INCOME PER COMMON SHARE:
As reported............................................. $ 2.27 $ 2.66
Pro forma............................................... 2.20 2.52
</TABLE>
The following summary sets forth activity under the Plan for the years ended
December 31:
<TABLE>
<CAPTION>
1994 1995 1996
----------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of the year............ 804,896 $16.09 828,896 $16.06 1,055,699 $18.37
Granted................. 24,000 15.23 414,409 21.98 129,394 31.93
Exercised............... -- -- 42,750 15.63 55,667 15.51
Forfeited............... -- -- 144,856 16.31 106,554 16.99
------- ------ --------- ------ --------- ------
Outstanding--end of the
year................... 828,896 $16.06 1,055,699 $18.37 1,022,872 $20.38
======= ====== ========= ====== ========= ======
Weighted-average fair
value of options
granted during the
year................... $ 21.30 $ 28.37 $ 25.85
</TABLE>
Of the 1,022,872 outstanding options at December 31, 1996, 549,087 were
exercisable with the remaining having varying vesting periods. Exercise prices
for options outstanding as of December 31, 1996 ranged from $15.00 to $35.375.
Unexercised options with exercise prices of less than $25.00 for 810,358
shares had a weighted average contractual life of 7.8 years and a weighted
average exercise price of $17.86 while unexercised options with exercise
prices greater than $25.00 for 212,514 shares had a weighted average
contractual life of 9.6 years and a weighted average exercise price of $30.01.
In 1993, the Company entered into restricted stock agreements under which
Vesta granted 153,300 shares of common stock at $10.26 per share to officers
of the Company in exchange for promissory notes. In 1994, an additional 60,000
shares of Common Stock at $18.92 per share were issued to an officer of the
Company under a restricted stock agreement in exchange for a promissory note.
The common stock is being held by the Company as security for repayment of the
notes. A portion of the shares will be released to the officers annually as
they repay the promissory notes. The Company intends to pay cash bonuses each
year in amounts sufficient to reduce the notes by the amount of the purchase
price for the shares which are earned in that year. During 1995 the company
acquired 31,192 shares of its common stock with respect to previously granted
awards of restricted stock in exchange for release of indebtedness of
$320,036. The balance of the notes at December 31, 1995 was $1,962,150. During
1996 the Company acquired 19,564 shares of its common stock with respect to
previously granted awards of restricted stock in exchange for release of
indebtedness of $168,951. The balance of the notes at December 31, 1996 was
$1,580,269. The promissory notes and the unearned compensation are shown as
deductions from stockholders equity.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
In 1995, the Company entered into restricted stock agreements under which
the Company granted 23,333 shares of restricted common stock to certain
officers of the Company. In 1996, the Company entered into restricted stock
agreements under which the Company granted 23,144 shares of restricted common
stock to certain officers of the Company and 5,664 shares of restricted common
stock to certain directors of the Company. The common stock with respect to
all awards of restricted stock is being held by the Company until the
restrictions lapse.
NOTE P--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands except
per share data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Gross premiums written............ $194,460 $185,567 $173,884 $215,675
Net premiums written.............. 152,509 165,494 67,568 155,061
Premiums earned................... 145,136 167,135 88,344 111,297
Net investment income.............
Operating costs and expenses...... 131,965 147,750 71,748 100,557
Net income........................ 10,509 15,141 13,412 11,174
-------- -------- -------- --------
Per Share Data:
Net income........................ 0.56 0.80 0.71 0.60
Stockholders' equity per share.... 15.28 16.01 16.72 17.16
Cash dividends per share.......... 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- --------
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Gross premiums written............ $111,414 $115,924 $202,186 $157,258
Net premiums written.............. 90,391 97,890 150,153 120,794
Premiums earned................... 75,899 78,332 125,634 101,937
Net investment income............. 3,853 4,070 4,820 5,230
Operating costs and expenses...... 67,913 65,085 105,023 92,613
Net income........................ 7,807 11,645 15,704 7,543
-------- -------- -------- --------
Per Share Data:
Net income........................ 0.41 0.62 0.84 0.40
Stockholders' equity per share.... 12.89 13.54 14.40 14.89
Cash dividends per share.......... 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- --------
</TABLE>
NOTE Q--SUBSEQUENT EVENT
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Capital Securities.
These securities have a 30 year maturity and are not redeemable except in
certain limited circumstances. These securities were sold in a private
placement transaction to qualified institutional buyers under Rule 144A and
were not registered under the Securities Act of 1933. A portion of the
proceeds from the sale of these capital securities were used to repay
indebtedness under the Company's existing lines of credit and the remainder
will be used for general corporate purposes.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and "Compensation and Other Transactions with
Executive Officers and Directors" in the Proxy Statement for the Annual
Meeting of Stockholders to be held May 20, 1997 (the "Proxy Statement"), which
is to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Compensation and Other Transactions with Executive Officers
and Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the
section entitled "Principal Stockholders" in the Proxy Statement.
(b)Security ownership of management:
Information required by this item is incorporated by reference from the
section entitled "Stock Ownership" in the Proxy Statement.
(c)Changes in control:
The Company knows of no arrangements, including any pledges by any person
of its securities, the operation of which may at a subsequent date result
in a change of control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Compensation Committee Interlocks and Insider Participation;
Other Transactions" in the Proxy Statement.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as a part of this report:
<TABLE>
<CAPTION>
Page of
this
Report
-------
<S> <C>
(1) Financial Statements:
Vesta Insurance Group, Inc.
Independent Auditors' Report......................................... 26
Consolidated Balance Sheets at December 31, 1995 and 1996............ 27
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1996........................... 28
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year
period ended December 31, 1996...................................... 29
Consolidated Statements of Cash Flow for each of the years in the
three-year period ended December 31, 1996........................... 30
Notes to Consolidated Financial Statements........................... 31
(2) Schedules Supporting Financial Statements for the three years
ended December 31, 1996:
II.Condensed Financial Information of Registrant (Parent Company)..... 50
III.Supplemental Insurance Information (Consolidated)................. 53
IV.Reinsurance (Consolidated)......................................... 55
V.Valuation and Qualifying Accounts (Consolidated).................... 56
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(3) Exhibits
Exhibits are listed in the index of Exhibits at page 47.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
</TABLE>
46
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company, dated
September 1, 1993 (filed as an exhibit to Amendment No. 1 to
the Registration Statement on Form S-1 (Registration No. 33-
68114) of Vesta Insurance Group, Inc., filed on October 18,
1993 and incorporated herein by reference (File No. 1-12338))
3.2 By-Laws of the Company (Amended and Restated as of October 1,
1993) (filed as an exhibit to Amendment No. 1 to the Registra-
tion Statement on Form S-1 (Registration No. 33-68114) of
Vesta Insurance Group, Inc., filed on October 18, 1993 and in-
corporated herein by reference (File No. 1-12338))
4.1 Indenture between the Company and Southtrust Bank of Alabama,
National Association, dated as of July 19, 1995.
4.2 Supplemental Indebenture between the Company and Southtrust
Bank of Alabama, National Association, dated July 19, 1995.
10.1 Separation and Public Offering Agreement between Torchmark
Corporation and the Company dated September 13, 1993 (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1993, filed on March 28, 1994 and incorporated
herein by reference (File No. 1-2338))
10.2 Marketing and Administrative Services Agreement between Lib-
erty National Fire Insurance Company, Liberty National Insur-
ance Corporation and Liberty National Life Insurance Company
dated September 13, 1993 (filed as an exhibit to the Company's
Form 10-K for the year ended December 31, 1993, filed on March
28, 1994 and incorporated herein by reference (File No. 1-
2338))
10.3 Investment Services Agreement between Waddell & Reed Asset
Management Company and the Company (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)) dated September 13, 1993.
10.5 Management Agreement between J. Gordon Gaines, Inc., Liberty
National Fire Insurance Company, Sheffield Insurance Corpora-
tion, Liberty National Insurance Corporation and Vesta Insur-
ance Corporation dated November 15, 1994 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-2338))
10.6 Form of Restricted Stock Agreement (filed as an exhibit to the
Registration Statement on Form S-1 (Registration No. 33-68114)
of Vesta Insurance Group, Inc., filed on August 31, 1993 and
incorporated herein by reference (File No. 1-12338))
10.7* The Company's Long Term Incentive Plan as amended effective as
of May 16, 1995 (filed as an exhibit to the Company's Form 10Q
for the quarter ended June 30, 1995, filed on August 14, 1995
and incorporated herein by reference (File No. 1-12338))
10.8* Form of Non-Qualified Stock Option Agreement entered into by
and between the Company and certain of its executive officers
and directors.
10.9* Cash Bonus Plan of the Company (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1993,
filed on March 28, 1994 and incorporated herein by reference
(File No. 1-2338))
10.10* J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1994, filed on March 29, 1995 and incorporated
herein by reference (File No. 1-12338))
10.11* J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an
exhibit to the Company's Form 10-K for the year ended December
31, 1994, filed on March 29, 1995 and incorporated herein by
reference (File No. 1-12338))
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.12* The Company's Non-Employee Director Stock Plan (filed as an
exhibit to the Company's
10-Q for the quarter ended June 30, 1995, filed on August 14,
1995 and incorporated herein by reference (File No. 1-12338))
10.13 Office Lease between the Company and Torchmark Development
Corporation, dated as of April 20, 1992 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-12338))
10.14 Agency Agreement between Liberty National Fire Insurance Com-
pany, Vesta Insurance Corporation, Sheffield Insurance Corpo-
ration, and Overby-Seawell Company (filed as an exhibit to
Amendment No. 1 to the Registraion Statement on Form S-1 (Reg-
istration No. 33-68114) of Vesta Insurance Group, Inc., filed
on October 18, 1993 and incorporated herein by reference (File
No. 1-12338))
10.15 Commercial/Personal Property Risk Excess Reinsurance Con-
tracts, dated July 1, 1993,
constituting the Company's Direct Per Risk Treaty Program, be-
tween Vesta Fire Insurance Corporation, Sheffield Insurance
Corporation, Vesta Insurance Corporation, Vesta Lloyds Insur-
ance Company and various reinsurers (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)) Renewed July 1, 1996.
10.16 Catastrophe Reinsurance Contracts, dated July 1, 1995, consti-
tuting the Company's Direct Property Catastrophe Program, be-
tween Vesta Fire Insurance Corporation, Vesta Insurance Corpo-
ration, Sheffield Insurance Corporation, Vesta Lloyds Insur-
ance Company and various reinsurers (filed as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994,
filed on March 29, 1995 and incorporated herein by reference
(File No. 1-12338)). Renewed July 1, 1996.
10.17 Specific Regional Castastrophe Excess Contracts, dated January
1, 1996, constituting the Company's Regional Property Catas-
trophe Program, between Vesta Fire Insurance Corporation and
various reinsurers (filed as an exhibit to the Company's Form
10-K for the year ended December 31, 1995, filed on March 28,
1996 and incorporated herein by reference (File No. 1-12338)).
Renewed January 1, 1997.
10.18 Casualty Excess of Loss Reinsurance Agreements, dated January
1, 1994, constituting the Company's Casualty Excess of Loss
Reinsurance Program, between Vesta Fire Insurance Corporation,
Vesta Insurance Corporation, Sheffield Insurance Corporation,
Vesta Lloyds Insurance Company and various reinsurers (filed
as an exhibit to the Company's Form 10-K for the year ended
December 31, 1993, filed on March 28, 1994 and incorporated
herein by reference (File No. 1-12338)). Renewed January 1,
1997.
10.19 Amendment to Catastrophe Reinsurance Contracts, dated July 1,
1995, constituting the Company's Direct Property Catastrophe
Program, between Vesta Fire Insurance Corporation, Vesta In-
surance Corporation, Sheffield Insurance Corporation, Vesta
Lloyds Insurance Company, Hawaiian Insurance & Guaranty Compa-
ny, Limited and various reinsurers. (Filed as an exhibit to
the Company's Form 10-Q for the quarter ended September 30,
1995, filed on November 14, 1995 and incorporated herein by
reference (File No. 1-12338)). Renewed July 1, 1996.
10.20 Amendment to Catastrophe Reinsurance Contracts, dated January
1, 1996, constituting the Company's Direct Property Catastro-
phe Program, between Vesta Fire Insurance Corporation, Vesta
Insurance Corporation, Sheffield Insurance Corporation, Vesta
Lloyds Insurance Company, Hawaiian Insurance & Guaranty Compa-
ny, Limited and various reinsurers (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1995,
filed on March 28, 1996 and incorporated herein by reference
(File No. 1-12338)). Renewed January 1, 1997.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.21 Credit Agreement between Vesta Insurance Group, Inc. and
Southtrust Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of
Tokyo-Mitsubishi Trust Company. The First National Bank of
Chicago, Wachovia Bank of Georgia, N.A. and First Union Na-
tional Bank of North Carolina, as agent dated September 24,
1996 (filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 1996, filed on November 14, 1996
and incorporated herein by reference (File No. 1-12338)).
10.22 Quota Share Reinsurance Contract, effective July 1, 1996, cov-
ering all lines of business written by Vesta Fire Insurance
Coprporation, Sheffield Insurance Corporation, Vesta Insurance
Corporation, Vesta Lloyds Insurance Company, The Hawaiian In-
surance and Guaranty Company, Ltd. and various reinsurers
(filed as an exhibit to the Company's Form 10-Q for the quar-
ter ended September 30, 1996, filed on November 14, 1996 and
incorporated herein by reference (File No. 1-12338)).
11 Computation of Net Income Per Common Share.
21 List of Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
</TABLE>
- --------
*These are the Company's compensatory plans.
Exhibit 11. Statement re computation of per share earnings
VESTA INSURANCE GROUP, INC. COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net Income.................................. $29,229,394 $42,698,844 $50,236,581
=========== =========== ===========
Weighted average shares outstanding......... 18,810,756 18,841,756 18,860,427
=========== =========== ===========
Primary earnings per share:
Net income................................ $ 1.55 $ 2.27 $ 2.66
=========== =========== ===========
</TABLE>
- --------
Adjusted for stock split.
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
<TABLE>
<CAPTION>
NAME UNDER WHICH
COMPANY STATE OF INCORPORATION COMPANY DOES BUSINESS
------- ---------------------- ---------------------
<S> <C> <C>
Vesta Fire Alabama Vesta Fire
Insurance Corporation Insurance Corporation
</TABLE>
All other exhibits required by Regulation S-K are listed as to location in the
Exhibits Index on pages 47 through 49 of this report. Exhibits not referred to
have been omitted as inapplicable or not required.
49
<PAGE>
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
1995 1996
-------- --------
<S> <C> <C>
Assets
Investment in affiliates................................. $394,383 $433,632
Short-term investments................................... -- 6,980
-------- --------
Total investments...................................... 394,383 440,612
Cash..................................................... 77 5
Other assets............................................. 2,028 2
-------- --------
Total assets........................................... $396,488 $440,619
======== ========
Liabilities
Other liabilities........................................ 2,706 1,637
Short term debt.......................................... 15,000 22,000
Long term debt........................................... 98,163 98,279
-------- --------
Total liabilities...................................... 115,869 121,916
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none -- --
issued.....................................................
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1995--18,878,190 shares; 1996--18,970,695
shares................................................ 189 190
Additional paid-in capital............................... 159,449 161,037
Unrealized investment gains, net of applicable taxes..... 5,205 4,442
Retained earnings........................................ 119,458 166,795
Receivable from issuance of restricted stock............. (3,163) (3,207)
Treasury stock........................................... (520) (10,554)
-------- --------
Total stockholders' equity............................. 280,619 318,703
-------- --------
Total liabilities and stockholders' equity............. $396,488 $440,619
======== ========
</TABLE>
50
<PAGE>
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net investment income............. $ 158 $ 385 $ 213
---------- ---------- ----------
Total revenues.................. 158 385 213
Expenses:
Interest expenses................. 1,708 5,273 10,059
Operating expenses................ 1,083 1,918 (6,745)
---------- ---------- ----------
Total expenses.................. 2,791 7,191 3,314
---------- ---------- ----------
Net income before income tax and
equity
in earnings of affiliates......... (2,633) (6,806) (3,101)
Income tax......................... 890 2,356 1,327
---------- ---------- ----------
Income before equity in earnings of (1,743) (4,450) (1,774)
affiliates.........................
Equity in earnings of affiliates... 30,972 47,149 52,008
---------- ---------- ----------
Net income......................... $ 29,229 $42,699 $ 50,237
========== ========== ==========
</TABLE>
51
<PAGE>
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash provided from operations............... $ 630 $ 7,223 $ 2,629
Cash used in investing activities:
Contribution to investments in affiliates.. -- (90,000)
Net (increase) decrease in short-term 1,235 195 (6,980)
investments.................................
--------- ---------- ----------
Cash used in investing activities........... 1,235 (82,582) (4,351)
Cash provided from financing activities:
Dividends paid............................. (1,881) (2,512) (2,836)
Issuance of debt........................... -- 113,164 7,115
Retirement of debt......................... -- (28,000) --
--------- ---------- ----------
Cash provided from financing activities..... (1,881) 82,652 4,279
Net increase (decrease) in cash............. 16 70 (72)
Cash balance at beginning of period......... 23 7 77
--------- ---------- ----------
Cash balance at end of period............... $ 7 $ 77 $ 5
========= ========== ==========
</TABLE>
52
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION (CONSOLIDATED)
AS OF DECEMBER 31, 1995 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RESERVES FOR
DEFERRED UNPAID CLAIMS
POLICY AND CLAIM
ACQUISITION ADJUSTMENT UNEARNED
COSTS EXPENSES PREMIUMS
----------- ------------- --------
<S> <C> <C> <C>
As of December 31, 1995:
Reinsurance................................ $43,891 $153,156 $102,186
Primary.................................... 23,940 46,158 66,326
------- -------- --------
$67,831 $199,314 $168,512
======= ======== ========
As of December 31, 1996:
Reinsurance................................ $56,232 $203,913 $170,798
Primary.................................... 19,300 43,311 57,527
------- -------- --------
$75,532 $247,224 $228,325
======= ======== ========
</TABLE>
53
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION--(continued) (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLAR AMOUNTS IN
THOUSANDS)
<TABLE>
<CAPTION>
CLAIM AND
CLAIM
NET NET ADJUSTMENT AMORTIZATION OTHER NET
EARNED INVESTMENT EXPENSES OF OPERATING PREMIUMS
PREMIUMS INCOME INCURRED DAC EXPENSES WRITTEN
-------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1994:
Reinsurance............ $191,700 $ 9,503 $ 96,715 $15,607 $ 37,712 $193,136
Primary................ 68,252 3,496 43,566 8,219 26,757 66,574
-------- ------- -------- ------- -------- --------
$259,952 $12,999 $140,281 $23,826 $ 64,469 $259,710
======== ======= ======== ======= ======== ========
Year Ended December 31,
1995:
Reinsurance............ $290,657 $13,682 $171,132 $27,251 $ 56,488 $358,289
Primary................ 91,145 4,290 47,959 11,168 16,900 100,939
-------- ------- -------- ------- -------- --------
$381,802 $17,972 $219,091 $38,419 $ 73,388 $459,228
======== ======= ======== ======= ======== ========
Year Ended December 31,
1996:
Reinsurance............ $415,028 $18,767 $248,142 $38,724 $ 72,450 $446,062
Primary................ 96,884 4,381 46,778 14,372 29,052 94,570
-------- ------- -------- ------- -------- --------
$511,912 $23,148 $294,920 $53,096 $101,502 $540,632
======== ======= ======== ======= ======== ========
</TABLE>
54
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE IV--REINSURANCE (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS CEDED TO ASSUMED PERCENTAGE OF
DIRECT OTHER FROM OTHER NET AMOUNT ASSUMED
PREMIUMS EARNED AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- --------------- -------- --------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
1994...................... $106,190 $ 86,805 $240,567 $259,952 92.5%
1995...................... 139,910 117,654 359,546 381,802 94.2%
1996...................... 161,824 195,202 545,290 511,912 106.5%
</TABLE>
55
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLAR AMOUNTS IN
THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS-- BALANCE
AT CHARGED AT END
BEGINNING TO COSTS AND OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- --------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Allowance for premiums of
collection:
1994.................... 30 74 34 70
1995.................... 70 60 60 70
1996.................... 70 168 168 70
</TABLE>
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VESTA INSURANCE GROUP, INC.
/s/ Robert Y. Huffman
By___________________________________
Robert Y. Huffman
Its President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ R. K. Richey
- ------------------------------------
R. K. Richey Director, Chairman of the
Board March 10, 1997
/s/ Robert Y. Huffman
- ------------------------------------
Robert Y. Huffman Director, President and March 10, 1997
Chief Executive Officer
(Principal Executive
Officer)
/s/ Barry A Patrick
- ------------------------------------
Barry A. Patrick Senior Vice President, March 10, 1997
Administration (Principal
Financial Officer)
/s/ Mary Beth Heibein
- ------------------------------------
Mary Beth Heibein Controller and Principal March 10, 1997
Accounting Officer
/s/ Walter M. Beale, Jr.
- ------------------------------------
Walter M. Beale, Jr. Director March 10, 1997
/s/ Ehney A. Camp, III
- ------------------------------------
Ehney A. Camp, III Director March 10, 1997
/s/ Robert A. Hershbarger
- ------------------------------------
Robert A. Hershbarger Director March 10, 1997
/s/ Clifford F. Palmer
- ------------------------------------
Clifford F. Palmer Director March 10, 1997
/s/ Jarvis W. Palmer
- ------------------------------------
Jarvis W. Palmer Director March 10, 1997
/s/ Norman L. Rosenthal
- ------------------------------------
Norman L. Rosenthal Director March 10, 1997
/s/ Keith A. Tucker
- ------------------------------------
Keith A. Tucker Director March 10, 1997
</TABLE>
57
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VESTA INSURANCE GROUP, INC.
------------------
------------------
INDENTURE
Dated as of January 31, 1997
----------------------------
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA
as Trustee
------------------
8.525% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
ARTICLE I.
DEFINITIONS
<S> <C>
SECTION 1.01. Definitions................................................ 1
Additional Sums...................................................... 1
Adjusted Treasury Rate............................................... 1
Affiliate............................................................ 2
Authenticating Agent................................................. 2
Bankruptcy Law....................................................... 2
Board of Directors................................................... 2
Board Resolution..................................................... 2
Business Day......................................................... 2
Capital Leases....................................................... 2
Capital Securities................................................... 3
Commission........................................................... 3
Common Securities.................................................... 3
Common Securities Guarantee.......................................... 3
Common Stock......................................................... 3
Company.............................................................. 3
Company Request...................................................... 3
Comparable Treasury Issue............................................ 4
Comparable Treasury Price............................................ 4
Compounded Interest.................................................. 4
Contingent Obligation................................................ 4
Custodian............................................................ 5
Declaration.......................................................... 5
Default.............................................................. 5
Deferred Interest.................................................... 5
Definitive Securities................................................ 5
Depositary........................................................... 5
Dissolution Event.................................................... 5
Event of Default..................................................... 5
Exchange Act......................................................... 5
Extended Interest Payment Period..................................... 5
GAAP................................................................. 5
Global Security...................................................... 6
Guarantees........................................................... 6
Indebtedness for Money Borrowed...................................... 6
Indenture............................................................ 6
Interest Payment Date................................................ 6
Investment Company Event............................................. 6
Issue Date........................................................... 6
Lien................................................................. 6
Maturity Date........................................................ 6
Mortgage............................................................. 6
Non Book-Entry Capital Securities.................................... 7
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Officers............................................................. 7
Officers' Certificate................................................ 7
Opinion of Counsel................................................... 7
Other Debentures..................................................... 7
Other Guarantees..................................................... 7
outstanding.......................................................... 7
Person............................................................... 8
Predecessor Security................................................. 8
Prepayment Price..................................................... 8
Principal office of the Trustee...................................... 8
Property Trustee..................................................... 8
Purchase Agreement................................................... 8
"Qualified Debt Obligations"......................................... 8
Quotation Agent...................................................... 9
Reference Treasury Dealer............................................ 9
Reference Treasury Dealer Quotations................................. 9
Responsible Officer.................................................. 9
Restricted Security.................................................. 9
Rule 144A............................................................ 9
Securities........................................................... 9
Securities Act....................................................... 9
Securityholder....................................................... 9
Security Register.................................................... 10
Senior Indebtedness.................................................. 10
Special Event........................................................ 10
Special Event Prepayment Price....................................... 10
Subsidiary........................................................... 10
Tax Event............................................................ 11
Trustee.............................................................. 11
Trust Indenture Act of 1939.......................................... 11
Trust Securities..................................................... 12
U.S. Government Obligations.......................................... 12
Vesta Capital Trust.................................................. 12
ARTICLE II.
SECURITIES
SECTION 2.01. Forms Generally............................................ 12
SECTION 2.02. Execution and Authentication............................... 12
SECTION 2.03. Form and Payment........................................... 13
SECTION 2.04. Legends.................................................... 13
SECTION 2.05. Global Security............................................ 14
SECTION 2.06. Interest................................................... 15
SECTION 2.07. Transfer and Exchange...................................... 16
SECTION 2.08. Replacement Securities..................................... 17
SECTION 2.09. Treasury Securities........................................ 17
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 2.10. Temporary Securities....................................... 18
SECTION 2.11. Cancellation............................................... 18
SECTION 2.12. Defaulted Interest......................................... 19
SECTION 2.13. CUSIP Numbers.............................................. 20
ARTICLE III.
PARTICULAR COVENANTS OF THE COMPANY
SECTION 3.01. Payment of Principal, Premium and Interest................. 20
SECTION 3.02. Offices for Notices and Payments, etc...................... 20
SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office......... 21
SECTION 3.04. Provision as to Paying Agent............................... 21
SECTION 3.05. Certificate to Trustee..................................... 22
SECTION 3.06. Compliance with Consolidation Provisions................... 23
SECTION 3.07. Limitation on Dividends.................................... 23
SECTION 3.08. Covenants as to Vesta Capital Trust........................ 24
SECTION 3.09. Payment of Expenses........................................ 24
SECTION 3.10. Payment Upon Resignation or Removal........................ 25
ARTICLE IV.
SECURITYHOLDERS' LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE
SECTION 4.01. Securityholders' Lists..................................... 25
SECTION 4.02. Preservation and Disclosure of Lists....................... 26
SECTION 4.03. Reports of the Company..................................... 28
SECTION 4.04. Reports by the Trustee..................................... 29
ARTICLE V.
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT
SECTION 5.01. Events of Default.......................................... 30
SECTION 5.02. Payment of Securities on Default; Suit Therefor............ 32
SECTION 5.03. Application of Moneys Collected by Trustee................. 34
SECTION 5.04. Proceedings by Securityholders............................. 35
SECTION 5.05. Proceedings by Trustee..................................... 36
SECTION 5.06. Remedies Cumulative and Continuing......................... 36
SECTION 5.07. Direction of Proceedings and Waiver of
Defaults by Majority of Securityholders................... 37
SECTION 5.08. Notice of Defaults......................................... 38
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.09. Undertaking to Pay Costs................................... 38
ARTICLE VI.
CONCERNING THE TRUSTEE
SECTION 6.01. Duties and Responsibilities of Trustee..................... 39
SECTION 6.02. Reliance on Documents, Opinions, etc....................... 40
SECTION 6.03. No Responsibility for Recitals, etc........................ 42
SECTION 6.04. Trustee, Authenticating Agent, Paying Agents,
Transfer Agents or Registrar May Own Securities........... 42
SECTION 6.05. Moneys to be Held in Trust................................. 42
SECTION 6.06. Compensation and Expenses of Trustee....................... 42
SECTION 6.07. Officers' Certificate as Evidence.......................... 43
SECTION 6.08. Conflicting Interest of Trustee............................ 44
SECTION 6.09. Eligibility of Trustee..................................... 44
SECTION 6.10. Resignation or Removal of Trustee.......................... 44
SECTION 6.11. Acceptance by Successor Trustee............................ 46
SECTION 6.12. Successor by Merger, etc................................... 47
SECTION 6.13. Limitation on Rights of Trustee as a Creditor.............. 47
SECTION 6.14. Authenticating Agents...................................... 48
ARTICLE VII.
CONCERNING THE SECURITYHOLDERS
SECTION 7.01. Action by Securityholders.................................. 49
SECTION 7.02. Proof of Execution by Securityholders...................... 50
SECTION 7.03. Who Are Deemed Absolute Owners............................. 50
SECTION 7.04. Securities Owned by Company Deemed Not Outstanding......... 51
SECTION 7.05. Revocation of Consents; Future Holders Bound............... 51
ARTICLE VIII.
SECURITYHOLDERS' MEETINGS
SECTION 8.01. Purpose of Meetings........................................ 52
SECTION 8.02. Call of Meetings by Trustee................................ 52
SECTION 8.03. Call of Meetings by Company or Securityholders............. 52
SECTION 8.04. Qualifications for Voting.................................. 53
SECTION 8.05. Regulations................................................ 53
SECTION 8.06. Voting..................................................... 54
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ARTICLE IX.
AMENDMENTS
SECTION 9.01. Without Consent of Securityholders......................... 54
SECTION 9.02. With Consent of Securityholders............................ 56
SECTION 9.03. Compliance with Trust Indenture Act; Effect of
Supplemental Indentures................................... 57
SECTION 9.04. Notation on Securities..................................... 58
SECTION 9.05. Evidence of Compliance of Supplemental Indenture
to be Furnished Trustee................................... 58
ARTICLE X.
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
SECTION 10.01. Company May Consolidate, etc., on Certain Terms........... 58
SECTION 10.02. Successor Corporation to be Substituted for Company....... 59
SECTION 10.03. Opinion of Counsel to be Given Trustee.................... 60
ARTICLE XI.
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 11.01. Discharge of Indenture.................................... 60
SECTION 11.02. Deposited Moneys and U.S. Government Obligations
to be Held in Trust by Trustee........................... 61
SECTION 11.03. Paying Agent to Repay Moneys Held......................... 61
SECTION 11.04. Return of Unclaimed Moneys................................ 61
SECTION 11.05. Defeasance Upon Deposit of Moneys or
U.S. Government Obligations.............................. 62
SECTION 11.06. Reinstatement............................................. 64
ARTICLE XII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 12.01. Indenture and Securities Solely Corporate Obligations..... 64
ARTICLE XIII.
MISCELLANEOUS PROVISIONS
SECTION 13.01. Successors................................................ 64
SECTION 13.02. Official Acts by Successor Corporation.................... 64
SECTION 13.03. Surrender of Company Powers............................... 65
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SECTION 13.04. Address for Notices, etc.................................. 65
SECTION 13.05. Governing Law............................................. 66
SECTION 13.06. Evidence of Compliance with Conditions Precedent.......... 66
SECTION 13.07. Business Days............................................. 66
SECTION 13.08. Trust Indenture Act to Control............................ 66
SECTION 13.09. Table of Contents, Headings, etc.......................... 67
SECTION 13.10. Execution in Counterparts................................. 67
SECTION 13.11. Separability.............................................. 67
SECTION 13.12. Assignment................................................ 67
SECTION 13.13. Acknowledgement of Rights................................. 67
ARTICLE XIV.
PREPAYMENT OF SECURITIES
SECTION 14.01. Special Event Prepayment.................................. 68
SECTION 14.02. No Optional Prepayment by Company......................... 68
SECTION 14.03. No Sinking Fund........................................... 68
SECTION 14.04. Notice of Prepayment...................................... 69
SECTION 14.05. Payment of Securities Called for Prepayment............... 69
ARTICLE XV.
SUBORDINATION OF SECURITIES
SECTION 15.01. Agreement to Subordinate.................................. 70
SECTION 15.02. Default on Senior Indebtedness............................ 70
SECTION 15.03. Liquidation; Dissolution; Bankruptcy...................... 71
SECTION 15.04. Subrogation............................................... 73
SECTION 15.05. Trustee to Effectuate Subordination....................... 74
SECTION 15.06. Notice by the Company..................................... 74
SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness..... 75
SECTION 15.08. Subordination May Not Be Impaired......................... 76
ARTICLE XVI.
EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 16.01. Extension of Interest Payment Period...................... 76
SECTION 16.02. Notice of Extension....................................... 77
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THIS INDENTURE, dated as of January 31, 1997, between Vesta Insurance
Group, Inc., a Delaware corporation (hereinafter sometimes called the
"Company"), and First Union National Bank of North Carolina, a national banking
association, as trustee (hereinafter sometimes called the "Trustee").
W I T N E S S E T H:
In consideration of the premises, and the purchase of the Securities
by the holders thereof, the Company covenants and agrees with the Trustee for
the equal and proportionate benefit of the respective holders from time to time
of the Securities, as follows:
ARTICLE I.
DEFINITIONS
SECTION 1.01. Definitions.
The terms defined in this Section 1.01 (except as herein otherwise
expressly provided or unless the context otherwise requires) for all purposes of
this Indenture shall have the respective meanings specified in this Section
1.01. All other terms used in this Indenture which are defined in the Trust
Indenture Act of 1939, or which are by reference therein defined in the
Securities Act, shall (except as herein otherwise expressly provided or unless
the context otherwise requires) have the meanings assigned to such terms in said
Trust Indenture Act and in said Securities Act as in force at the date of this
Indenture as originally executed. The following terms have the meanings given
to them in the Declaration: (i) Clearing Agency; (ii) Delaware Trustee; (iii)
Depository; (iv) Capital Security Certificate; (v) Property Trustee; (vi)
Administrative Trustees; (vii) Direct Action; (viii) Capital Securities; and
(ix) Capital Securities Guarantee. All accounting terms used herein and not
expressly defined shall have the meanings assigned to such terms in accordance
with generally accepted accounting principles and the term "generally accepted
accounting principles" means such accounting principles as are generally
accepted at the time of any computation. The words "herein", "hereof" and
"hereunder" and other words of similar import refer to this Indenture as a
whole and not to any particular Article, Section or other subdivision. Headings
are used for convenience of reference only and do not affect interpretation.
The singular includes the plural and vice versa.
"Additional Sums" shall have the meaning set forth in Section 2.06(c).
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"Adjusted Treasury Rate" shall mean, with respect to any prepayment
date, the rate per annum equal to the semi-annual equivalent yield to maturity
of the Comparable Treasury Issue, calculated using a price for the Comparable
Treasury Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such prepayment date, in each case calculated on
the third Business Day preceding such prepayment date, plus in each case (a)
1.25% if such prepayment date occurs on or prior to the first anniversary of the
Issue Date and (b) 0.50% in all other cases.
"Affiliate" shall mean, with respect to a specified Person, (a) any
Person directly or indirectly owning, controlling or holding the power to vote
10% or more of the outstanding voting securities or other ownership interests of
the specified Person, (b) any Person 10% or more of whose outstanding voting
securities or other ownership interests are directly or indirectly owned,
controlled or held with power to vote by the specified Person, (c) any Person
directly or indirectly controlling, controlled by, or under common control with
the specified Person, (d) a partnership in which the specified Person is a
general partner, (e) any officer or director of the specified Person, and (f) if
the specified Person is an individual, any entity of which the specified Person
is an officer, director or general partner.
"Authenticating Agent" shall mean any agent or agents of the Trustee
which at the time shall be appointed and acting pursuant to Section 6.14.
"Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar
federal or state law for the relief of debtors.
"Board of Directors" shall mean either the Board of Directors of the
Company or any duly authorized committee of that board.
"Board Resolution" shall mean a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" shall mean, with respect to any series of Securities,
any day other than a Saturday or a Sunday or a day on which banking institutions
in The City of New York are authorized or required by law or executive order to
close.
"Capital Leases" means, with respect to the Company and its
Subsidiaries, any lease of any property that should, in
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accordance with GAAP, be classified and accounted for as a capital lease on a
consolidated balance sheet of the Company and its Subsidiaries.
"Capital Securities" shall mean undivided beneficial interests in the
assets of Vesta Capital Trust which rank pari passu with the Common Securities
issued by Vesta Capital Trust; provided, however, that if an Event of Default
-------- -------
has occurred and is continuing, no payments in respect of Distributions on, or
payments upon liquidation, redemption or otherwise with respect to, the Common
Securities shall be made until the holders of the Capital Securities shall be
paid in full the Distributions and the liquidation, redemption and other
payments to which they are entitled.
"Commission" shall mean the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or if at any time
after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act of 1939,
then the body performing such duties at such time.
"Common Securities" shall mean undivided beneficial interests in the
assets of Vesta Capital Trust which rank pari passu with Capital Securities
issued by Vesta Capital Trust; provided, however, that if an Event of Default
-------- -------
has occurred and is continuing, no payments in respect of Distributions on, or
payments upon liquidation, redemption or otherwise with respect to, the Common
Securities shall be made until the holders of the Capital Securities shall be
paid in full the Distributions and the liquidation, redemption and other
payments to which they are entitled.
"Common Securities Guarantee" shall mean any guarantee that the
Company may enter into with any Person or Persons that operate directly or
indirectly for the benefit of holders of Common Securities of Vesta Capital
Trust.
"Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company or any other class of stock resulting from changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value.
"Company" shall mean Vesta Insurance Group, Inc., a Delaware
corporation, and, subject to the provisions of Article X, shall include its
successors and assigns.
"Company Request" or "Company Order" shall mean a written request or
order signed in the name of the Company by the
3
<PAGE>
Chief Executive Officer, the President, a Vice President, the Controller, the
Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Comparable Treasury Issue" shall mean the United States Treasury
security selected by the Quotation Agent as having a maturity comparable to the
remaining term to the Stated Maturity Date of the Securities that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of the Securities.
"Comparable Treasury Price" shall mean, with respect to any prepayment
date pursuant to Section 14.01, (i) the average of the bid and asked prices for
the Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) on the third Business Day preceding such prepayment date, as
set forth in the daily statistical release (or any successor release) published
by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations for U.S. Government Securities" or (ii) if such release (or any
successor release) is not published or does not contain such prices on such
Business Day, (A) the average of five Reference Treasury Dealer Quotations for
such prepayment date, after excluding the highest and lowest such Reference
Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than three such
Reference Treasury Dealer Quotations, the average of all such Quotations.
"Compounded Interest" shall have the meaning set forth in
Section 16.01.
"Contingent Obligation" means, with respect to the Company and its
Subsidiaries, without duplication, any obligation, contingent or otherwise, of
any such Person pursuant to which such Person has directly or indirectly
guaranteed any debt or other obligation of any other Person and, without
limiting the generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of any such Person (a) to purchase or pay (or advance
or supply funds for the purchase or payment of) such debt or other obligation
(whether arising by virtue of partnership arrangements, by agreement to keep
well, to purchase assets, goods, securities or services, to take or pay, or to
maintain financial statement condition or otherwise) or (b) entered into for the
purpose of assuring in any other manner the obligee of such debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, that the term Contingent
Obligation shall not include (i) obligations under insurance or reinsurance
policies, or (ii) endorsements for collection or deposit in the ordinary course
of business.
4
<PAGE>
"Custodian" shall mean any receiver, trustee, assignee, liquidator, or
similar official under any Bankruptcy Law.
"Declaration" shall mean the Amended and Restated Declaration of Trust
of Vesta Capital Trust, dated as of January 31, 1997.
"Default" shall mean any event, act or condition that with notice or
lapse of time, or both, would constitute an Event of Default.
"Deferred Interest" shall have the meaning set forth in
Section 16.01.
"Definitive Securities" shall mean those securities issued in fully
registered certificated form not otherwise in global form.
"Depositary" shall mean, with respect to Securities of any series, for
which the Company shall determine that such Securities will be issued as a
Global Security, The Depository Trust Company, New York, New York, another
clearing agency, or any successor registered as a clearing agency under the
Exchange Act or other applicable statute or regulation, which, in each case,
shall be designated by the Company pursuant to Section 2.05(d).
"Dissolution Event" shall mean the liquidation of the Trust pursuant
to the Declaration, and the distribution of the Securities held by the Property
Trustee to the holders of the Trust Securities issued by the Vesta Capital Trust
pro rata in accordance with the Declaration.
"Event of Default" shall mean any event specified in Section 5.01,
continued for the period of time, if any, and after the giving of the notice, if
any, therein designated.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Extended Interest Payment Period" shall have the meaning set forth in
Section 16.01.
"GAAP" means generally accepted accounting principles, as recognized
by the American Institute of Certificated Public Accountants and the Financial
Accounting Standards Board, consistently applied and maintained on a consistent
basis for the Company and its Subsidiaries throughout the period indicated and
consistent with the prior financial practice of the Company and its
Subsidiaries.
5
<PAGE>
"Global Security" shall mean, with respect to the Securities, a
Security executed by the Company and delivered by the Trustee to the Depositary
or pursuant to the Depositary's instruction, all in accordance with the
Indenture, which shall be registered in the name of the Depositary or its
nominee.
"Guarantees" shall mean the Capital Securities Guarantee and the
Common Securities Guarantee.
"Indebtedness for Money Borrowed" shall mean any obligation of, or any
obligation guaranteed by, the Company for the repayment of borrowed money,
whether or not evidenced by bonds, debentures, notes or other written
instruments.
"Indenture" shall mean this instrument as originally executed or, if
amended as herein provided, as so amended.
"Interest Payment Date" shall have the meaning set forth in
Section 2.06.
"Investment Company Event" shall mean that Vesta Capital Trust and the
Company shall have received an opinion, requested by the Company, of counsel
experienced in practice under the Investment Company Act of 1940, as amended
(the "1940 Act"), to the effect that, as a result of the occurrence of a change
in law or regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or regulatory
authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk
that Vesta Capital Trust is or will be considered an "investment company" which
is required to be registered under the 1940 Act, which Change in 1940 Act Law
becomes effective on or after the Issue Date.
"Issue Date" shall mean January 31, 1997.
"Lien" means, with respect to any asset, any Mortgage, lien, pledge,
charge, security interest or encumbrance of any kind with respect to such asset.
For the purposes of this Indenture, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Maturity Date" shall mean January 15, 2027.
"Mortgage" shall mean and include any mortgage, pledge, lien, security
interest, conditional sale or other title retention agreement or other similar
encumbrance.
6
<PAGE>
"Non Book-Entry Capital Securities" shall have the meaning set forth
in Section 2.05.
"Officers" shall mean any of the Chief Executive Officer, the
President, a Vice President, the Controller, the Secretary or an Assistant
Secretary, the Treasurer or an Assistant Treasurer of the Company.
"Officers' Certificate" shall mean a certificate signed by two
Officers and delivered to the Trustee.
"Opinion of Counsel" shall mean a written opinion of counsel, who may
be an employee of the Company, and who shall be acceptable to the Trustee.
"Other Debentures" shall mean all junior subordinated debentures
issued by the Company from time to time and sold to trusts to be established by
the Company (if any), in each case similar to Vesta Capital Trust.
"Other Guarantees" shall mean all guarantees to be issued by the
Company with respect to capital securities (if any) and issued to other trusts
to be established by the Company (if any), in each case similar to the Vesta
Capital Trust.
The term "outstanding" when used with reference to Securities, shall,
subject to the provisions of Section 7.04, mean, as of any particular time, all
Securities authenticated and delivered by the Trustee or an Authenticating Agent
under this Indenture, except
(a) Securities theretofore cancelled by the Trustee or an
Authenticating Agent or delivered to the Trustee for
cancellation;
(b) Securities, or portions thereof, for the payment or prepayment of
which moneys in the necessary amount shall have been deposited in
trust with the Trustee or with any paying agent (other than the
Company) or shall have been set aside and segregated in trust by
the Company (if the Company shall act as its own paying agent);
provided that, if such Securities, or portions thereof, are to be
prepaid prior to maturity thereof, notice of such prepayment
shall have been given as in Article XIV provided or provision
satisfactory to the Trustee shall have been made for giving such
notice; and
(c) Securities in lieu of or in substitution for which other
Securities shall have been authenticated and
7
<PAGE>
delivered pursuant to the terms of Section 2.08 unless proof
satisfactory to the Company and the Trustee is presented that any
such Securities are held by bona fide holders in due course.
"Person" shall mean a legal person, including any individual,
corporation, estate, partnership, joint venture, association, joint stock
company, limited liability company, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other entity
of whatever nature.
"Predecessor Security" of any particular Security shall mean every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 2.08 in lieu of a lost,
destroyed or stolen Security shall be deemed to evidence the same debt as the
lost, destroyed or stolen Security.
"Prepayment Price" shall mean the Special Event Prepayment Price.
"Principal office of the Trustee", or other similar term, shall mean
the principal office of the Trustee, at which at any particular time its
corporate trust business shall be administered.
"Property Trustee" shall have the same meaning as set forth in the
Declaration.
"Purchase Agreement" shall mean the Purchase Agreement, dated January
29, 1997, among the Company, Vesta Capital Trust and the initial purchasers
named therein.
"Qualified Debt Obligations" means, without duplication, (a) debt
securities of the Company, provided that the terms of any such debt security (i)
permit the deferral of principal and interest payments for a period of up to
five years (but not beyond the maturity date), as elected by the Company, (ii)
have a maturity for payment of principal of not less than ten (10) years after
the date of issuance, and (iii) include provisions making the debt security
expressly subordinate to all other debt of the Company, (b) preferred securities
issued by a Subsidiary, the sole purpose of which is to issue such preferred
securities and invest the proceeds thereof in debt securities of the type
described in clause (a) above, and which preferred securities are payable solely
out of the proceeds of payments on account of such debt securities; and (c) the
obligations recorded on the consolidated balance sheet of the Company and its
8
<PAGE>
Subsidiaries with respect to debt securities of the type described in clause (a)
above and preferred securities of the type described in clause (b) above.
"Quotation Agent" shall mean the Reference Treasury Dealer appointed
by the Company.
"Reference Treasury Dealer" shall mean (i) Donaldson, Lufkin &
Jenrette Securities Corporation, and its successors; provided, however, that if
the foregoing shall cease to be a primary U.S. Government securities dealer in
New York City (a "Primary Treasury Dealer"), the Company shall substitute
therefor another Primary Treasury Dealer, and (ii) any other Primary Treasury
Dealer selected by the Trustee after consultation with the Company.
"Reference Treasury Dealer Quotations" shall mean, with respect to
each Reference Treasury Dealer and any prepayment date pursuant to Section
14.01, the average, as determined by the Trustee, of the bid and asked prices
for the Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) at 5:00 p.m. New York City time on the third Business Day
preceding such prepayment date, quoted in writing to the Trustee by such
Reference Treasury Dealer.
"Responsible Officer", when used with respect to the Trustee, shall
mean any officer of the Trustee with responsibility for the administration of
this Indenture and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Security" shall mean Securities that bear or are required
to bear the legends set forth in Exhibit A hereto, other than those legends to
be set forth only on a Global Security.
"Rule 144A" shall mean Rule 144A under the Securities Act, as such
Rule may be amended from time to time, or under any similar rule or regulation
hereafter adopted by the Commission.
"Securities" means the Company's 8.525% Junior Subordinated Deferrable
Interest Debentures due January 15, 2027, as authenticated and issued under this
Indenture.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securityholder", "holder of Securities", or other similar terms,
shall mean any Person in whose name at the time a
9
<PAGE>
particular Security is registered on the register kept by the Company or the
Trustee for that purpose in accordance with the terms hereof.
"Security Register" shall mean (i) prior to a Dissolution Event, the
list of holders provided to the Trustee pursuant to Section 4.01, and (ii)
following a Dissolution Event, any security register maintained by a security
registrar for the securities appointed by the Company following the execution of
a supplemental indenture providing for transfer procedures as provided for in
Section 2.07(a).
"Senior Indebtedness" shall mean with respect to the Company and its
Subsidiaries: (a) all liabilities, obligations and indebtedness for borrowed
money, whether or not evidenced by bonds, debentures, notes or other similar
instruments, (b) all obligations to pay the deferred purchase price of property
or services (other than trade payables due and arising in the ordinary course of
business), (c) all Capital Lease Obligations, (d) all debt of any other Person
secured by a Lien on any asset of the Company or any of its Subsidiaries, (e)
all Contingent Obligations, and (f) all obligations, contingent or otherwise,
relating to the face amount of letters of credit, whether or not drawn, and
banker's acceptance, but excluding any obligation relating to an undrawn letter
of credit if the undrawn letter of credit is issued in connection with a
liability for which a reserve has been established by the Company or the
applicable Subsidiary in accordance with GAAP; provided, that Senior
Indebtedness shall not include the Securities, the Guarantees or other Qualified
Debt Obligations.
"Special Event" means either a Tax Event or an Investment Company
Event.
"Special Event Prepayment Price" shall mean, with respect to any
prepayment of the Securities pursuant to Section 14.01 hereof, an amount in cash
equal to the greater of (i) 100% of the principal amount of the Securities to be
prepaid and (ii) the sum, as determined by a Quotation Agent, of the present
values of the remaining scheduled payments of principal and interest on the
Securities discounted to the prepayment date on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Adjusted Treasury Rate,
plus, in each case, accrued and unpaid interest thereon, including Compounded
Interest and Additional Sums, if any, to the date of such prepayment.
"Subsidiary" shall mean with respect to any Person, (i) any
corporation at least a majority of whose outstanding voting stock of which is
owned, directly or indirectly, by such Person
10
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or by one or more of its Subsidiaries, or by such Person and one or more of its
Subsidiaries, (ii) any general partnership, joint venture or similar entity, at
least a majority of whose outstanding partnership or similar interests shall at
the time be owned by such Person, or by one or more of its Subsidiaries, or by
such Person and one or more of its Subsidiaries and (iii) any limited
partnership of which such Person or any of its Subsidiaries is a general
partner. For the purposes of this definition, "voting stock" means shares,
interests, participations or other equivalents in the equity interest (however
designated) in such Person having ordinary voting power for the election of a
majority of the directors (or the equivalent) of such Person, other than shares,
interests, participations or other equivalents having such power only by reason
of the occurrence of a contingency.
"Tax Event" shall mean the receipt by Vesta Capital Trust and the
Company of an opinion, requested by the Company, of counsel experienced in such
matters to the effect that, as a result of any amendment to, or change
(including any announced prospective change) in, the laws or any regulations
thereunder of the United States or any political subdivision or taxing authority
thereof or therein or as a result of any official administrative written
decision or pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is made on or after the Issue Date, there is more than
an insubstantial risk that (i) Vesta Capital Trust is, or will be within 90 days
of the date of such opinion, subject to United States Federal income tax with
respect to income received or accrued on the Securities, (ii) interest payable
by the Company on the Securities is not, or within 90 days of the date of such
opinion, will not be, deductible by the Company, in whole or in part, for United
States Federal income tax purposes, or (iii) Vesta Capital Trust is, or will be
within 90 days of the date of such opinion, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
"Trustee" shall mean the Person identified as "Trustee" in the first
paragraph hereof, and, subject to the provisions of Article VI hereof, shall
also include its successors and assigns as Trustee hereunder.
"Trust Indenture Act of 1939" shall mean the Trust Indenture Act of
1939 as in force at the date of execution of this Indenture except as provided
in Section 9.03; provided, however, that, in the event the Trust Indenture Act
-------- -------
of 1939 is amended after such date, "Trust Indenture Act of 1939" shall mean, to
the extent required by any such amendment, the Trust Indenture Act of 1939 as so
amended.
11
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"Trust Securities" shall mean the Capital Securities and the Common
Securities, collectively.
"U.S. Government Obligations" shall mean securities that are
(i) direct obligations of the United States of America for the payment of which
its full faith and credit is pledged or (ii) obligations of a Person controlled
or supervised by and acting as an agency or instrumentality of the United States
of America the payment of which is unconditionally guaranteed as a full faith
and credit obligation by the United States of America, which, in either case
under clauses (i) or (ii) are not callable or redeemable at the option of the
issuer thereof, and shall also include a depository receipt issued by a bank or
trust company as custodian with respect to any such U.S. Government Obligation
or a specific payment of interest on or principal of any such U.S. Government
Obligation held by such custodian for the account of the holder of a depository
receipt, provided that (except as required by law) such custodian is not
authorized to make any deduction from the amount payable to the holder of such
depository receipt from any amount received by the custodian in respect of the
U.S. Government Obligation or the specific payment of interest on or principal
of the U.S. Government Obligation evidenced by such depository receipt.
"Vesta Capital Trust" shall mean Vesta Capital Trust I, a Delaware
business trust created for the purpose of issuing its undivided beneficial
interests in connection with the issuance of Securities under this Indenture.
ARTICLE II.
SECURITIES
SECTION 2.01. Forms Generally.
The Securities and the Trustee's certificate of authentication shall
be substantially in the form of Exhibit A, the terms of which are incorporated
in and made a part of this Indenture. The Securities may have notations,
legends or endorsements required by law, stock exchange rule, agreements to
which the Company is subject or usage. Each Security shall be dated the date of
its authentication. The Securities shall be issued in denominations of $1,000
and integral multiples thereof.
SECTION 2.02. Execution and Authentication.
The Securities shall be signed on behalf of the Company by the Chief
Executive Officer, the President, a Vice President or the Controller and
attested by its Secretary or an Assistant
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Secretary. Any signature may be in the form of a manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office at
the time the Security is authenticated, the Security shall nevertheless be
valid.
A Security shall not be valid until authenticated by the manual
signature of the Trustee. The signature of the Trustee shall be conclusive
evidence that the Security has been authenticated under this Indenture. The
form of Trustee's certificate of authentication to be borne by the Securities
shall be substantially as set forth in Exhibit A hereto.
The Trustee shall, upon a Company Order, authenticate for original
issue up to, and the aggregate principal amount of Securities outstanding at any
time may not exceed, $103,093,000 aggregate principal amount of the Securities;
except as provided in Sections 2.07, 2.08, 2.10 and 14.05.
SECTION 2.03. Form and Payment.
Except as provided in Section 2.05, the Securities shall be issued in
fully registered certificated form without interest coupons. Principal of and
premium, if any, and interest on the Securities issued in certificated form will
be payable, the transfer of such Securities will be registrable and such
Securities will be exchangeable for Securities bearing identical terms and
provisions at the office or agency of the Trustee; provided, however, that
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payment of interest with respect to the Securities (other than Securities issued
in global form, the payment of interest on which shall be made in immediately
available funds) may be made at the option of the Company (i) by check mailed to
the holder at such address as shall appear in the Security Register or (ii) by
transfer to an account maintained by the Person entitled thereto, provided that
proper transfer instructions have been received in writing by the relevant
record date. Notwithstanding the foregoing, so long as the holder of any
Securities is the Property Trustee, the payment of the principal of and premium,
if any, and interest (including Compounded Interest and Additional Sums, if any)
on such Securities held by the Property Trustee will be made in immediately
available funds at such place and to such account as may be designated by the
Property Trustee.
SECTION 2.04. Legends.
Except as otherwise determined by the Company in accordance with
applicable law, each Security shall bear the applicable legends relating to
restrictions on transfer pursuant to the securities laws in substantially the
form set forth on Exhibit A hereto.
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SECTION 2.05. Global Security.
(a) In connection with a Dissolution Event,
(i) if any Capital Securities are held in book-entry form, the
related Definitive Securities shall be presented to the Trustee (if an
arrangement with the Depositary has been maintained) by the Property
Trustee in exchange for one or more Global Securities (as may be required
pursuant to Section 2.07) in an aggregate principal amount equal to the
aggregate principal amount of all outstanding Securities, to be registered
in the name of the Depositary, or a custodian therefor, or its nominee, and
delivered by the Trustee to the Depositary for crediting to the accounts of
its participants pursuant to the instructions of the Administrative
Trustees; the Company upon any such presentation shall execute one or more
Global Securities in such aggregate principal amount and deliver the same
to the Trustee for authentication and delivery in accordance with this
Indenture; and payments on the Securities issued as a Global Security will
be made to the Depositary; and
(ii) if any Capital Securities are held in certificated form, the
related Definitive Securities may be presented to the Trustee by the
Property Trustee and any Capital Security certificate which represents
Capital Securities other than Capital Securities in book-entry form ("Non
Book-Entry Capital Securities") will be deemed to represent beneficial
interests in Securities presented to the Trustee by the Property Trustee
having an aggregate principal amount equal to the aggregate liquidation
amount of the Non Book-Entry Capital Securities until such Capital Security
certificates are presented to the Security Registrar for transfer or
reissuance, at which time such Capital Security certificates will be
cancelled and a Security, registered in the name of the holder of the
Capital Security certificate, with an aggregate principal amount equal to
the aggregate liquidation amount of the Capital Security certificate
cancelled, will be executed by the Company and delivered to the Trustee for
authentication and delivery in accordance with this Indenture. Upon the
issuance of such Securities, Securities with an equivalent aggregate
principal amount that were presented by the Property Trustee to the Trustee
will be deemed to have been cancelled.
(b) The Global Securities shall represent the aggregate amount of
outstanding Securities from time to time endorsed thereon; provided, that the
--------
aggregate amount of
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outstanding Securities represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges and prepayments. Any
endorsement of a Global Security to reflect the amount of any increase or
decrease in the amount of outstanding Securities represented thereby shall be
made by the Trustee, in accordance with instructions given by the Company as
required by this Section 2.05.
(c) The Global Securities may be transferred, in whole but not in
part, only to another nominee of the Depositary, or to a successor Depositary
selected or approved by the Company or to a nominee of such successor
Depositary.
(d) If at any time the Depositary notifies the Company that it is
unwilling or unable to continue as Depositary or the Depositary has ceased to be
a clearing agency registered under the Exchange Act, and a successor Depositary
is not appointed by the Company within 90 days after the Company receives such
notice or becomes aware of such condition, as the case may be, the Company will
execute, and the Trustee, upon receipt of a Company Order, will authenticate and
make available for delivery the Definitive Securities, in authorized
denominations, and in an aggregate principal amount equal to the principal
amount of the Global Security in exchange for such Global Security. If there is
an Event of Default, the Depositary shall have the right to exchange the Global
Securities for Definitive Securities. In addition, the Company may at any time
determine that the Securities shall no longer be represented by a Global
Security. In the event of such an Event of Default or such a determination, the
Company shall execute, and subject to Section 2.07, the Trustee, upon receipt of
an Officers' Certificate evidencing such determination by the Company, will
authenticate and make available for delivery the Definitive Securities, in
authorized denominations, and in an aggregate principal amount equal to the
principal amount of the Global Security in exchange for such Global Security.
Upon the exchange of the Global Security for such Definitive Securities, in
authorized denominations, the Global Security shall be cancelled by the Trustee.
Such Definitive Securities issued in exchange for the Global Security shall be
registered in such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee. The Trustee shall deliver such Definitive
Securities to the Depositary for delivery to the Persons in whose names such
Definitive Securities are so registered.
SECTION 2.06. Interest.
(a) Each Security will bear interest at the rate of 8.525% per annum
(the "Coupon Rate") from the most recent date to
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which interest has been paid or, if no interest has been paid, from January 31,
1997, until the principal thereof becomes due and payable, and on any overdue
principal and (to the extent that payment of such interest is enforceable under
applicable law) on any overdue installment of interest at the Coupon Rate,
compounded semi-annually, payable (subject to the provisions of Article XVI)
semi-annually in arrears on January 15 and July 15 of each year (each, an
"Interest Payment Date") commencing on July 15, 1997 to the Person in whose name
such Security or any predecessor Security is registered, at the close of
business on the regular record date for such interest installment, which shall
be the first day of the month in which the relevant Interest Payment Date falls.
(b) Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months and, for any period of less than a full
calendar month, the number of days elapsed in such month. In the event that any
Interest Payment Date falls on a day that is not a Business Day, then payment of
interest payable on such date will be made on the next succeeding day which is a
Business Day (and without any interest or other payment in respect of any such
delay), with the same force and effect as if made on such date.
(c) During such time as the Property Trustee is the holder of any
Securities, the Company shall pay any additional amounts on the Securities as
may be necessary in order that the amount of Distributions then due and payable
by Vesta Capital Trust on the outstanding Trust Securities shall not be reduced
as a result of any additional taxes, duties and other governmental charges to
which Vesta Capital Trust has become subject as a result of a Tax Event
("Additional Sums").
SECTION 2.07. Transfer and Exchange.
(a) Transfer Restrictions. The Securities may not be transferred
---------------------
except in compliance with any legend contained in Exhibit A unless otherwise
determined by the Company in accordance with applicable law. Upon any
distribution of the Securities following a Dissolution Event, the Company and
the Trustee shall enter into a supplemental indenture pursuant to Section 9.01
to provide for the transfer restrictions and procedures with respect to the
Securities substantially similar to those contained in the Declaration to the
extent applicable in the circumstances existing at such time.
(b) General Provisions Relating to Transfers and Exchanges. To permit
------------------------------------------------------
registrations of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Definitive Securities and Global Securities. All
Definitive
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Securities and Global Securities issued upon any registration of transfer or
exchange of Definitive Securities or Global Securities shall be the valid
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Definitive Securities or Global Securities
surrendered upon such registration of transfer or exchange.
No service charge shall be made to a holder for any registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable in connection
therewith.
The Company shall not be required to (i) issue, register the transfer
of or exchange Securities during a period beginning at the opening of business
15 days before the day of mailing of a notice of prepayment or any notice of
selection of Securities for prepayment under Article XIV hereof and ending at
the close of business on the day of such mailing; or (ii) register the transfer
of or exchange any Security so selected for prepayment in whole or in part,
except the unprepaid portion of any Security being prepaid in part.
Prior to due presentment for the registration of a transfer of any
Security, the Trustee, any agent and the Company may deem and treat the Person
in whose name any Security is registered as the absolute owner of such Security
for the purpose of receiving payment of principal of and premium, if any, and
interest on such Securities, and neither the Trustee, any agent nor the Company
shall be affected by notice to the contrary.
SECTION 2.08. Replacement Securities.
If any mutilated Security is surrendered to the Trustee, or the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, the Company shall issue and the
Trustee shall authenticate a replacement Security if the Trustee's requirements
for replacements of Securities are met. An indemnity bond must be supplied by
the holder that is sufficient in the judgment of the Trustee and the Company to
protect the Company, the Trustee and any authenticating agent from any loss that
any of them may suffer if a Security is replaced. The Company or the Trustee
may charge for its expenses in replacing a Security.
Every replacement Security is an obligation of the Company and shall
be entitled to all of the benefits of this Indenture equally and proportionately
with all other Securities duly issued hereunder.
SECTION 2.09. Treasury Securities.
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In determining whether the holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company or any Affiliate of the Company shall be considered as though not
outstanding, except that for purposes of determining whether the Trustee shall
be protected in relying on any such direction, waiver or consent, only
Securities that a Responsible Officer of the Trustee actually knows to be so
owned shall be so considered.
SECTION 2.10. Temporary Securities.
Pending the preparation of Definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and make
available for delivery, temporary Securities that are printed, typewritten,
lithographed, mimeographed or otherwise reproduced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu of
which they are issued and with such appropriate insertions, omissions,
substitutions and other variations as the officers executing such Securities may
determine, as conclusively evidenced by their execution of such Securities.
If temporary Securities are issued, the Company shall cause Definitive
Securities to be prepared without unreasonable delay. The Definitive Securities
shall be printed, typewritten, lithographed or engraved, or provided by any
combination thereof, or in any other manner permitted by the rules and
regulations of any applicable securities exchange, all as determined by the
officers executing such Definitive Securities. After the preparation of
Definitive Securities, the temporary Securities shall be exchangeable for
Definitive Securities upon surrender of the temporary Securities at the office
or agency maintained by the Company for such purpose pursuant to Section 3.02
hereof, without charge to the Holder. Upon surrender for cancellation of any
one or more temporary Securities, the Company shall execute, and the Trustee
shall authenticate and make available for delivery, in exchange therefor the
same aggregate principal amount of Definitive Securities of authorized
denominations. Until so exchanged, the temporary Securities shall in all
respects be entitled to the same benefits under this Indenture as Definitive
Securities.
SECTION 2.11. Cancellation.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Trustee and no one else shall cancel all Securities
surrendered for registration of transfer, exchange, payment, replacement or
cancellation and shall retain or destroy cancelled Securities in accordance with
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its normal practices (subject to the record retention requirement of the
Exchange Act) unless the Company directs them to be returned to it. The Company
may not issue new Securities to replace Securities that have been redeemed or
paid or that have been delivered to the Trustee for cancellation. All cancelled
Securities not destroyed by the Trustee shall be delivered to the Company.
SECTION 2.12. Defaulted Interest.
Any interest on any Security that is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the holder on the
relevant regular record date by virtue of having been such holder; and such
Defaulted Interest shall be paid by the Company, at its election, as provided in
clause (a) or clause (b) below:
(a) The Company may make payment of any Defaulted Interest on
Securities to the Persons in whose names such Securities (or their
respective Predecessor Securities) are registered at the close of business
on a special record date for the payment of such Defaulted Interest, which
shall be fixed in the following manner: the Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each such Security and the date of the proposed payment, and at the same
time the Company shall deposit with the Trustee an amount of money equal to
the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such
deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this clause provided. Thereupon the Trustee
shall fix a special record date for the payment of such Defaulted Interest
which shall not be more than 15 nor less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the
Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Company of such special record date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the special record date therefor to be mailed, first
class postage prepaid, to each Securityholder at his or her address as it
appears in the Security Register, not less than 10 days prior to such
special record date. Notice of the proposed payment of such Defaulted
Interest and the special record date therefor having been mailed as
aforesaid, such Defaulted Interest shall be paid to the Persons in whose
names such Securities (or their respective
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Predecessor Securities) are registered on such special record date and
shall be no longer payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest on any
Securities in any other lawful manner not inconsistent with the requirements of
any securities exchange on which such Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.
SECTION 2.13. CUSIP Numbers.
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of prepayment as a convenience to Securityholders; provided that any such notice
--------
may state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
prepayment and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such prepayment shall not be affected
by any defect in or omission of such numbers. The Company will promptly notify
the Trustee of any change in the CUSIP numbers.
ARTICLE III.
PARTICULAR COVENANTS OF THE COMPANY
SECTION 3.01. Payment of Principal, Premium and Interest
The Company covenants and agrees for the benefit of the holders of the
Securities that it will duly and punctually pay or cause to be paid the
principal of and premium, if any, and interest on the Securities at the place,
at the respective times and in the manner provided herein.
SECTION 3.02. Offices for Notices and Payments, etc.
So long as any of the Securities remains outstanding, the Company will
maintain in the Borough of Manhattan, The City of New York, an office or agency
where the Securities may be presented for payment, an office or agency where
the Securities may be presented for registration of transfer and for exchange as
in this Indenture provided and an office or agency where notices and demands to
or upon the Company in respect of the Securities or of this Indenture may be
served. The Company
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will give to the Trustee written notice of the location of any such office or
agency and of any change of location thereof. Until otherwise designated from
time to time by the Company in a notice to the Trustee, any such office or
agency for all of the above purposes shall be the office or agency of the
Trustee in the Borough of Manhattan, The City of New York. In case the Company
shall fail to maintain any such office or agency in the Borough of Manhattan,
The City of New York, or shall fail to give such notice of the location or of
any change in the location thereof, presentations and demands may be made and
notices may be served at the principal corporate trust office of the Trustee.
In addition to any such office or agency, the Company may from time to
time designate one or more offices or agencies outside the Borough of Manhattan,
The City of New York, where the Securities may be presented for registration of
transfer and for exchange in the manner provided in this Indenture, and the
Company may from time to time rescind such designation, as the Company may deem
desirable or expedient; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligation to maintain
any such office or agency in the Borough of Manhattan, The City of New York, for
the purposes above mentioned. The Company will give to the Trustee prompt
written notice of any such designation or rescission thereof; provided, further,
that the Company shall at all times maintain a paying agent in each such office
or agency.
SECTION 3.03. Appointments to Fill Vacancies in Trustee's Office.
The Company, whenever necessary to avoid or fill a vacancy in the
office of Trustee, will appoint, in the manner provided in Section 6.10, a
Trustee, so that there shall at all times be a Trustee hereunder.
SECTION 3.04. Provision as to Paying Agent.
(a) If the Company shall appoint a paying agent other than the
Trustee with respect to the Securities, it will cause such paying
agent to execute and deliver to the Trustee an instrument in
which such agent shall agree with the Trustee, subject to the
provision of this Section 3.04,
(1) that it will hold all sums held by it as such agent for the
payment of the principal of and premium, if any, or interest
on the Securities (whether such sums have been paid to it by
the Company or by any other obligor
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on the Securities) in trust for the benefit of the holders
of the Securities; and
(2) that it will give the Trustee notice of any failure by the
Company (or by any other obligor on the Securities) to make
any payment of the principal of and premium or interest on
the Securities when the same shall be due and payable.
(b) If the Company shall act as its own paying agent, it will, on or
before each due date of the principal of and premium, if any, or
interest on the Securities, set aside, segregate and hold in
trust for the benefit of the holders of the Securities a sum
sufficient to pay such principal, premium or interest so becoming
due and will notify the Trustee of any failure to take such
action and of any failure by the Company (or by any other obligor
under the Securities) to make any payment of the principal of and
premium, if any, or interest on the Securities when the same
shall become due and payable.
(c) Anything in this Section 3.04 to the contrary notwithstanding,
the Company may, at any time, for the purpose of obtaining a
satisfaction and discharge with respect to the Securities
hereunder, or for any other reason, pay or cause to be paid to
the Trustee all sums held in trust for any such Securities by the
Trustee or any paying agent hereunder, as required by this
Section 3.04, such sums to be held by the Trustee upon the trusts
herein contained.
(d) Anything in this Section 3.04 to the contrary notwithstanding,
the agreement to hold sums in trust as provided in this Section
3.04 is subject to Sections 11.03 and 11.04.
SECTION 3.05. Certificate to Trustee.
The Company will deliver to the Trustee on or before 120 days after
the end of each fiscal year in each year, commencing with the first fiscal year
ending after the date hereof, so long as Securities are outstanding hereunder,
an Officers' Certificate, one of the signers of which shall be the principal
executive, principal financial or principal accounting officer of the Company,
stating that in the course of the performance by the signers of their duties as
officers of the
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Company they would normally have knowledge of any default by the Company in the
performance of any covenants contained herein, stating whether or not they have
knowledge of any such default and, if so, specifying each such default of which
the signers have knowledge and the nature thereof.
SECTION 3.06. Compliance with Consolidation Provisions.
The Company will not, while any of the Securities remain outstanding,
consolidate with, or merge into, or merge into itself, or sell or convey all or
substantially all of its property to, any other Person unless the provisions of
Article X hereof are complied with.
SECTION 3.07. Limitation on Dividends.
The Company will not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock (which includes common and preferred stock)
or (ii) make any payment of principal, interest or premium, if any, on or repay
or repurchase or redeem any debt securities of the Company (including any Other
Debentures) that rank pari passu with or junior in right of payment to the
Securities or (iii) make any guarantee payments with respect to any guarantee by
the Company of the debt securities of any Subsidiary of the Company (including
Other Guarantees) if such guarantee ranks pari passu or junior in right of
payment to the Securities (other than (a) dividends or distributions in shares
of, or options, warrants or rights to subscribe for or purchase shares of,
Common Stock of the Company, (b) any declaration of a dividend in connection
with the implementation of a stockholder's rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, (c) payments under the Capital Securities Guarantee,
(d) as a result of a reclassification of the Company's capital stock or the
exchange or the conversion of one class or series of the Company's capital stock
for another class or series of the Company's capital stock, (e) the purchase of
fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of such capital stock or the security being
converted or exchanged, and (f) purchases or issuances of Common Stock in
connection with any of the Company's stock option, stock purchase, stock loan or
other benefit plans for its directors, officers or employees or any of the
Company's dividend reinvestment plans, in each case as now existing or hereafter
established or amended) if at such time (i) there shall have occurred any event
of which the Company has actual knowledge that (a) with the giving of notice or
the lapse of time, or both,
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would constitute an Event of Default and (b) in respect of which the Company
shall not have taken reasonable steps to cure, (ii) if such Securities are held
by the Property Trustee, the Company shall be in default with respect to its
payment of any obligations under the Capital Securities Guarantee or (iii) the
Company shall have given notice of its election of the exercise of its right to
extend the interest payment period pursuant to Section 16.01 and any such
extension shall be continuing.
SECTION 3.08. Covenants as to Vesta Capital Trust
In the event Securities are issued to Vesta Capital Trust or a trustee
of such trust in connection with the issuance of Trust Securities by Vesta
Capital Trust, for so long as such Trust Securities remain outstanding, the
Company will (i) directly or indirectly maintain 100% ownership of the Common
Securities of Vesta Capital Trust; provided, however, that any successor of the
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Company, permitted pursuant to Article X, may succeed to the Company's ownership
of such Common Securities, (ii) use its reasonable efforts to cause Vesta
Capital Trust (a) to remain a business trust, except in connection with a
distribution of Securities to the holders of the Trust Securities in a
liquidation of Vesta Capital Trust, the redemption of all of the Trust
Securities of Vesta Capital Trust or certain mergers, consolidations or
amalgamations, each as permitted by the Declaration of Vesta Capital Trust, and
(b) to continue to be treated as a grantor trust and not as an association
taxable as a corporation or a partnership for United States federal income tax
purposes and (iii) to use its reasonable efforts to cause each holder of Trust
Securities to be treated as owning an undivided beneficial interest in the
Securities.
SECTION 3.09. Payment of Expenses.
In connection with the offering, sale and issuance of the Securities
to Vesta Capital Trust and in connection with the sale of the Trust Securities
by Vesta Capital Trust, the Company, in its capacity as borrower with respect to
the Securities, shall:
(a) pay all costs and expenses relating to the offering, sale and
issuance of the Securities, including commissions to the initial purchasers
payable pursuant to the Purchase Agreement and compensation of the Trustee in
accordance with the provisions of Section 6.06;
(b) pay all costs and expenses of Vesta Capital Trust (including, but
not limited to, costs and expenses relating to the organization of Vesta Capital
Trust, the offering, sale and issuance of the Trust Securities (including
commissions to the
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initial purchasers payable pursuant to the Purchase Agreement in connection
therewith), the fees and expenses of the Property Trustee and the Delaware
Trustee, the costs and expenses relating to the operation of the Trust,
including without limitation, costs and expenses of accountants, attorneys,
statistical or bookkeeping services, expenses for printing and engraving and
computing or accounting equipment, paying agent(s), registrar(s), transfer
agent(s), duplicating, travel and telephone and other telecommunications
expenses and costs and expenses incurred in connection with the acquisition,
financing and disposition of the assets of Vesta Capital Trust;
(c) be primarily and fully liable for any indemnification obligations
arising with respect to the Declaration;
(d) pay any and all taxes (other than United States withholding taxes
attributable to Vesta Capital Trust or its assets) and all liabilities, costs
and expenses with respect to such taxes of Vesta Capital Trust; and
(e) pay all other fees, expenses, debts and obligations (other than
the Trust Securities) related to Vesta Capital Trust.
SECTION 3.10. Payment Upon Resignation or Removal.
Upon termination of this Indenture or the removal or resignation of
the Trustee, unless otherwise stated, the Company shall pay to the Trustee all
amounts accrued and owing to the date of such termination, removal or
resignation. Upon termination of the Declaration or the removal or resignation
of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to
Section 5.7 of the Declaration, the Company shall pay to the Delaware Trustee or
the Property Trustee, as the case may be, all amounts accrued and owing to the
date of such termination, removal or resignation.
ARTICLE IV.
SECURITYHOLDERS' LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE
SECTION 4.01. Securityholders' Lists.
The Company covenants and agrees that it will furnish or cause to be
furnished to the Trustee:
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(a) on a semi-annual basis on each regular record date for the
Securities, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Securityholders as of
such record date; and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15
days prior to the time such list is furnished;
except that, no such lists need be furnished so long as the Trustee is in
possession thereof by reason of its acting as Security registrar.
SECTION 4.02. Preservation and Disclosure of Lists.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of the
holders of the Securities (1) contained in the most recent list
furnished to it as provided in Section 4.01 or (2) received by it
in the capacity of Securities registrar (if so acting) hereunder.
The Trustee may destroy any list furnished to it as provided in
Section 4.01 upon receipt of a new list so furnished.
(b) In case three or more holders of Securities (hereinafter referred
to as "applicants") apply in writing to the Trustee and furnish
to the Trustee reasonable proof that each such applicant has
owned a Security for a period of at least six months preceding
the date of such application, and such application states that
the applicants desire to communicate with other holders of
Securities or with holders of all Securities with respect to
their rights under this Indenture and is accompanied by a copy of
the form of proxy or other communication which such applicants
propose to transmit, then the Trustee shall within 5 Business
Days after the receipt of such application, at its election,
either:
(1) afford such applicants access to the information preserved at the
time by the Trustee in accordance with the provisions of
subsection (a) of this Section 4.02; or
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(2) inform such applicants as to the approximate number of holders of
all Securities, whose names and addresses appear in the
information preserved at the time by the Trustee in accordance
with the provisions of subsection (a) of this Section 4.02, and
as to the approximate cost of mailing to such Securityholders the
form of proxy or other communication, if any, specified in such
application.
If the Trustee shall elect not to afford such applicants
access to such information, the Trustee shall, upon the written
request of such applicants, mail to each Securityholder whose
name and address appear in the information preserved at the time
by the Trustee in accordance with the provisions of subsection
(a) of this Section 4.02 a copy of the form of proxy or other
communication which is specified in such request with reasonable
promptness after a tender to the Trustee of the material to be
mailed and of payment, or provision for the payment, of the
reasonable expenses of mailing, unless within five days after
such tender, the Trustee shall mail to such applicants and file
with the Commission, together with a copy of the material to be
mailed, a written statement to the effect that, in the opinion of
the Trustee, such mailing would be contrary to the best interests
of the holders of all Securities or would be in violation of
applicable law. Such written statement shall specify the basis
of such opinion. If the Commission, after opportunity for a
hearing upon the objections specified in the written statement so
filed, shall enter an order refusing to sustain any of such
objections or if, after the entry of an order sustaining one or
more of such objections, the Commission shall find, after notice
and opportunity for hearing, that all the objections so sustained
have been met and shall enter an order so declaring, the Trustee
shall mail copies of such material to all such Securityholders
with reasonable promptness after the entry of such order and the
renewal of such tender; otherwise the Trustee shall be relieved
of any obligation or duty to such applicants respecting their
application.
(c) Each and every holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the
Company nor the
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Trustee nor any paying agent shall be held accountable by reason
of the disclosure of any such information as to the names and
addresses of the holders of Securities in accordance with the
provisions of subsection (b) of this Section 4.02, regardless of
the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any
material pursuant to a request made under said subsection (b).
SECTION 4.03. Reports of the Company
(a) The Company covenants and agrees to file with the Trustee,
within 15 days after the date on which the Company is required to
file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the Commission may from
time to time by rules and regulations prescribe) which the
Company may be required to file with the Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act; or, if the
Company is not required to file information, documents or reports
pursuant to either of such sections, then to file with the
Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such
of the supplementary and periodic information, documents and
reports which may be required pursuant to Section 13 of the
Exchange Act in respect of a security listed and registered on a
national securities exchange as may be prescribed from time to
time in such rules and regulations.
(b) The Company covenants and agrees to file with the Trustee and the
Commission, in accordance with the rules and regulations
prescribed from time to time by the Commission, such additional
information, documents and reports with respect to compliance by
the Company with the conditions and covenants provided for in
this Indenture as may be required from time to time by such rules
and regulations.
(c) The Company covenants and agrees to transmit by mail to all
holders of Securities, as the names and addresses of such holders
appear upon the Security Register, within 30 days after the
filing thereof with the Trustee, such summaries of any
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information, documents and reports required to be filed by the
Company pursuant to subsections (a) and (b) of this Section 4.03
as may be required by rules and regulations prescribed from time
to time by the Commission.
(d) Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's
receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information
contained therein, including the Company's compliance with any of
its covenants hereunder (as to which the Trustee is entitled to
rely exclusively on Officers' Certificates).
(e) So long as is required for an offer or sale of the Securities to
qualify for an exemption under Rule 144A under the Securities
Act, the Company shall, upon request, provide the information
required by clause (d)(4) thereunder to each holder of Restricted
Securities and to each beneficial owner and prospective purchaser
of Securities identified by any holder of Restricted Securities,
unless such information is furnished to the Commission pursuant
to Section 13 or 15(d) of the Exchange Act.
SECTION 4.04. Reports by the Trustee
(a) The Trustee shall transmit to Securityholders such reports
concerning the Trustee and its actions under this Indenture as
may be required pursuant to the Trust Indenture Act of 1939 at
the times and in the manner provided pursuant thereto. If
required by Section 313(a) of the Trust Indenture Act of 1939,
the Trustee shall, within sixty days after each May 15 following
the date of this Indenture, commencing May 15, 1997, deliver to
Securityholders a brief report, dated as of such May 15, which
complies with the provisions of such Section 313(a).
(b) A copy of each such report shall, at the time of such
transmission to Securityholders, be filed by the Trustee with
each stock exchange, if any, upon which the Securities are
listed, with the Commission and with the Company. The Company
will promptly notify the Trustee when the Securities are listed
on any stock exchange.
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ARTICLE V.
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
ON EVENT OF DEFAULT
SECTION 5.01. Events of Default.
One or more of the following events of default shall constitute an
Event of Default hereunder (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(a) default in the payment of any interest upon any Security or any
Other Debentures when it becomes due and payable, and continuance
of such default for a period of 30 days; provided, however, that
--------
a valid extension of an interest payment period by the Company in
accordance with the terms hereof or, in the case of any Other
Debentures, the indenture related thereto, shall not constitute a
default in the payment of interest for this purpose; or
(b) default in the payment of all or any part of the principal of (or
premium, if any, on) any Security or any Other Debentures as and
when the same shall become due and payable either at maturity,
upon prepayment, by declaration of acceleration of maturity or
otherwise; or
(c) default in any material respect in the performance, or breach, of
any covenant or warranty of the Company in this Indenture (other
than a covenant or warranty a default in whose performance or
whose breach is elsewhere in this Section specifically dealt
with), and continuance of such default or breach for a period of
90 days after there has been given, by registered or certified
mail, to the Company by the Trustee or to the Company and the
Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding Securities a written notice specifying
such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(d) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of
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the Company in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in
effect, or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of the
Company or for any substantial part of its property, or ordering
the winding-up or liquidation of its affairs and such decree or
order shall remain unstayed and in effect for a period of 90
consecutive days; or
(e) the Company shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in
effect, shall consent to the entry of an order for relief in an
involuntary case under any such law, or shall consent to the
appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian, sequestrator (or other similar
official) of the Company or of any substantial part of its
property, or shall make any general assignment for the benefit of
creditors, or shall fail generally to pay its debts as they
become due.
If an Event of Default with respect to Securities at the time
outstanding occurs and is continuing, then in every such case the Trustee or the
holders of not less than 25% in aggregate principal amount of the Securities
then outstanding may declare the principal amount of all Securities to be due
and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by the holders of the outstanding Securities), and upon any
such declaration the same shall become immediately due and payable.
The foregoing provisions, however, are subject to the condition that
if, at any time after the principal of the Securities shall have been so
declared due and payable, and before any judgment or decree for the payment of
the moneys due shall have been obtained or entered as hereinafter provided, (i)
the Company shall pay or shall deposit with the Trustee a sum sufficient to pay
(A) all matured installments of interest upon all the Securities and the
principal of and premium, if any, on any and all Securities which shall have
become due otherwise than by acceleration (with interest upon such principal and
premium, if any, and, to the extent that payment of such interest is enforceable
under applicable law, on overdue installments of interest, at the same rate as
the rate of interest specified in the Securities to the date of such payment or
deposit) and (B) such amount as shall be sufficient to pay to the Trustee and
each
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predecessor Trustee all amounts payable pursuant to Section 6.06, and (ii) any
and all Events of Default under the Indenture shall have been cured, waived or
otherwise remedied as provided herein, then, in every such case, the holders of
a majority in aggregate principal amount of the Securities then outstanding, by
written notice to the Company and to the Trustee, may rescind and annul such
declaration and its consequences, but no such waiver or rescission and annulment
shall extend to or shall affect any subsequent default or shall impair any right
consequent thereon.
In case the Trustee shall have proceeded to enforce any right under
this Indenture and such proceedings shall have been discontinued or abandoned
because of such rescission or annulment or for any other reason or shall have
been determined adversely to the Trustee, then and in every such case the
Company, the Trustee and the holders of the Securities shall be restored
respectively to their several positions and rights hereunder, and all rights,
remedies and powers of the Company, the Trustee and the holders of the
Securities shall continue as though no such proceeding had been taken.
SECTION 5.02. Payment of Securities on Default; Suit Therefor.
The Company covenants that (a) in case default shall be made in the
payment of any installment of interest upon any of the Securities as and when
the same shall become due and payable, and such default shall have continued for
a period of 30 days, or (b) in case default shall be made in the payment of the
principal of or premium, if any, on any of the Securities as and when the same
shall have become due and payable, whether at maturity of the Securities or upon
prepayment or by declaration of acceleration of maturity or otherwise, then,
upon demand of the Trustee, the Company will pay to the Trustee, for the benefit
of the holders of the Securities, the whole amount that then shall have become
due and payable on all such Securities for principal and premium, if any, or
interest, or both, as the case may be, with interest upon the overdue principal
and premium, if any, and (to the extent that payment of such interest is
enforceable under applicable law and, if the Securities are held by Vesta
Capital Trust or a trustee of such trust, without duplication of any other
amounts paid by Vesta Capital Trust or a trustee in respect thereof) upon the
overdue installments of interest at the rate borne by the Securities; and, in
addition thereto, such further amount as shall be sufficient to cover the costs
and expenses of collection, including a reasonable compensation to the Trustee,
its agents, attorneys and counsel, and any expenses or liabilities incurred by
the Trustee hereunder other than through its negligence or bad faith.
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In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any actions or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor on the
Securities and collect in the manner provided by law out of the property of the
Company or any other obligor on the Securities wherever situated the moneys
adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for
the reorganization of the Company or any other obligor on the Securities under
Title 11, United States Code, or any other applicable law, or in case a receiver
or trustee shall have been appointed for the property of the Company or such
other obligor, or in the case of any other similar judicial proceedings relative
to the Company or other obligor upon the Securities, or to the creditors or
property of the Company or such other obligor, the Trustee, irrespective of
whether the principal of the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee
shall have made any demand pursuant to the provisions of this Section 5.02,
shall be entitled and empowered, by intervention in such proceedings or
otherwise, to file and prove a claim or claims for the whole amount of principal
and interest owing and unpaid in respect of the Securities and, in case of any
judicial proceedings, to file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the Trustee
(including any claim for all amounts payable pursuant to Section 6.06 to the
Trustee and each predecessor Trustee) and of the Securityholders allowed in such
judicial proceedings relative to the Company or any other obligor on the
Securities, or to the creditors or property of the Company or such other
obligor, unless prohibited by applicable law and regulations, to vote on behalf
of the holders of the Securities in any election of a trustee or a standby
trustee in arrangement, reorganization, liquidation or other bankruptcy or
insolvency proceedings or Person performing similar functions in comparable
proceedings, and to collect and receive any moneys or other property payable or
deliverable on any such claims, and to distribute the same after the deduction
of its charges and expenses; and any receiver, assignee or trustee in bankruptcy
or reorganization is hereby authorized by each of the Securityholders to make
such payments to the Trustee, and, in the event that the Trustee shall consent
to the making of such payments directly to the Securityholders, to pay to the
Trustee such amounts as shall be sufficient to pay to the Trustee and
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each predecessor Trustee all amounts payable pursuant to Section 6.06.
Nothing herein contained shall be construed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Securityholder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any holder thereof or to authorize the Trustee to
vote in respect of the claim of any Securityholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or
under any of the Securities, may be enforced by the Trustee without the
possession of any of the Securities, or the production thereof in any trial or
other proceeding relative thereto, and any such suit or proceeding instituted by
the Trustee shall be brought in its own name as trustee of an express trust, and
any recovery of judgment shall be for the ratable benefit of the holders of the
Securities.
In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the holders
of the Securities, and it shall not be necessary to make any holders of the
Securities parties to any such proceedings.
SECTION 5.03. Application of Moneys Collected by Trustee.
Any moneys collected by the Trustee shall be applied in the order
following, at the date or dates fixed by the Trustee for the distribution of
such moneys, upon presentation of the Securities in respect of which moneys have
been collected, and stamping thereon the payment, if only partially paid, and
upon surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee under Section
6.06, including the costs and expenses of collection applicable to the
Securities and reasonable compensation to the Trustee, its agents, attorneys and
counsel, and of all other expenses and liabilities incurred, and all advances
made, by the Trustee except as a result of its negligence or bad faith;
Second: To the payment of all Senior Indebtedness of the Company if
and to the extent required by Article XV;
Third: To the payment of the amounts then due and unpaid upon
Securities for principal of (and premium, if any) and
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interest on the Securities, in respect of which or for the benefit of which
money has been collected, ratably, without preference of priority of any kind,
according to the amounts due on such Securities for principal (and premium, if
any) and interest, respectively; and
Fourth: To the Company.
SECTION 5.04. Proceedings by Securityholders.
Except as contemplated by this Section 5.04, no holder of any Security
shall have any right by virtue of or by availing of any provision of this
Indenture to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Indenture or for the appointment of a receiver
or trustee, or for any other remedy hereunder, unless such holder previously
shall have given to the Trustee written notice of an Event of Default and of the
continuance thereof with respect to the Securities specifying such Event of
Default, as hereinbefore provided, and unless also the holders of not less than
25% in aggregate principal amount of the Securities then outstanding shall have
made written request upon the Trustee to institute such action, suit or
proceeding in its own name as Trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses
and liabilities to be incurred therein or thereby, and the Trustee for 60 days
after its receipt of such notice, request and offer of indemnity shall have
failed to institute any such action, suit or proceeding, it being understood and
intended, and being expressly covenanted by the taker and holder of every
Security with every other taker and holder and the Trustee, that no one or more
holders of Securities shall have any right in any manner whatsoever by virtue of
or by availing of any provision of this Indenture to affect, disturb or
prejudice the rights of any other holder of Securities, or to obtain or seek to
obtain priority over or preference to any other such holder, or to enforce any
right under this Indenture, except in the manner herein provided and for the
equal, ratable and common benefit of all holders of Securities.
Notwithstanding any other provisions in this Indenture, however, the
right of any holder of any Security to receive payment of the principal of
(premium, if any) and interest on such Security, on or after the same shall have
become due and payable, or to institute suit for the enforcement of any such
payment, shall not be impaired or affected without the consent of such holder
and by accepting a Security hereunder it is expressly understood, intended and
covenanted by the taker and holder of every Security with every other such taker
and holder and the Trustee, that no one or more holders of Securities shall have
any
35
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right in any manner whatsoever by virtue or by availing of any provision of this
Indenture to affect, disturb or prejudice the rights of the holders of any other
Securities, or to obtain or seek to obtain priority over or preference to any
other such holder, or to enforce any right under this Indenture, except in the
manner herein provided and for the equal, ratable and common benefit of all
holders of Securities. For the protection and enforcement of the provisions of
this Section, each and every Securityholder and the Trustee shall be entitled
to such relief as can be given either at law or in equity.
The Company and the Trustee acknowledge that pursuant to the
Declaration, the holders of Capital Securities are entitled, in the
circumstances and subject to the limitations set forth therein, to commence a
Direct Action with respect to any Event of Default under this Indenture and the
Securities.
SECTION 5.05. Proceedings by Trustee.
In case an Event of Default occurs with respect to Securities and is
continuing, the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by this Indenture by such appropriate judicial proceedings
as the Trustee shall deem most effectual to protect and enforce any of such
rights, either by suit in equity or by action at law or by proceeding in
bankruptcy or otherwise, whether for the specific enforcement of any covenant or
agreement contained in this Indenture or in aid of the exercise of any power
granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
SECTION 5.06. Remedies Cumulative and Continuing.
All powers and remedies given by this Article V to the Trustee or to
the Securityholders shall, to the extent permitted by law, be deemed cumulative
and not exclusive of any other powers and remedies available to the Trustee or
the holders of the Securities, by judicial proceedings or otherwise, to enforce
the performance or observance of the covenants and agreements contained in this
Indenture or otherwise established with respect to the Securities, and no delay
or omission of the Trustee or of any holder of any of the Securities to exercise
any right or power accruing upon any Event of Default occurring and continuing
as aforesaid shall impair any such right or power, or shall be construed to be a
waiver of any such default or an acquiescence therein; and, subject to the
provisions of Section 5.04, every power and remedy given by this Article V or by
law to the Trustee or to the Securityholders may be exercised from time to time,
and as often as shall be deemed expedient, by the Trustee or by the
Securityholders.
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SECTION 5.07. Direction of Proceedings and Waiver of Defaults by
Majority of Securityholders.
The holders of a majority in aggregate principal amount of the
Securities at the time outstanding shall have the right to direct the time,
method, and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee; provided,
--------
however, that (subject to the provisions of Section 6.01) the Trustee shall have
- -------
the right to decline to follow any such direction if the Trustee shall determine
that the action so directed would be unjustly prejudicial to the holders not
taking part in such direction or if the Trustee being advised by counsel
determines that the action or proceeding so directed may not lawfully be taken
or if the Trustee in good faith by its board of directors or trustees, executive
committee, or a trust committee of directors or trustees and/or Responsible
Officers shall determine that the action or proceedings so directed would
involve the Trustee in personal liability. Prior to any declaration
accelerating the maturity of the Securities, the holders of a majority in
aggregate principal amount of the Securities at the time outstanding may on
behalf of the holders of all of the Securities waive any past default or Event
of Default and its consequences except a default (a) in the payment of principal
of or premium, if any, or interest on any of the Securities or (b) in respect of
covenants or provisions hereof which cannot be modified or amended without the
consent of the holder of each Security affected; provided, however, that if the
-------- -------
Securities are held by the Property Trustee, such waiver or modification to such
waiver shall not be effective until the holders of a majority in aggregate
liquidation amount of Trust Securities shall have consented to such waiver or
modification to such waiver; provided further, that if the consent of the holder
-------- -------
of each outstanding Security is required, such waiver shall not be effective
until each holder of the Trust Securities shall have consented to such waiver.
Upon any such waiver, the default covered thereby shall be deemed to be cured
for all purposes of this Indenture and the Company, the Trustee and the holders
of the Securities shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon. Whenever any default or
Event of Default hereunder shall have been waived as permitted by this Section
5.07, said default or Event of Default shall for all purposes of the Securities
and this Indenture be deemed to have been cured and to be not continuing.
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SECTION 5.08. Notice of Defaults.
The Trustee shall, within 90 days after the occurrence of a default
with respect to the Securities known to the Trustee, mail to all
Securityholders, as the names and addresses of such holders appear upon the
Security register, notice of all defaults known to the Trustee, unless such
defaults shall have been cured before the giving of such notice (the term
"defaults" for the purpose of this Section 5.08 being hereby defined to be the
events specified in clauses (a), (b), (c), (d) and (e) of Section 5.01, not
including periods of grace, if any, provided for therein, and irrespective of
the giving of written notice specified in clause (c) of Section 5.01); and
provided that, except in the case of default in the payment of the principal of
or premium, if any, or interest on any of the Securities, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee, or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determines that the withholding of such
notice is in the interests of the Securityholders; and provided further, that in
the case of any default of the character specified in Section 5.01(c) no such
notice to Securityholders shall be given until at least 60 days after the
occurrence thereof but shall be given within 90 days after such occurrence.
SECTION 5.09. Undertaking to Pay Costs.
All parties to this Indenture agree, and each holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees and
expenses, against any party litigant in such suit, having due regard to the
merits and good faith of the claims or defenses made by such party litigant; but
the provisions of this Section 5.09 shall not apply to any suit instituted by
the Trustee, to any suit instituted by any Securityholder, or group of
Securityholders, holding in the aggregate more than 10% in aggregate principal
amount of the Securities outstanding, or to any suit instituted by any
Securityholder for the enforcement of the payment of the principal of (or
premium, if any) or interest on any Security against the Company on or after the
same shall have become due and payable.
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ARTICLE VI.
CONCERNING THE TRUSTEE
SECTION 6.01. Duties and Responsibilities of Trustee.
With respect to the holders of the Securities issued hereunder, the
Trustee, prior to the occurrence of an Event of Default and after the curing or
waiving of all Events of Default which may have occurred, undertakes to perform
such duties and only such duties as are specifically set forth in this
Indenture. In case an Event of Default has occurred (which has not been cured
or waived) the Trustee shall exercise such of the rights and powers vested in it
by this Indenture, and use the same degree of care and skill in their exercise,
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct, except that
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default which may have
occurred
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this
Indenture, and the Trustee shall not be liable except for
the performance of such duties and obligations as are
specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the
Trustee and conforming to the requirements of this
Indenture; but, in the case of any such certificates or
opinions that by any provision hereof are specifically
required to be furnished to the Trustee, the Trustee shall
be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture;
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(b) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Officers of the Trustee,
unless it shall be proved that the Trustee was negligent in
ascertaining the pertinent facts; and
(c) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith, in accordance with
the direction of the Securityholders pursuant to Section 5.07,
relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee, under this
Indenture.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there is reasonable ground for believing that the
repayment of such funds or liability is not reasonably assured to it under the
terms of this Indenture and that adequate indemnity against such risk is not
reasonably assured to it.
SECTION 6.02. Reliance on Documents, Opinions, etc.
Except as otherwise provided in Section 6.01:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, bond, note, debenture or other paper or document believed
by it to be genuine and to have been signed or presented by the
proper party or parties;
(b) any request, direction, order or demand of the Company mentioned
herein may be sufficiently evidenced by an Officers' Certificate
(unless other evidence in respect thereof be herein specifically
prescribed); and any Board Resolution may be evidenced to the
Trustee by a copy thereof certified by the Secretary or an
Assistant Secretary of the Company;
(c) the Trustee may consult with counsel of its selection and any
advice or Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or
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suffered omitted by it hereunder in good faith and in accordance
with such advice or Opinion of Counsel;
(d) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request,
order or direction of any of the Securityholders, pursuant to the
provisions of this Indenture, unless such Securityholders shall
have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred
therein or thereby;
(e) the Trustee shall not be liable for any action taken or omitted
by it in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this
Indenture; nothing contained herein shall, however, relieve the
Trustee of the obligation, upon the occurrence of an Event of
Default (that has not been cured or waived), to exercise such of
the rights and powers vested in it by this Indenture, and to use
the same degree of care and skill in their exercise, as a prudent
man would exercise or use under the circumstances in the conduct
of his own affairs;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, approval, bond, debenture, coupon or other paper or
document, unless requested in writing to do so by the holders of
a majority in aggregate principal amount of the outstanding
Securities; provided, however, that if the payment within a
reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee, not reasonably
assured to the Trustee by the security afforded to it by the
terms of this Indenture, the Trustee may require reasonable
indemnity against such expense or liability as a condition to so
proceeding; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through
agents (including any Authenticating Agent) or attorneys, and the
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Trustee shall not be responsible for any misconduct or negligence
on the part of any such agent or attorney appointed by it with
due care.
SECTION 6.03. No Responsibility for Recitals, etc.
The recitals contained herein and in the Securities (except in the
certificate of authentication of the Trustee or the Authenticating Agent) shall
be taken as the statements of the Company and the Trustee and the Authenticating
Agent assume no responsibility for the correctness of the same. The Trustee and
the Authenticating Agent make no representations as to the validity or
sufficiency of this Indenture or of the Securities. The Trustee and the
Authenticating Agent shall not be accountable for the use or application by the
Company of any Securities or the proceeds of any Securities authenticated and
delivered by the Trustee or the Authenticating Agent in conformity with the
provisions of this Indenture.
SECTION 6.04. Trustee, Authenticating Agent, Paying Agents, Transfer
Agents or Registrar May Own Securities.
The Trustee or any Authenticating Agent or any paying agent or any
transfer agent or any Security registrar, in its individual or any other
capacity, may become the owner or pledgee of Securities with the same rights it
would have if it were not Trustee, Authenticating Agent, paying agent, transfer
agent or Security registrar.
SECTION 6.05. Moneys to be Held in Trust.
Subject to the provisions of Section 11.04, all moneys received by the
Trustee or any paying agent shall, until used or applied as herein provided, be
held in trust for the purpose for which they were received, but need not be
segregated from other funds except to the extent required by law. The Trustee
and any paying agent shall be under no liability for interest on any money
received by it hereunder except as otherwise agreed in writing with the Company.
SECTION 6.06. Compensation and Expenses of Trustee.
The Company, as borrower, covenants and agrees to pay to the Trustee
from time to time, and the Trustee shall be entitled to, such compensation as
shall be agreed to in writing between the Company and the Trustee (which shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust), and the Company will pay or reimburse the Trustee
upon its request for all reasonable
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expenses, disbursements and advances incurred or made by the Trustee in
accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and of
all Persons not regularly in its employ) except any such expense, disbursement
or advance as may arise from its negligence or bad faith. The Company also
covenants to indemnify each of the Trustee or any predecessor Trustee (and its
officers, agents, directors and employees) for, and to hold each of them
harmless against, any and all loss, damage, claim, liability or expense
including taxes (other than taxes based on the income of the Trustee) incurred
without negligence or bad faith on the part of the Trustee and arising out of or
in connection with the acceptance or administration of this trust, including the
costs and expenses of defending itself against any claim of liability in the
premises. The obligations of the Company under this Section 6.06 shall
constitute additional indebtedness hereunder. Such additional indebtedness
shall be secured by a lien prior to that of the Securities upon all property and
funds held or collected by the Trustee as such, except funds held in trust for
the benefit of the holders of particular Securities.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable federal or state bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the resignation or
removal of the Trustee and the defeasance or other termination of this
Indenture.
SECTION 6.07. Officers' Certificate as Evidence.
Except as otherwise provided in Sections 6.01 and 6.02, whenever in
the administration of the provisions of this Indenture the Trustee shall deem it
necessary or desirable that a matter be proved or established prior to taking or
omitting any action hereunder, such matter (unless other evidence in respect
thereof is herein specifically prescribed) may, in the absence of negligence or
bad faith on the part of the Trustee, be deemed to be conclusively proved and
established by an Officers' Certificate delivered to the Trustee, and such
certificate, in the absence of negligence or bad faith on the part of the
Trustee, shall be full warrant to the Trustee for any action taken or omitted by
it under the provisions of this Indenture upon the faith thereof.
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SECTION 6.08. Conflicting Interest of Trustee.
If the Trustee has or shall acquire any "conflicting interest" within
the meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act.
SECTION 6.09. Eligibility of Trustee.
The Trustee hereunder shall at all times be a corporation or a
national banking association organized and doing business under the laws of the
United States of America or any state or territory thereof or of the District of
Columbia or a corporation or other Person permitted to act as trustee by the
Commission authorized under such laws to exercise corporate trust powers, having
a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000)
and subject to supervision or examination by federal, state, territorial, or
District of Columbia authority. If such corporation or a national banking
association publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section 6.09 the combined capital and surplus of such
corporation or national banking association shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published.
The Company may not, nor may any Person directly or indirectly
controlling, controlled by, or under common control with the Company, serve as
Trustee.
In case at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section 6.09, the Trustee shall resign
immediately in the manner and with the effect specified in Section 6.10.
SECTION 6.10. Resignation or Removal of Trustee.
(a) The Trustee, or any trustee or trustees hereafter appointed, may
at any time resign by giving written notice of such resignation
to the Company and by mailing notice thereof to the holders of
the Securities at their addresses as they shall appear on the
Security register. Upon receiving such notice of resignation,
the Company shall promptly appoint a successor trustee or
trustees by written instrument, in duplicate, one copy of which
instrument shall be delivered to the resigning Trustee and one
copy to the successor
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trustee. If no successor trustee shall have been so appointed
and have accepted appointment within 60 days after the mailing of
such notice of resignation to the affected Securityholders, the
resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee, or any
Securityholder who has been a bona fide holder of a Security for
at least six months may, subject to the provisions of Section
5.09, on behalf of himself and all others similarly situated,
petition any such court for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as
it may deem proper and prescribe, appoint a successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with the provisions of
Section 6.08 after written request therefor by the Company
or by any Securityholder who has been a bona fide holder of
a Security or Securities for at least six months, or
(2) the Trustee shall cease to be eligible in accordance with
the provisions of Section 6.09 and shall fail to resign
after written request therefor by the Company or by any such
Securityholder, or
(3) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the
Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of
its property or affairs for the purpose of rehabilitation,
conservation or liquidation,
then, in any such case, the Company may remove the Trustee and
appoint a successor trustee by written instrument, in duplicate,
one copy of which instrument shall be delivered to the Trustee so
removed and one copy to the successor trustee, or, subject to the
provisions of Section 5.09, any Securityholder who has been a
bona fide holder of a Security for at least six months may, on
behalf of himself and all others similarly situated,
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petition any court of competent jurisdiction for the removal of
the Trustee and the appointment of a successor trustee. Such
court may thereupon, after such notice, if any, as it may deem
proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The holders of a majority in aggregate principal amount of the
Securities at the time outstanding may at any time remove the
Trustee and nominate a successor trustee, which shall be deemed
appointed as successor trustee unless within 10 days after such
nomination the Company objects thereto or if no successor trustee
shall have been so appointed and shall have accepted appointment
within 30 days after such removal, in which case the Trustee so
removed or any Securityholder, upon the terms and conditions and
otherwise as in subsection (a) of this Section 6.10 provided, may
petition any court of competent jurisdiction for an appointment
of a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this
Section 6.10 shall become effective upon acceptance of
appointment by the successor trustee as provided in Section 6.11.
SECTION 6.11. Acceptance by Successor Trustee.
Any successor trustee appointed as provided in Section 6.10 shall
execute, acknowledge and deliver to the Company and to its predecessor trustee
an instrument accepting such appointment hereunder, and thereupon the
resignation or removal of the retiring trustee shall become effective and such
successor trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, duties and obligations of its predecessor
hereunder, with like effect as if originally named as trustee herein; but,
nevertheless, on the written request of the Company or of the successor trustee,
the trustee ceasing to act shall, upon payment of any amounts then due it
pursuant to the provisions of Section 6.06, execute and deliver an instrument
transferring to such successor trustee all the rights and powers of the trustee
so ceasing to act and shall duly assign, transfer and deliver to such successor
trustee all property and money held by such retiring trustee thereunder. Upon
request of any such successor trustee, the Company shall execute any and all
instruments in writing for more fully and certainly vesting in and confirming to
such successor trustee all such rights and powers. Any trustee ceasing to act
shall,
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nevertheless, retain a lien upon all property or funds held or collected by such
trustee to secure any amounts then due it pursuant to the provisions of
Section 6.06.
No successor trustee shall accept appointment as provided in this
Section 6.11 unless at the time of such acceptance such successor trustee shall
be qualified under the provisions of Section 6.08 and eligible under the
provisions of Section 6.09.
Upon acceptance of appointment by a successor trustee as provided in
this Section 6.11, the Company shall mail notice of the succession of such
trustee hereunder to the holders of Securities at their addresses as they shall
appear on the Security register. If the Company fails to mail such notice
within 10 days after the acceptance of appointment by the successor trustee, the
successor trustee shall cause such notice to be mailed at the expense of the
Company.
SECTION 6.12. Successor by Merger, etc.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder without
the execution or filing of any paper or any further act on the part of any of
the parties hereto.
In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any Securities shall have been authenticated
but not delivered, any such successor to the Trustee may adopt the certificate
of authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor trustee; and in all such cases such certificates shall have the full
force which the Securities or this Indenture elsewhere provides that the
certificate of the Trustee shall have; provided, however, that the right to
adopt the certificate of authentication of any predecessor Trustee or
authenticate Securities in the name of any predecessor Trustee shall apply only
to its successor or successors by merger, conversion or consolidation.
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SECTION 6.13. Limitation on Rights of Trustee as a Creditor.
The Trustee shall comply with Section 311(a) of the Trust Indenture
Act of 1939, excluding any creditor relationship described in Section 311(b) of
the Trust Indenture Act of 1939. A Trustee who has resigned or been removed
shall be subject to Section 311(a) of the Trust Indenture Act of 1939 to the
extent included therein.
SECTION 6.14. Authenticating Agents.
There may be one or more Authenticating Agents appointed by the
Trustee upon the request of the Company with power to act on its behalf and
subject to its direction in the authentication and delivery of Securities issued
upon exchange or registration of transfer thereof as fully to all intents and
purposes as though any such Authenticating Agent had been expressly authorized
to authenticate and deliver Securities; provided, that the Trustee shall have no
liability to the Company for any acts or omissions of the Authenticating Agent
with respect to the authentication and delivery of Securities. Any such
Authenticating Agent shall at all times be a corporation organized and doing
business under the laws of the United States or of any state or territory
thereof or of the District of Columbia authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of at least
$5,000,000 and being subject to supervision or examination by federal, state,
territorial or District of Columbia authority. If such corporation publishes
reports of condition at least annually pursuant to law or the requirements of
such authority, then for the purposes of this Section 6.14 the combined capital
and surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time an Authenticating Agent shall cease to be eligible in accordance with
the provisions of this Section, it shall resign immediately in the manner and
with the effect herein specified in this Section.
Any corporation into which any Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, consolidation or conversion to which any Authenticating Agent
shall be a party, or any corporation succeeding to the corporate trust business
of any Authenticating Agent, shall be the successor of such Authenticating Agent
hereunder, if such successor corporation is otherwise eligible under this
Section 6.14 without the execution or filing of any paper or any further act on
the part of the parties hereto or such Authenticating Agent.
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Any Authenticating Agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at any
time terminate the agency of any Authenticating Agent by giving written notice
of termination to such Authenticating Agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
any Authenticating Agent shall cease to be eligible under this Section 6.14, the
Trustee may, and upon the request of the Company shall, promptly appoint a
successor Authenticating Agent eligible under this Section 6.14, shall give
written notice of such appointment to the Company and shall mail notice of such
appointment to all Securityholders as the names and addresses of such holders
appear on the Security Register. Any successor Authenticating Agent upon
acceptance of its appointment hereunder shall become vested with all rights,
powers, duties and responsibilities of its predecessor hereunder, with like
effect as if originally named as Authenticating Agent herein.
The Company, as borrower, agrees to pay to any Authenticating Agent
from time to time reasonable compensation for its services. Any Authenticating
Agent shall have no responsibility or liability for any action taken by it as
such in accordance with the directions of the Trustee.
ARTICLE VII.
CONCERNING THE SECURITYHOLDERS
SECTION 7.01. Action by Securityholders.
Whenever in this Indenture it is provided that the holders of a
specified percentage in aggregate principal amount of the Securities may take
any action (including the making of any demand or request, the giving of any
notice, consent or waiver or the taking of any other action) the fact that at
the time of taking any such action the holders of such specified percentage have
joined therein may be evidenced (a) by any instrument or any number of
instruments of similar tenor executed by such Securityholders in person or by
agent or proxy appointed in writing, or (b) by the record of such holders of
Securities voting in favor thereof at any meeting of such Securityholders duly
called and held in accordance with the provisions of Article VIII, or (c) by a
combination of such instrument or instruments and any such record of such a
meeting of such Securityholders.
If the Company shall solicit from the Securityholders any request,
demand, authorization, direction, notice, consent, waiver or other action, the
Company may, at its option, as evidenced by an Officers' Certificate, fix in
advance a record date for the determination of Securityholders entitled to give
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such request, demand, authorization, direction, notice, consent, waiver or other
action, but the Company shall have no obligation to do so. If such a record
date is fixed, such request, demand, authorization, direction, notice, consent,
waiver or other action may be given before or after the record date, but only
the Securityholders of record at the close of business on the record date shall
be deemed to be Securityholders for the purposes of determining whether
Securityholders of the requisite proportion of Outstanding Securities have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other action, and for that purpose the
Outstanding Securities shall be computed as of the record date; provided,
however, that no such authorization, agreement or consent by such
Securityholders on the record date shall be deemed effective unless it shall
become effective pursuant to the provisions of this Indenture not later than six
months after the record date.
SECTION 7.02. Proof of Execution by Securityholders.
Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of
the execution of any instrument by a Securityholder or his agent or proxy shall
be sufficient if made in accordance with such reasonable rules and regulations
as may be prescribed by the Trustee or in such manner as shall be satisfactory
to the Trustee. The ownership of Securities shall be proved by the Security
Register or by a certificate of the Security registrar. The Trustee may require
such additional proof of any matter referred to in this Section as it shall deem
necessary.
The record of any Securityholders' meeting shall be proved in the
manner provided in Section 8.06.
SECTION 7.03. Who Are Deemed Absolute Owners.
Prior to due presentment for registration of transfer of any Security,
the Company, the Trustee, any Authenticating Agent, any paying agent, any
transfer agent and any Security registrar may deem the Person in whose name such
Security shall be registered upon the Security Register to be, and may treat him
as, the absolute owner of such Security (whether or not such Security shall be
overdue) for the purpose of receiving payment of or on account of the principal
of and premium, if any, and interest on such Security and for all other
purposes; and neither the Company nor the Trustee nor any Authenticating Agent
nor any paying agent nor any transfer agent nor any Security registrar shall be
affected by any notice to the contrary. All such payments so made to any holder
for the time being or upon his order shall be valid, and, to the extent of the
sum or sums so
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paid, effectual to satisfy and discharge the liability for moneys payable upon
any such Security.
SECTION 7.04. Securities Owned by Company Deemed Not Outstanding.
In determining whether the holders of the requisite aggregate
principal amount of Securities have concurred in any direction, consent or
waiver under this Indenture, Securities which are owned by the Company or any
other obligor on the Securities or by any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Company, except for the Securities owned by or on behalf of Vesta Capital Trust,
or any other obligor on the Securities shall be disregarded and deemed not to be
outstanding for the purpose of any such determination; provided that for the
purposes of determining whether the Trustee shall be protected in relying on any
such direction, consent or waiver, only Securities which a Responsible Officer
of the Trustee actually knows are so owned shall be so disregarded. Securities
so owned which have been pledged in good faith may be regarded as outstanding
for the purposes of this Section 7.04 if the pledgee shall establish to the
satisfaction of the Trustee the pledgee's right to vote such Securities and that
the pledgee is not the Company or any such other obligor or Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or any such other obligor. In the case of a dispute as
to such right, any decision by the Trustee taken upon the advice of counsel
shall be full protection to the Trustee.
SECTION 7.05. Revocation of Consents; Future Holders Bound.
At any time prior to (but not after) the evidencing to the Trustee, as
provided in Section 7.01, of the taking of any action by the holders of the
percentage in aggregate principal amount of the Security specified in this
Indenture in connection with such action, any holder of a Security (or any
Security issued in whole or in part in exchange or substitution therefor) the
serial number of which is shown by the evidence to be included in the Securities
the holders of which have consented to such action may, by filing written notice
with the Trustee at its principal office and upon proof of holding as provided
in Section 7.02, revoke such action so far as concerns such Security (or so far
as concerns the principal amount represented by any exchanged or substituted
Security). Except as aforesaid, any such action taken by the holder of any
Security shall be conclusive and binding upon such holder and upon all future
holders and owners of such Security, and of any Security issued in exchange or
substitution therefor, irrespective of whether or not any notation in regard
thereto is made upon such Security or any Security issued in exchange or
substitution therefor.
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ARTICLE VIII.
SECURITYHOLDERS' MEETINGS
SECTION 8.01. Purpose of Meetings
A meeting of Securityholders may be called at any time and from time
to time pursuant to the provisions of this Article VIII for any of the following
purposes:
(a) to give any notice to the Company or to the Trustee, or to give
any directions to the Trustee, or to consent to the waiving of
any Default hereunder and its consequences, or to take any other
action authorized to be taken by Securityholders pursuant to any
of the provisions of Article V;
(b) to remove the Trustee and nominate a successor trustee pursuant
to the provisions of Article VI;
(c) to consent to the execution of an indenture or indentures
supplemental hereto pursuant to the provisions of Section 9.02;
or
(d) to take any other action authorized to be taken by or on behalf
of the holders of any specified aggregate principal amount of
such Securities under any other provision of this Indenture or
under applicable law.
SECTION 8.02. Call of Meetings by Trustee.
The Trustee may at any time call a meeting of Securityholders to take
any action specified in Section 8.01, to be held at such time and at such place
in the Borough of Manhattan, The City of New York, as the Trustee shall
determine. Notice of every meeting of the Securityholders, setting forth the
time and the place of such meeting and in general terms the action proposed to
be taken at such meeting, shall be mailed to holders of Securities at their
addresses as they shall appear on the Securities Register. Such notice shall be
mailed not less than 20 nor more than 180 days prior to the date fixed for the
meeting.
SECTION 8.03. Call of Meetings by Company or Securityholders.
In case at any time the Company pursuant to a resolution of the Board
of Directors, or the holders of at least
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10% in aggregate principal amount of the Securities then outstanding, shall have
requested the Trustee to call a meeting of Securityholders, by written request
setting forth in reasonable detail the action proposed to be taken at the
meeting, and the Trustee shall not have mailed the notice of such meeting within
20 days after receipt of such request, then the Company or such Securityholders
may determine the time and the place in the Borough of Manhattan, The City of
New York, for such meeting and may call such meeting to take any action
authorized in Section 8.01, by mailing notice thereof as provided in
Section 8.02.
SECTION 8.04. Qualifications for Voting.
To be entitled to vote at any meeting of Securityholders a Person
shall be (a) a holder of one or more Securities or (b) a Person appointed by an
instrument in writing as proxy by a holder of one or more Securities. The only
Persons who shall be entitled to be present or to speak at any meeting of
Securityholders shall be the Persons entitled to vote at such meeting and their
counsel and any representatives of the Trustee and its counsel and any
representatives of the Company and its counsel.
SECTION 8.05. Regulations.
Notwithstanding any other provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting of
Securityholders, in regard to proof of the holding of Securities and of the
appointment of proxies, and in regard to the appointment and duties of
inspectors of votes, the submission and examination of proxies, certificates
and other evidence of the right to vote, and such other matters concerning the
conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Securityholders as provided in Section 8.03, in which case the
Company or the Securityholders calling the meeting, as the case may be, shall in
like manner appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by majority vote of the meeting.
Subject to the provisions of Section 8.04, at any meeting each holder
of Securities or proxy therefor shall be entitled to one vote for each $1,000
principal amount of Securities held or represented by him; provided, however,
that no vote shall be cast or counted at any meeting in respect of any Security
challenged as not outstanding and ruled by the chairman
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of the meeting to be not outstanding. The chairman of the meeting shall have no
right to vote other than by virtue of Securities held by him or instruments in
writing as aforesaid duly designating him as the person to vote on behalf of
other Securityholders. Any meeting of Securityholders duly called pursuant to
the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a
majority of those present, whether or not constituting a quorum, and the meeting
may be held as so adjourned without further notice.
SECTION 8.06. Voting.
The vote upon any resolution submitted to any meeting of holders of
Securities shall be by written ballots on which shall be subscribed the
signatures of such holders or of their representatives by proxy and the serial
number or numbers of the Securities held or represented by them. The permanent
chairman of the meeting shall appoint two inspectors of votes who shall count
all votes cast at the meeting for or against any resolution and who shall make
and file with the secretary of the meeting their verified written reports in
triplicate of all votes cast at the meeting. A record in duplicate of the
proceedings of each meeting of Securityholders shall be prepared by the
secretary of the meeting and there shall be attached to said record the original
reports of the inspectors of votes on any vote by ballot taken thereat and
affidavits by one or more persons having knowledge of the facts setting forth a
copy of the notice of the meeting and showing that said notice was mailed as
provided in Section 8.02. The record shall show the serial numbers of the
Securities voting in favor of or against any resolution. The record shall be
signed and verified by the affidavits of the permanent chairman and secretary of
the meeting and one of the duplicates shall be delivered to the Company and the
other to the Trustee to be preserved by the Trustee, the latter to have attached
thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the
matters therein stated.
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ARTICLE IX.
AMENDMENTS
SECTION 9.01. Without Consent of Securityholders.
The Company, when authorized by a Board Resolution, and the Trustee
may from time to time and at any time amend this Indenture, without the consent
of the Securityholders, for one or more of the following purposes:
(a) to evidence the succession of another corporation to the Company,
or successive successions, and the assumption by the successor
corporation of the covenants, agreements and obligations of the
Company pursuant to Article X hereof;
(b) to add to the covenants of the Company such further covenants,
restrictions or conditions for the protection of the
Securityholders as the Board of Directors and the Trustee shall
consider to be for the protection of the Securityholders, and to
make the occurrence, or the occurrence and continuance, of a
default in any of such additional covenants, restrictions or
conditions a Default or an Event of Default permitting the
enforcement of all or any of the remedies provided in this
Indenture as herein set forth; provided, however, that in respect
of any such additional covenant, restriction or condition such
amendment may provide for a particular period of grace after
default (which period may be shorter or longer than that allowed
in the case of other Defaults) or may provide for an immediate
enforcement upon such default or may limit the remedies available
to the Trustee upon such default;
(c) to provide for the issuance under this Indenture of Securities in
coupon form (including Securities registrable as to principal
only) and to provide for exchangeability of such Securities with
the Securities issued hereunder in fully registered form and to
make all appropriate changes for such purpose;
(d) to cure any ambiguity or to correct or supplement any provision
contained herein or in any supplemental indenture which may be
defective or inconsistent with any other provision contained
herein or in any supplemental indenture, or to make such other
provisions in regard to matters or
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questions arising under this Indenture; provided that any such
action shall not materially adversely affect the interests of the
holders of the Securities;
(e) to evidence and provide for the acceptance of appointment
hereunder by a successor trustee with respect to the Securities;
(f) to make provision for transfer procedures, certification, book-
entry provisions, the form of restricted securities legends, if
any, to be placed on Securities, and all other matters required
pursuant to Section 2.07 or otherwise necessary, desirable or
appropriate in connection with the issuance of Securities to
holders of Capital Securities in the event of a distribution of
Securities by Vesta Capital Trust following a Dissolution Event;
(g) to qualify or maintain qualification of this Indenture under the
Trust Indenture Act of 1939; or
(h) to make any change that does not adversely affect the rights of
any Securityholder in any material respect.
The Trustee is hereby authorized to join with the Company in the
execution of any supplemental indenture to effect such amendment, to make any
further appropriate agreements and stipulations which may be therein contained
and to accept the conveyance, transfer and assignment of any property
thereunder, but the Trustee shall not be obligated to, but may in its
discretion, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Any amendment to this Indenture authorized by the provisions of this
Section 9.01 may be executed by the Company and the Trustee without the consent
of the holders of any of the Securities at the time outstanding, notwithstanding
any of the provisions of Section 9.02.
SECTION 9.02. With Consent of Securityholders.
With the consent (evidenced as provided in Section 7.01) of the
holders of a majority in aggregate principal amount of the Securities at the
time outstanding, the Company, when authorized by a Board Resolution, and the
Trustee may from time
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to time and at any time amend this Indenture for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
this Indenture or of modifying in any manner the rights of the holders of the
Securities; provided, however, that no such amendment shall without the consent
--------
of the holders of each Security then outstanding and affected hereby (i) extend
the Maturity Date of any Security, or reduce the rate or extend the time of
payment of interest thereon (except as contemplated by Article XVI), or reduce
the principal amount thereof (including in the case of a discounted Security the
amount payable thereon in the event of acceleration or the amount provable in
bankruptcy), or reduce any amount payable on redemption thereof, or make the
principal thereof or any interest or premium thereon payable in any coin or
currency other than that provided in the Securities, or impair or affect the
right of any Securityholder to institute suit for payment thereof, or (ii)
reduce the aforesaid percentage of Securities the holders of which are required
to consent to any such amendment to this Indenture, provided, however, that if
-------- -------
the Securities are held by Vesta Capital Trust, such amendment shall not be
effective until the holders of a majority in liquidation amount of Trust
Securities shall have consented to such amendment; provided, further, that if
-------- -------
the consent of the holder of each outstanding Security is required, such
amendment shall not be effective until each holder of the Trust Securities shall
have consented to such amendment.
Upon the request of the Company accompanied by a copy of a resolution
of the Board of Directors certified by its Secretary or Assistant Secretary
authorizing the execution of any supplemental indenture affecting such
amendment, and upon the filing with the Trustee of evidence of the consent of
Securityholders as aforesaid, the Trustee shall join with the Company in the
execution of such supplemental indenture unless such supplemental indenture
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such supplemental indenture.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Trustee
shall transmit by mail, first class postage prepaid, a notice, prepared by the
Company, setting forth in general terms the substance of such supplemental
indenture, to the Securityholders as their names and addresses appear upon the
Security Register. Any failure of the Trustee to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such supplemental indenture.
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It shall not be necessary for the consent of the Securityholders under
this Section 9.02 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.
SECTION 9.03. Compliance with Trust Indenture Act; Effect of
Supplemental Indentures.
Any supplemental indenture executed pursuant to the provisions of this
Article IX shall comply with the Trust Indenture Act. Upon the execution of any
supplemental indenture pursuant to the provisions of this Article IX, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitations of rights, obligations, duties
and immunities under this Indenture of the Trustee, the Company and the holders
of Securities shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments and all the terms
and conditions of any such supplemental indenture shall be and be deemed to be
part of the terms and conditions of this Indenture for any and all purposes.
SECTION 9.04. Notation on Securities.
Securities authenticated and delivered after the execution of any
supplemental indenture affecting such series pursuant to the provisions of this
Article IX may bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company or the Trustee
shall so determine, new Securities so modified as to conform, in the opinion of
the Trustee and the Board of Directors, to any modification of this Indenture
contained in any such supplemental indenture may be prepared and executed by the
Company, authenticated by the Trustee or the Authenticating Agent and delivered
in exchange for the Securities then outstanding.
SECTION 9.05. Evidence of Compliance of Supplemental Indenture to be
Furnished Trustee.
The Trustee, subject to the provisions of Sections 6.01 and 6.02, may
receive an Officers' Certificate and an Opinion of Counsel as conclusive
evidence that any supplemental indenture executed pursuant to this Article is
authorized or permitted by, and conforms to, the terms of this Article and that
it is proper for the Trustee under the provisions of this Article to join in the
execution thereof.
ARTICLE X.
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
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SECTION 10.01. Company May Consolidate, etc., on Certain Terms.
Nothing contained in this Indenture or in any of the Securities shall
prevent any consolidation or merger of the Company with or into any other Person
(whether or not affiliated with the Company, as the case may be), or successive
consolidations or mergers in which the Company, as the case may be, or its
successor or successors shall be a party or parties, or shall prevent any sale,
conveyance, transfer or lease of the property of the Company, as the case may
be, or its successor or successors as an entirety, or substantially as an
entirety, to any other Person (whether or not affiliated with the Company, as
the case may be, or its successor or successors) authorized to acquire and
operate the same; provided, that (a) the Company is the surviving Person or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, conveyance, transfer or lease of property is
made is a Person organized and existing under the laws of the United States or
any State thereof or the District of Columbia, and (b) upon any such
consolidation, merger, sale, conveyance, transfer or lease, the due and punctual
payment of the principal of (and premium, if any) and interest on the Securities
according to their tenor and the due and punctual performance and observance of
all the covenants and conditions of this Indenture to be kept or performed by
the Company shall be expressly assumed, by supplemental indenture (which shall
conform to the provisions of the Trust Indenture Act of 1939, as then in effect)
satisfactory in form to the Trustee, and executed and delivered to the Trustee
by the Person formed by such consolidation, or into which the Company, as the
case may be, shall have been merged, or by the Person which shall have acquired
such property, and (c) after giving effect to such consolidation, merger, sale,
conveyance, transfer or lease, no Default or Event of Default shall have
occurred and be continuing.
SECTION 10.02. Successor Corporation to be Substituted for Company.
In case of any such consolidation, merger, conveyance or transfer and
upon the assumption by the successor corporation, by supplemental indenture,
executed and delivered to the Trustee and satisfactory in form to the Trustee,
of the due and punctual payment of the principal of and premium, if any, and
interest on all of the Securities and the due and punctual performance and
observance of all of the covenants and conditions of this Indenture to be
performed or observed by the Company, such successor Person shall succeed to and
be substituted for the Company, with the same effect as if it had been named
herein as the party of the first part, and the Company thereupon shall be
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relieved of any further liability or obligation hereunder or upon the
Securities. Such successor Person thereupon may cause to be signed, and may
issue either in its own name or in the name of Vesta Insurance Group, Inc., any
or all of the Securities issuable hereunder which theretofore shall not have
been signed by the Company and delivered to the Trustee or the Authenticating
Agent; and, upon the order of such successor Person instead of the Company and
subject to all the terms, conditions and limitations in this Indenture
prescribed, the Trustee or the Authenticating Agent shall authenticate and
deliver any Securities which previously shall have been signed and delivered by
the officers of the Company to the Trustee or the Authenticating Agent for
authentication, and any Securities which such successor Person thereafter shall
cause to be signed and delivered to the Trustee or the Authenticating Agent for
that purpose. All the Securities so issued shall in all respects have the same
legal rank and benefit under this Indenture as the Securities theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities had been issued at the date of the execution hereof.
SECTION 10.03. Opinion of Counsel to be Given Trustee.
The Trustee, subject to the provisions of Sections 6.01 and 6.02, may
receive an Opinion of Counsel as conclusive evidence that any consolidation,
merger, sale, conveyance, transfer or lease, and any assumption, permitted or
required by the terms of this Article X complies with the provisions of this
Article X.
ARTICLE XI.
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 11.01. Discharge of Indenture.
When (a) the Company shall deliver to the Trustee for cancellation all
Securities theretofore authenticated (other than any Securities which shall have
been destroyed, lost or stolen and which shall have been replaced or paid as
provided in Section 2.08) and not theretofore cancelled, or (b) all the
Securities not theretofore cancelled or delivered to the Trustee for
cancellation shall have become due and payable, or are by their terms to become
due and payable within one year or are to be called for prepayment within one
year under arrangements satisfactory to the Trustee for the giving of notice of
prepayment, and the Company shall deposit or cause to be deposited with the
Trustee, in trust, funds sufficient to pay on the Maturity Date or upon
prepayment all of the Securities (other than any Securities which shall have
been destroyed, lost or stolen and which shall have been replaced or paid as
provided in
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Section 2.08) not theretofore cancelled or delivered to the Trustee for
cancellation, including principal (and premium, if any) and interest due or to
become due to the Maturity Date or prepayment date, as the case may be, but
excluding, however, the amount of any moneys for the payment of principal (or
premium, if any) or interest on the Securities (1) theretofore repaid to the
Company in accordance with the provisions of Section 11.04, or (2) paid to any
State or to the District of Columbia pursuant to its unclaimed property or
similar laws, and if in either case the Company shall also pay or cause to be
paid all other sums payable hereunder by the Company, then this Indenture shall
cease to be of further effect except for the provisions of Sections 2.02, 2.07,
2.08, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof shall survive until such
Securities shall mature and be paid. Thereafter, Sections 6.06, 6.10 and 11.04
shall survive, and the Trustee, on demand of the Company accompanied by any
Officers' Certificate and an Opinion of Counsel to the effect that all
conditions to the satisfaction and discharge of this Indenture have been
satisfied and at the cost and expense of the Company, shall execute proper
instruments acknowledging satisfaction of and discharging this Indenture, the
Company, however, hereby agreeing to reimburse the Trustee for any costs or
expenses thereafter reasonably and properly incurred by the Trustee in
connection with this Indenture or the Securities.
SECTION 11.02. Deposited Moneys and U.S. Government Obligations to be
Held in Trust by Trustee.
Subject to the provisions of Section 11.04, all moneys and U.S.
Government Obligations deposited with the Trustee pursuant to Sections 11.01 or
11.05 shall be held in trust and applied by it to the payment, either directly
or through any paying agent (including the Company if acting as its own paying
agent), to the holders of the particular Securities for the payment of which
such moneys or U.S. Government Obligations have been deposited with the
Trustee, of all sums due and to become due thereon for principal, premium, if
any, and interest.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 11.05 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the holders of outstanding Securities.
SECTION 11.03. Paying Agent to Repay Moneys Held.
Upon the satisfaction and discharge of this Indenture all moneys then
held by any paying agent of the Securities (other
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than the Trustee) shall, upon written demand of the Company, be repaid to it or
paid to the Trustee, and thereupon such paying agent shall be released from all
further liability with respect to such moneys.
SECTION 11.04. Return of Unclaimed Moneys.
Any moneys deposited with or paid to the Trustee or any paying agent
for payment of the principal of or premium, if any, or interest on Securities
and not applied but remaining unclaimed by the holders of Securities for two
years after the date upon which the principal of or premium, if any, or interest
on such Securities, as the case may be, shall have become due and payable, shall
be repaid to the Company by the Trustee or such paying agent on written demand;
and the holder of any of the Securities shall thereafter look only to the
Company for any payment which such holder may be entitled to collect and all
liability of the Trustee or such paying agent with respect to such moneys shall
thereupon cease.
SECTION 11.05. Defeasance Upon Deposit of Moneys or U.S. Government
Obligations
The Company shall be deemed to have been Discharged (as defined below)
from its respective obligations with respect to the Securities on the 91st day
after the applicable conditions set forth below have been satisfied with respect
to the Securities at any time after the applicable conditions set forth below
have been satisfied:
(1) The Company shall have deposited or caused to be deposited
irrevocably with the Trustee or the Defeasance Agent (as defined
below) as trust funds in trust, specifically pledged as security
for, and dedicated solely to, the benefit of the holders of the
Securities (i) money in an amount, or (ii) U.S. Government
Obligations which through the payment of interest and principal
in respect thereof in accordance with their terms will provide,
not later than one day before the due date of any payment, money
in an amount, or (iii) a combination of (i) and (ii), sufficient,
in the opinion (with respect to (ii) and (iii)) of a nationally
recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee and the
Defeasance Agent, if any, to pay and discharge each installment
of principal of and interest and premium, if any, on the
outstanding Securities on
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the dates such installments of principal, premium or interest are
due;
(2) if the Securities are then listed on any national securities
exchange, the Company shall have delivered to the Trustee and the
Defeasance Agent, if any, an Opinion of Counsel to the effect
that the exercise of the option under this Section 11.05 would
not cause such Securities to be delisted from such exchange;
(3) no Default or Event of Default with respect to the Securities
shall have occurred and be continuing on the date of such
deposit;
(4) the Company shall have delivered to the Trustee and the
Defeasance Agent, if any, an Opinion of Counsel to the effect
that holders of the Securities will not recognize income, gain or
loss for United States federal income tax purposes as a result of
the exercise of the option under this Section 11.05 and will be
subject to United States federal income tax on the same amount
and in the same manner and at the same times as would have been
the case if such option had not been exercised, and such opinion
shall be accompanied by a private letter ruling to that effect
received from the United States Internal Revenue Service or a
revenue ruling pertaining to a comparable form of transaction to
that effect published by the United States Internal Revenue
Service; and
(5) the Company shall have delivered to the Trustee and the
Defeasance Agent, if any, an Officers' Certificate and an Opinion
of Counsel each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
"Discharged" means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by, and obligations under, the
Securities and to have satisfied all the obligations under this Indenture
relating to the Securities (and the Trustee, at the expense of the Company,
shall execute proper instruments acknowledging the same), except (A) the rights
of holders of Securities to receive, from the trust fund described in clause (1)
above, payment of the principal of and the interest and premium, if any, on the
Securities when such payments are due; (B) the Company's obligations with
respect to the Securities under Sections 2.07, 2.08, 5.02 and 11.04; and (C)
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the rights, powers, trusts, duties and immunities of the Trustee hereunder.
"Defeasance Agent" means another financial institution which is
eligible to act as Trustee hereunder and which assumes all of the obligations of
the Trustee necessary to enable the Trustee to act hereunder. In the event such
a Defeasance Agent is appointed pursuant to this Section, the following
conditions shall apply:
(1) The Trustee shall have approval rights over the document
appointing such Defeasance Agent and the document setting forth
such Defeasance Agent's rights and responsibilities; and
(2) The Defeasance Agent shall provide verification to the Trustee
acknowledging receipt of sufficient money and/or U.S. Government
Obligations to meet the applicable conditions set forth in this
Section 11.05.
SECTION 11.06. Reinstatement.
If the Trustee or any Defeasance Agent is unable to apply any money in
accordance with Section 11.05 by reason of any legal proceeding or by reason of
any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, the Company's obligations
under this Indenture and the Securities shall be revived and reinstated as
though no deposit had occurred pursuant to Section 11.05 until such time as the
Trustee or any Defeasance Agent is permitted to apply all such money in
accordance with Section 11.05.
ARTICLE XII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
SECTION 12.01. Indenture and Securities Solely Corporate Obligations.
No recourse for the payment of the principal of or premium, if any, or
interest on any Security, or for any claim based thereon or otherwise in respect
thereof, and no recourse under or upon any obligation, covenant or agreement of
the Company in this Indenture, or in any Security, or because of the creation of
any indebtedness represented thereby, shall be had against any incorporator,
stockholder, officer or director, as such, past, present or future, of the
Company or of any successor Person to the Company, either directly or through
the Company any
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constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise; it being expressly understood that all such liability is
hereby expressly waived and released as a condition of, and as a consideration
for, the execution of this Indenture and the issue of the Securities.
ARTICLE XIII.
MISCELLANEOUS PROVISIONS
SECTION 13.01. Successors.
All the covenants, stipulations, promises and agreements in this
Indenture contained by the Company shall bind its successors and assigns whether
so expressed or not.
SECTION 13.02. Official Acts by Successor Corporation.
Any act or proceeding by any provision of this Indenture authorized or
required to be done or performed by any board, committee or officer of the
Company shall and may be done and performed with like force and effect by the
like board, committee or officer of any corporation that shall at the time be
the lawful sole successor of the Company.
SECTION 13.03. Surrender of Company Powers.
The Company by instrument in writing executed by authority of 2/3
(two-thirds) of its Board of Directors and delivered to the Trustee may
surrender any of the powers reserved to the Company, and thereupon such power so
surrendered shall terminate both as to the Company, as the case may be, and as
to any successor Person.
SECTION 13.04. Address for Notices, etc.
Any notice or demand which by any provision of this Indenture is
required or permitted to be given or served by the Trustee or by the holders of
Securities on the Company may be given or served by being deposited postage
prepaid by registered or certified mail in a post office letter box addressed
(until another address is filed by the Company with the Trustee for the purpose)
to the Company, 3760 River Run Drive, Birmingham, Alabama 35243 Attention:
General Counsel. Any notice, direction, request or demand by any Securityholder
to or upon the Trustee shall be deemed to have been sufficiently given or made,
for all purposes, if given or made in writing at the office of the Trustee, 230
South Tryon Street, 9th Floor, Charlotte, North Carolina 28288-1179, Attention:
Bond Administration (unless another address is provided by the Trustee to the
Company for the
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purpose). All such notices shall be deemed to have been given when received in
person, telecopied with receipt confirmed, and mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.
SECTION 13.05. Governing Law.
This Indenture and each Security shall be deemed to be a contract made
under the laws of the State of New York, and for all purposes shall be governed
by and construed in accordance with the laws of said State, without regard to
conflicts of laws principles thereof.
SECTION 13.06. Evidence of Compliance with Conditions Precedent.
Upon any application or demand by the Company to the Trustee to take
any action under any of the provisions of this Indenture, the Company shall
furnish to the Trustee an Officers' Certificate stating that in the opinion of
the signers all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with and an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or covenant
provided for in this Indenture shall include (1) a statement that the person
making such certificate or opinion has read such covenant or condition; (2) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based; (3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
SECTION 13.07. Business Days.
In any case where the date of payment of principal of or premium, if
any, or interest on the Securities will not be a Business Day, the payment of
such principal of or premium, if any, or interest on the Securities need not be
made on such date but may be made on the next succeeding Business Day (and
without
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any interest or other payment in respect of any such delay), with the same force
and effect as if made on the date of payment and no interest shall accrue for
the period from and after such date.
SECTION 13.08. Trust Indenture Act to Control.
If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with another provision included in this Indenture which
is required to be included in this Indenture by any of Sections 310 to 317,
inclusive, of the Trust Indenture Act of 1939, such required provision shall
control.
SECTION 13.09. Table of Contents, Headings, etc.
The table of contents and the titles and headings of the articles and
sections of this Indenture have been inserted for convenience of reference only,
are not to be considered a part hereof, and shall in no way modify or restrict
any of the terms or provisions hereof.
SECTION 13.10. Execution in Counterparts
This Indenture may be executed in any number of counterparts, each of
which shall be an original, but such counterparts shall together constitute but
one and the same instrument.
SECTION 13.11. Separability.
In case any one or more of the provisions contained in this Indenture
or in the Securities shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Indenture or of the Securities,
but this Indenture and the Securities shall be construed as if such invalid or
illegal or unenforceable provision had never been contained herein or therein.
SECTION 13.12. Assignment.
The Company will have the right at all times to assign any of its
respective rights or obligations under this Indenture to a direct or indirect
wholly owned Subsidiary of the Company, provided that, in the event of any such
assignment, the Company, as the case may be, will remain liable for all such
obligations. Subject to the foregoing, the Indenture is binding upon and inures
to the benefit of the parties thereto and their respective successors and
assigns. This Indenture may not otherwise be assigned by the parties hereto.
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SECTION 13.13. Acknowledgement of Rights.
The Company acknowledges that, with respect to any Securities held by
Vesta Capital Trust or a trustee of such trust, if the Property Trustee of such
Trust fails to enforce its rights under this Indenture as the holder of the
Securities held as the assets of Vesta Capital Trust any holder of Capital
Securities may institute legal proceedings directly against the Company to
enforce such Property Trustee's rights under this Indenture without first
instituting any legal proceedings against such Property Trustee or any other
Person. Notwithstanding the foregoing, if an Event of Default has occurred and
is continuing and such event is attributable to the failure of the Company to
pay principal of or premium, if any, or interest on the Securities when due, the
Company acknowledges that a holder of Capital Securities may directly institute
a proceeding for enforcement of payment to such holder of the principal of or
premium, if any, or interest on the Securities having a principal amount equal
to the aggregate liquidation amount of the Capital Securities of such holder on
or after the respective due date specified in the Securities.
ARTICLE XIV.
PREPAYMENT OF SECURITIES
SECTION 14.01. Special Event Prepayment.
If a Special Event has occurred and is continuing, then the Company
shall have the right upon (i) not less than 45 days written notice to the
Trustee and (ii) not less than 30 days nor more than 60 days written notice to
the Securityholders, to prepay the Securities, in whole (but not in part), at
any time within 90 days following the occurrence of such Special Event, at the
Special Event Prepayment Price. Following a Special Event, the Company shall
take such action as is necessary to promptly determine the Special Event
Prepayment Price, including without limitation the appointment by the Company of
a Quotation Agent. The Special Event Prepayment Price shall be paid prior to
12:00 noon, New York City time, on the date of such prepayment or such earlier
time as the Company determines, provided that the Company shall deposit with the
Trustee an amount sufficient to pay the Special Event Prepayment Price by 10:00
a.m., New York City time, on the date such Special Event Prepayment Price is to
be paid.
SECTION 14.02. No Optional Prepayment by Company.
Other than as set forth in Section 14.01, the Securities shall not be
subject to optional prepayment by the Company.
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SECTION 14.03. No Sinking Fund.
The Securities are not entitled to the benefit of any sinking fund.
SECTION 14.04. Notice of Prepayment.
In case the Company shall desire to exercise the right to prepay all
of the Securities in accordance with their terms, it shall fix a date for
prepayment and shall mail a notice of such prepayment at least 30 and not more
than 60 days prior to the date fixed for prepayment to the holders of Securities
so to be prepaid as a whole or in part at their last addresses as the same
appear on the Security Register. Such mailing shall be by first class mail.
The notice if mailed in the manner herein provided shall be conclusively
presumed to have been duly given, whether or not the holder receives such
notice. In any case, failure to give such notice by mail or any defect in the
notice to the holder of any Security designated for prepayment as a whole or in
part shall not affect the validity of the proceedings for the prepayment of any
other Security.
Each such notice of prepayment shall specify the CUSIP number of the
Securities to be prepaid, the date fixed for prepayment, the prepayment price at
which the Securities are to be prepaid (or the method by which such prepayment
price is to be calculated), the place or places of payment that payment will be
made upon presentation and surrender of the Securities, that interest accrued to
the date fixed for prepayment will be paid as specified in said notice, and that
on and after said date interest thereon or on the portions thereof to be prepaid
will cease to accrue. If less than all the Securities are to be prepaid the
notice of prepayment shall specify the numbers of the Securities to be prepaid.
Prior to 10:00 a.m., New York City time, on the prepayment date
specified in the notice of prepayment given as provided in this Section, the
Company will deposit with the Trustee or with one or more paying agents an
amount of money sufficient to prepay on the prepayment date all the Securities
so called for prepayment at the appropriate Prepayment Price, together with
accrued interest to the date fixed for prepayment.
The Company will give the Trustee notice not less than 45 days prior
to the prepayment date as to the aggregate principal amount of Securities to be
prepaid.
SECTION 14.05. Payment of Securities Called for Prepayment.
If notice of prepayment has been given as provided in Section 14.04,
the Securities with respect to which such notice
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has been given shall become due and payable on the date and at the place or
places stated in such notice at the applicable Prepayment Price, together with
interest accrued to the date fixed for prepayment (subject to the rights of
holders of Securities on the close of business on a regular record date in
respect of an Interest Payment Date occurring on or prior to the prepayment
date), and on and after said date (unless the Company shall default in the
payment of such Securities at the Prepayment Price, together with interest
accrued to said date) interest on the Securities so called for prepayment shall
cease to accrue. On presentation and surrender of such Securities at a place of
payment specified in said notice, the said Securities shall be paid and prepaid
by the Company at the applicable Prepayment Price, together with interest
accrued thereon to the date fixed for prepayment (subject to the rights of
holders of Securities on the close of business on a regular record date in
respect of an Interest Payment Date occurring on or prior to the prepayment
date).
ARTICLE XV.
SUBORDINATION OF SECURITIES
SECTION 15.01. Agreement to Subordinate.
The Company covenants and agrees, and each holder of Securities issued
hereunder likewise covenants and agrees, that the Securities shall be issued
subject to the provisions of this Article XV; and each holder of a Security,
whether upon original issue or upon transfer or assignment thereof, accepts and
agrees to be bound by such provisions.
The payment by the Company of the principal of and premium, if any,
and interest on all Securities issued hereunder shall, to the extent and in the
manner hereinafter set forth, be subordinated and junior in right of payment to
the prior payment in full of all amounts with respect to Senior Indebtedness,
whether outstanding at the date of this Indenture or thereafter incurred.
No provision of this Article XV shall prevent the occurrence of any
Default or Event of Default hereunder.
SECTION 15.02. Default on Senior Indebtedness.
In the event and during the continuation of any default by the Company
in the payment of principal, premium, interest or any other payment due on any
Senior Indebtedness, or in the event that the maturity of any Senior
Indebtedness has been accelerated because of a default, then, in either case, no
payment shall be made by the Company with respect to the principal (including
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prepayments) of or premium, if any, or interest on the Securities.
In the event of the acceleration of the maturity of the Securities,
then no payment shall be made by the Company with respect to the principal
(including prepayments) of or premium, if any, or interest on the Securities
until the holders of all Senior Indebtedness outstanding at the time of such
acceleration shall receive payment in full of all amounts due in respect of such
Senior Indebtedness (including any amounts due upon acceleration).
In the event that, notwithstanding the foregoing, any payment shall be
received by the Trustee when such payment is prohibited by the preceding
paragraph of this Section 15.02, such payment shall be held in trust for the
benefit of, and shall be paid over or delivered to, the holders of Senior
Indebtedness or their respective representatives, or to the trustee or trustees
under any indenture pursuant to which any of such Senior Indebtedness may have
been issued, as their respective interests may appear, but only to the extent of
the amounts due in respect of such Senior Indebtedness and only to the extent
that the holders of the Senior Indebtedness (or their representative or
representatives or a trustee) notify the Trustee in writing, within 90 days of
such payment, of the amounts then due and owing on such Senior Indebtedness and
only the amounts specified in such notice to the Trustee shall be paid to the
holders of such Senior Indebtedness.
SECTION 15.03. Liquidation; Dissolution; Bankruptcy.
Upon any payment by the Company or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due upon all Senior Indebtedness
of the Company shall first be paid in full, or payment thereof provided for in
money in accordance with its terms, before any payment is made by the Company on
account of the principal (and premium, if any) or interest on the Securities;
and upon any such dissolution or winding-up or liquidation or reorganization,
any payment by the Company, or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, to which the
Securityholders or the Trustee would be entitled to receive from the Company,
except for the provisions of this Article XV, shall be paid by the Company or by
any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such payment or distribution, or by the Securityholders or by the Trustee
under this Indenture if received by them or it, directly to the holders of
Senior Indebtedness of the Company (pro rata to such holders
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on the basis of the respective amounts of Senior Indebtedness held by such
holders, as calculated by the Company) or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing such Senior Indebtedness may have been issued,
as their respective interests may appear, to the extent necessary to pay such
Senior Indebtedness in full, in money or money's worth, after giving effect to
any concurrent payment or distribution to or for the holders of such Senior
Indebtedness, before any payment or distribution is made to the Securityholders
or to the Trustee.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be received by the
Trustee before all Senior Indebtedness is paid in full, or provision is made for
such payment in money in accordance with its terms, such payment or distribution
shall be held in trust for the benefit of and shall be paid over or delivered to
the holders of such Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing such Senior Indebtedness may have been issued,
and their respective interests may appear, as calculated by the Company, for
application to the payment of all Senior Indebtedness remaining unpaid to the
extent necessary to pay all amounts due in respect of such Senior Indebtedness
in full in money in accordance with its terms, after giving effect to any
concurrent payment or distribution to or for the benefit of the holders of such
Senior Indebtedness.
For purposes of this Article XV, the words "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this Article XV with respect
to the Securities to the payment of Senior Indebtedness that may at the time be
outstanding, provided that (i) such Senior Indebtedness is assumed by the new
corporation, if any, resulting from any such reorganization or readjustment, and
(ii) the rights of the holders of such Senior Indebtedness are not, without the
consent of such holders, altered by such reorganization or readjustment. The
consolidation of the Company with, or the merger of the Company into, another
Person or the liquidation or dissolution of the Company following the sale,
conveyance, transfer or lease of its property as an entirety, or substantially
as an entirety, to another Person upon the terms and conditions provided for in
Article X of this Indenture shall not be deemed a dissolution, winding-up,
liquidation or reorganization for the purposes of this Section 15.03 if such
other Person shall, as a part of such consolidation, merger,
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sale, conveyance, transfer or lease, comply with the conditions stated in
Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03
shall apply to claims of, or payments to, the Trustee under or pursuant to
Section 6.06 of this Indenture.
SECTION 15.04. Subrogation.
Subject to the payment in full of all amounts due in respect of Senior
Indebtedness, the rights of the Securityholders shall be subrogated to the
rights of the holders of such Senior Indebtedness to receive payments or
distributions of cash, property or securities of the Company, as the case may
be, applicable to such Senior Indebtedness until the principal of (and premium,
if any) and interest on the Securities shall be paid in full; and, for the
purposes of such subrogation, no payments or distributions to the holders of
such Senior Indebtedness of any cash, property or securities to which the
Securityholders or the Trustee would be entitled except for the provisions of
this Article XV, and no payment over pursuant to the provisions of this Article
XV to or for the benefit of the holders of such Senior Indebtedness by
Securityholders or the Trustee, shall, as between the Company, its creditors
other than holders of Senior Indebtedness of the Company, and the holders of the
Securities, be deemed to be a payment by the Company to or on account of such
Senior Indebtedness. It is understood that the provisions of this Article XV
are and are intended solely for the purposes of defining the relative rights of
the holders of the Securities, on the one hand, and the holders of such Senior
Indebtedness, on the other hand.
Nothing contained in this Article XV or elsewhere in this Indenture or
in the Securities is intended to or shall impair, as between the Company, its
creditors other than the holders of Senior Indebtedness of the Company, and the
holders of the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the holders of the Securities the principal of (and
premium, if any) and interest on the Securities as and when the same shall
become due and payable in accordance with their terms, or is intended to or
shall affect the relative rights of the holders of the Securities and creditors
of the Company, as the case may be, other than the holders of Senior
Indebtedness of the Company, as the case may be, nor shall anything herein or
therein prevent the Trustee or the holder of any Security from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article XV of the holders
of such Senior Indebtedness in respect of cash, property or securities of the
Company, as the case may be, received upon the exercise of any such remedy.
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Upon any payment or distribution of assets of the Company referred to
in this Article XV, the Trustee, subject to the provisions of Article VI of this
Indenture, and the Securityholders shall be entitled to conclusively rely upon
any order or decree made by any court of competent jurisdiction in which such
dissolution, winding-up, liquidation or reorganization proceedings are pending,
or a certificate of the receiver, trustee in bankruptcy, liquidation trustee,
agent or other Person making such payment or distribution, delivered to the
Trustee or to the Securityholders, for the purposes of ascertaining the Persons
entitled to participate in such distribution, the holders of Senior Indebtedness
and other indebtedness of the Company, as the case may be, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article XV.
SECTION 15.05. Trustee to Effectuate Subordination.
Each Securityholder by such Securityholder's acceptance thereof
authorizes and directs the Trustee on such Securityholder's behalf to take such
action as may be necessary or appropriate to effectuate the subordination
provided in this Article XV and appoints the Trustee such Securityholder's
attorney-in-fact for any and all such purposes.
SECTION 15.06. Notice by the Company.
The Company shall give prompt written notice to a Responsible Officer
of the Trustee of any fact known to the Company that would prohibit the making
of any payment of monies to or by the Trustee in respect of the Securities
pursuant to the provisions of this Article XV. Notwithstanding the provisions
of this Article XV or any other provision of this Indenture, the Trustee shall
not be charged with knowledge of the existence of any facts that would prohibit
the making of any payment of monies to or by the Trustee in respect of the
Securities pursuant to the provisions of this Article XV, unless and until a
Responsible Officer of the Trustee shall have received written notice thereof
from the Company or a holder or holders of Senior Indebtedness or from any
trustee therefor; and before the receipt of any such written notice, the
Trustee, subject to the provisions of Article VI of this Indenture, shall be
entitled in all respects to assume that no such facts exist; provided, however,
that if the Trustee shall not have received the notice provided for in this
Section 15.06 at least two Business Days prior to the date upon which by the
terms hereof any money may become payable for any purpose (including, without
limitation, the payment of the principal of (or premium, if any) or interest on
any Security), then, anything herein contained to the contrary notwithstanding,
the Trustee shall have full power and authority to receive such money and to
apply the same to the purposes for which they were received, and
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shall not be affected by any notice to the contrary that may be received by it
within two Business Days prior to such date.
The Trustee, subject to the provisions of Article VI of this
Indenture, shall be entitled to conclusively rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness of the Company, as the case may be (or a trustee on behalf of such
holder), to establish that such notice has been given by a holder of such Senior
Indebtedness or a trustee on behalf of any such holder or holders. In the event
that the Trustee determines in good faith that further evidence is required with
respect to the right of any Person as a holder of such Senior Indebtedness to
participate in any payment or distribution pursuant to this Article XV, the
Trustee may request such Person to furnish evidence to the reasonable
satisfaction of the Trustee as to the amount of such Senior Indebtedness held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Article XV, and, if such evidence is not furnished, the
Trustee may defer any payment to such Person pending judicial determination as
to the right of such Person to receive such payment.
Upon any payment or distribution of assets of the Company referred to
in this Article XV, the Trustee and the Securityholders shall be entitled to
rely upon any order or decree entered by any court of competent jurisdiction in
which such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, liquidating trustee, custodian,
receiver, assignee for the benefit of creditors, agent or other Person making
such payment or distribution, delivered to the Trustee or to the
Securityholders, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of Senior Indebtedness
and other indebtedness of the Company, the amount thereof or payable thereon,
the amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article XV.
SECTION 15.07. Rights of the Trustee; Holders of Senior Indebtedness.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article XV in respect of any Senior Indebtedness at any
time held by it, to the same extent as any other holder of Senior Indebtedness,
and nothing in this Indenture shall deprive the Trustee of any of its rights as
such holder.
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With respect to the holders of Senior Indebtedness of the Company, the
Trustee undertakes to perform or to observe only such of its covenants and
obligations as are specifically set forth in this Article XV, and no implied
covenants or obligations with respect to the holders of such Senior Indebtedness
shall be read into this Indenture against the Trustee. The Trustee shall not be
deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and,
subject to the provisions of Article VI of this Indenture, the Trustee shall not
be liable to any holder of such Senior Indebtedness if it shall pay over or
deliver to Securityholders, the Company or any other Person money or assets to
which any holder of such Senior Indebtedness shall be entitled by virtue of this
Article XV or otherwise.
Nothing in this Article XV shall apply to claims of, or payments to,
the Trustee under or pursuant to Section 6.06.
SECTION 15.08. Subordination May Not Be Impaired.
No right of any present or future holder of any Senior Indebtedness of
the Company to enforce subordination as herein provided shall at any time in any
way be prejudiced or impaired by any act or failure to act on the part of the
Company or by any act or failure to act, in good faith, by any such holder, or
by any noncompliance by the Company with the terms, provisions and covenants of
this Indenture, regardless of any knowledge thereof that any such holder may
have or otherwise be charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness of the Company may, at any time and from time
to time, without the consent of or notice to the Trustee or the Securityholders,
without incurring responsibility to the Securityholders and without impairing or
releasing the subordination provided in this Article XV or the obligations
hereunder of the holders of the Securities to the holders of such Senior
Indebtedness, do any one or more of the following: (i) change the manner, place
or terms of payment or extend the time of payment of, or renew or alter, such
Senior Indebtedness, or otherwise amend or supplement in any manner such Senior
Indebtedness or any instrument evidencing the same or any agreement under which
such Senior Indebtedness is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing such
Senior Indebtedness; (iii) release any Person liable in any manner for the
collection of such Senior Indebtedness; and (iv) exercise or refrain from
exercising any rights against the Company and any other Person.
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ARTICLE XVI.
EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 16.01. Extension of Interest Payment Period.
(a) So long as no Event of Default has occurred and is continuing, the
Company shall have the right, at any time and from time to time during the term
of the Securities, to defer payments of interest by extending the interest
payment period of such Securities for a period not exceeding 10 consecutive
semi-annual periods, including the first such semi-annual period during such
extension period (the "Extended Interest Payment Period"), during which Extended
Interest Payment Period no interest shall be due and payable; provided that no
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Extended Interest Payment Period may extend beyond the Maturity Date. To the
extent permitted by applicable law, interest, the payment of which has been
deferred because of the extension of the interest payment period pursuant to
this Section 16.01, will bear interest thereon at the Coupon Rate compounded
semi-annually for each semi-annual period of the Extended Interest Payment
Period ("Compounded Interest"). At the end of the Extended Interest Payment
Period, the Company shall pay all interest accrued and unpaid on the Securities,
including any Additional Sums and Compounded Interest (together, "Deferred
Interest") that shall be payable to the holders of the Securities in whose names
the Securities are registered in the Security Register on the first record date
after the end of the Extended Interest Payment Period.
(b) Before the termination of any Extended Interest Payment Period, the
Company may further defer payments of interest by further extending such period,
provided that such period, together with all such previous and further
- --------
extensions within such Extended Interest Payment Period, shall not exceed 10
consecutive semi-annual periods, including the first such semi-annual period
during such Extended Interest Payment Period, or extend beyond the Maturity Date
of the Securities. Upon the termination of any Extended Interest Payment Period
and the payment of all Deferred Interest then due, the Company may elect to
commence a new Extended Interest Payment Period, subject to the foregoing
requirements. No interest shall be due and payable during an Extended Interest
Payment Period, except at the end thereof, but the Company may prepay at any
time all or any portion of the interest accrued during an Extended Interest
Payment Period.
SECTION 16.02. Notice of Extension.
(a) If the Property Trustee is the only registered holder of the
Securities at the time the Company selects an Extended Interest Payment Period,
the Company shall give written notice to the Administrative Trustees, the
Property Trustee and
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the Trustee of its selection of such Extended Interest Payment Period at least
five Business Days before the earlier of (i) the next succeeding date on which
distributions on the Trust Securities issued by Vesta Capital Trust would have
been payable except for such election, or (ii) the date the Administrative
Trustees are required to give notice of the record date, or the date such
Distributions are payable, to any national securities exchange or to holders of
the Capital Securities issued by Vesta Capital Trust, but in any event at least
five Business Days before such record date.
(b) If the Property Trustee is not the only holder of the Securities
at the time the Company selects an Extended Interest Payment Period, the Company
shall give the holders of the Securities and the Trustee written notice of its
selection of such Extended Interest Payment Period at least 10 Business Days
before the earlier of (i) the next succeeding Interest Payment Date, or (ii) the
date the Company is required to give notice of the record or payment date of
such interest payment to any national securities exchange.
(c) The semi-annual period in which any notice is given pursuant to
paragraphs (a) or (b) of this Section 16.02 shall be counted as one of the 10
semi-annual periods permitted in the maximum Extended Interest Payment Period
permitted under Section 16.01. There is no limitation on the number of times
that the Company may elect to begin an Extended Interest Payment Period.
First Union National Bank of North Carolina hereby accepts the trusts
in this Indenture declared and provided, upon the terms and conditions
hereinabove set forth.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed by their respective officers thereunto duly authorized, as of
the day and year first above written.
VESTA INSURANCE GROUP, INC.
By
--------------------------------------
Name:
Title:
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA,
as Trustee
By
--------------------------------------
Name:
Title:
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EXHIBIT A
---------
(FORM OF FACE OF SECURITY)
[IF THE SECURITY IS A GLOBAL SECURITY, INSERT: - THIS SECURITY IS A
GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND
IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE OF A DEPOSITARY. THIS
SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER
THAN THE DEPOSITARY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF
THIS SECURITY AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY
A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE
DEPOSITARY) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.
UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC") TO THE ISSUER OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC (AND ANY PAYMENT HEREON IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF,
CEDE & CO., HAS AN INTEREST HEREIN.]
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY
OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR
PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR
UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE
ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
"AFFILIATE" OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT
WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS
SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT
("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND
SALES TO
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NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED
INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501
UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR
FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT
PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY
DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT,
SUBJECT TO THE RIGHT OF THE COMPANY PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER
(i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF
COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE COMPANY,
AND (ii) PURSUANT TO CLAUSE (E), TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN
THE FORM APPEARING ON THE REVERSE OF THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEREE TO THE COMPANY. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER
TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE.
No. CUSIP No.
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VESTA INSURANCE GROUP, INC.
8.525% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE
DUE JANUARY 15, 2027
Vesta Insurance Group, Inc., a Delaware corporation (the "Company",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to , or
----------
registered assigns, the principal sum of $ Dollars on January 15, 2027
----------
(the "Maturity Date"), unless previously prepaid, and to pay interest on the
outstanding principal amount hereof from January 31, 1997, or from the most
recent interest payment date (each such date, an "Interest Payment Date") to
which interest has been paid or duly provided for, semi-annually (subject to
deferral as set forth herein) in arrears on January 15 and July 15 of each year,
commencing July 15, 1997, at the rate of 8.525% per annum until the principal
hereof shall have become due and payable, and on any overdue principal and
premium, if any, and (without duplication and to the extent that payment of such
interest is enforceable under applicable law) on any overdue installment of
interest at the same rate per annum compounded semi-annually. The amount of
interest payable on any Interest Payment Date shall be computed on the basis of
a 360-day year of twelve 30-day months and, for any period less than a full
calendar month, the number of days elapsed in such month. In the event that any
date on which the principal of (or premium, if any) or interest on this Security
is payable is not a Business Day, then payment payable on such date will be made
on the next succeeding day that is a Business Day (and without any interest or
other payment in respect of any such delay), with the same force and effect as
if made on such date.
The interest installment so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture,
be paid to the Person in whose name this Security (or one or more Predecessor
Securities, as defined in said Indenture) is registered at the close of business
on the regular record date for such interest installment, which shall be the
first day of the month in which the relevant Interest Payment Date falls. Any
such interest installment not punctually paid or duly provided for shall
forthwith cease to be payable to the holders on such regular record date and may
be paid to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on a special record date to
be fixed by the Trustee for the payment of such defaulted interest, notice
whereof shall be given to the holders of Securities not less than 10 days prior
to such special record date, or may be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Securities may be listed, and upon such notice as may be required by
such exchange, all as more fully provided in the Indenture.
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<PAGE>
The principal of (and premium, if any) and interest on this Security
shall be payable at the office or agency of the Trustee in Charlotte, North
Carolina maintained for that purpose in any coin or currency of the United
States of America that at the time of payment is legal tender for payment of
public and private debts; provided, however, that, payment of interest may be
made at the option of the Company by (i) check mailed to the holder at such
address as shall appear in the Security Register or (ii) by transfer to an
account maintained by the Person entitled thereto, provided that proper written
transfer instructions have been received by the relevant record date; provided
that if this Security is in global form, the interest hereon shall be made in
immediately available funds. Notwithstanding the foregoing, so long as the
Holder of this Security is the Property Trustee, the payment of the principal of
(and premium, if any) and interest on this Security will be made at such place
and to such account as may be designated by the Property Trustee.
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and junior in right of payment to the prior
payment in full of Senior Indebtedness, and this Security is issued subject to
the provisions of the Indenture with respect thereto. Each holder of this
Security, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his or her behalf to take
such action as may be necessary or appropriate to acknowledge or effectuate the
subordination so provided and (c) appoints the Trustee his or her attorney-in-
fact for any and all such purposes. Each holder hereof, by his or her
acceptance hereof, hereby waives all notice of the acceptance of the
subordination provisions contained herein and in the Indenture by each holder of
Senior Indebtedness, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon said provisions.
This Security shall not be entitled to any benefit under the Indenture
hereinafter referred to, be valid or become obligatory for any purpose until the
Certificate of Authentication hereon shall have been signed by or on behalf of
the Trustee.
83
<PAGE>
The provisions of this Security are continued on the reverse side
hereof and such provisions shall for all purposes have the same effect as though
fully set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed.
Dated
-------------
VESTA INSURANCE GROUP, INC.
By:
-------------------------------------
Name:
Title:
Attest:
By:
--------------------------------
Name:
Title:
(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION
This is one of the Securities referred to in the within-mentioned
Indenture.
FIRST UNION NATIONAL BANK
OF NORTH CAROLINA,
as Trustee
By:
--------------------------------
Authorized Officer
84
<PAGE>
(FORM OF REVERSE OF SECURITY)
This Security is one of the Securities of the Company (herein
sometimes referred to as the "Securities"), specified in the Indenture, all
issued or to be issued under and pursuant to an Indenture, dated as of January
31, 1997 (the "Indenture"), duly executed and delivered between the Company and
First Union National Bank of North Carolina, as Trustee (the "Trustee"), to
which Indenture reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the
Trustee, the Company and the holders of the Securities.
Upon the occurrence and continuation of a Special Event, the Company
shall have the right to prepay this Security in whole (but not in part) at the
Special Event Prepayment Price. "Special Event Prepayment Price" shall mean an
amount in cash equal to the greater of (i) 100% of the principal amount of the
Securities to be prepaid and (ii) the sum, as determined by a Quotation Agent,
of the present values of the remaining scheduled payments of principal and
interest on the Securities discounted to the prepayment date on a semi-annual
basis (assuming a 360-day year consisting of twelve 30-day months) at the
Adjusted Treasury Rate, plus, in each case, any accrued and unpaid interest
thereon, including Compounded Interest and Additional Sums, if any, to the date
of such prepayment.
The Special Event Prepayment Price shall be paid prior to 12:00 noon,
New York City time, on the date of such prepayment, provided, that the Company
shall deposit with the Trustee an amount sufficient to pay the Special Event
Prepayment Price by 10:00 a.m., New York City time, on the date the Special
Event Prepayment Price is to be paid. Any prepayment pursuant to this paragraph
will be made upon not less than 30 days nor more than 60 days notice.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Securities may be
declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of a majority in aggregate principal
amount of the Securities at the time outstanding, as defined in the Indenture,
to execute supplemental indentures for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of modifying in any manner the rights of the holders of the Securities;
provided, however, that no such supplemental indenture shall, without the
consent of each holder
85
<PAGE>
of Securities then outstanding and affected thereby, (i) extend the Maturity
Date of any Securities, or reduce the principal amount thereof, or reduce any
amount payable on prepayment thereof, or reduce the rate or extend the time of
payment of interest thereon (subject to Article XVI of the Indenture), or make
the principal of, or interest or premium on, the Securities payable in any coin
or currency other than U.S. dollars, or impair or affect the right of any holder
of Securities to institute suit for the payment thereof, or (ii) reduce the
aforesaid percentage of Securities, the holders of which are required to consent
to any such supplemental indenture. The Indenture also contains provisions
permitting the holders of a majority in aggregate principal amount of the
Securities at the time outstanding affected thereby, on behalf of all of the
holders of the Securities, to waive any past default in the performance of any
of the covenants contained in the Indenture, or established pursuant to the
Indenture, and its consequences, except a default in the payment of the
principal of or premium, if any, or interest on any of the Securities or a
default in respect of any covenant or provision under which the Indenture cannot
be modified or amended without the consent of each holder of Securities then
outstanding. Any such consent or waiver by the holder of this Security (unless
revoked as provided in the Indenture) shall be conclusive and binding upon such
holder and upon all future holders and owners of this Security and of any
Security issued in exchange heretofore or in place hereof (whether by
registration of transfer or otherwise), irrespective of whether or not any
notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Security at the time and place and at the rate and in the money
herein prescribed.
The Company shall have the right, at any time and from time to time
during the term of the Securities, to defer payments of interest by extending
the interest payment period of such Securities for a period not exceeding 10
consecutive semi-annual periods, including the first such semi-annual period
during such extension period, and not to extend beyond the Maturity Date of the
Securities (an "Extended Interest Payment Period"), at the end of which period
the Company shall pay all interest then accrued and unpaid together with
interest thereon at the rate specified for the Securities (to the extent that
payment of such interest is enforceable under applicable law). Before the
termination of any such Extended Interest Payment Period, the Company may
further defer payments of interest by further extending such Extended Interest
Payment Period, provided that such Extended Interest Payment Period, together
with all such
86
<PAGE>
previous and further extensions within such Extended Interest Payment Period,
shall not exceed 10 consecutive semi-annual periods, including the first semi-
annual period during such Extended Interest Payment Period, or extend beyond the
Maturity Date of the Securities. Upon the termination of any such Extended
Interest Payment Period and the payment of all accrued and unpaid interest and
any additional amounts then due, the Company may commence a new Extended
Interest Payment Period, subject to the foregoing requirements.
The Company has agreed that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock (which
includes common and preferred stock) or (ii) make any payment of principal,
interest or-premium, if any, on or repay or repurchase or redeem any debt
securities of the Company that rank pari passu with or junior in right of
payment to the Securities or make any guarantee payments with respect to any
guarantee by the Company of the debt securities or any Subsidiary of the Company
if such guarantee ranks pari passu or junior in right of payment to the
Securities (other than (a) dividends or distributions in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Common Stock of the
Company, (b) any declaration of a dividend in connection with the implementation
of a stockholder's rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Capital Securities Guarantee, (d) as a result of a
reclassification of the Company's capital stock or the exchange or the
conversion of one class or series of the Company's capital stock for another
class or series of the Company's capital stock, (e) the purchase of fractional
interests in shares of the Company's capital stock pursuant to the exchange or
conversion of such capital stock or the security being exchanged or converted,
and (f) purchases or issuances of Common Stock in connection with any of the
Company's stock option, stock purchase, stock loan or other benefit plans for
its directors, officers or employees or any of the Company's dividend
reinvestment plans, in each case as now existing or hereinafter established or
amended) if at such time (i) there shall have occurred any event of which the
Company has actual knowledge that (a) is, or with the giving of notice or the
lapse of time, or both, would be, an Event of Default and (b) in respect of
which the Company shall not have taken reasonable steps to cure, (ii) if such
Securities are held by Vesta Capital Trust, the Company shall be in default with
respect to its payment of any obligations under the Capital Securities Guarantee
or (iii) the Company shall have given notice of its election of the exercise of
its right to extend the interest payment period and any such extension shall be
continuing.
87
<PAGE>
The Company will have the right at any time to liquidate Vesta Capital
Trust and cause the Securities to be distributed to the holders of the Trust
Securities in liquidation of Vesta Capital Trust.
The Securities are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to the transfer restrictions limitations as may be
contained herein and therein from time to time, the transfer of this Security is
registrable by the holder hereof on the Security Register of the Company, upon
surrender of this Security for registration of transfer at the office or agency
of the Trustee in the City of Charlotte and State of North Carolina accompanied
by a written instrument or instruments of transfer in form satisfactory to the
Company or the Trustee duly executed by the holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities of authorized
denominations and for the same aggregate principal amount and series will be
issued to the designated transferee or transferees. No service charge will be
made for any such registration of transfer, but the Company may require payment
of a sum sufficient to cover any tax or other governmental charge payable in
relation thereto.
Prior to due presentment for registration of transfer of this
Security, the Company, the Trustee, any paying agent and the registrar may deem
and treat the registered holder hereof as the absolute owner hereof (whether or
not this Security shall be overdue and notwithstanding any notice of ownership
or writing hereon made by anyone other than the Security Registrar) for the
purpose of receiving payment of or on account of the principal hereof and
premium, if any, and interest due hereon and for all other purposes, and neither
the Company nor the Trustee nor any paying agent nor any registrar shall be
affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or
premium, if any, or interest on this Security, or for any claim based hereon, or
otherwise in respect hereof, or based on or in respect of the Indenture, against
any incorporator, stockholder, officer or director, past, present or future, as
such, of the Company or of any predecessor or successor Person, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issuance hereof, expressly
waived and released.
All terms used in this Security that are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
88
<PAGE>
THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF
LAW PROVISIONS THEREOF.
89
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 308,898
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,326
<MORTGAGE> 0
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<TOTAL-ASSETS> 1,013,581
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 1,013,581
511,912
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<UNDERWRITING-OTHER> 21,167
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<INCOME-TAX> 24,982
<INCOME-CONTINUING> 50,237
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