<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________TO _______________________
COMMISSION FILE NUMBER 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-1097283
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
3760 RIVER RUN DRIVE BIRMINGHAM, 35243
ALABAMA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(205) 970-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the registrant's common stock,
$.01 par value, as of June 30, 1998
18,435,705
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
VESTA INSURANCE GROUP, INC.
INDEX
<TABLE>
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30, 1998 and
December 31, 1997................................................ 1
Consolidated Statements of Operations and Comprehensive Income
for the Three Months and Six Months Ended June 30, 1998 and 1997. 2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997.............................. 3
Notes to Consolidated Financial Statements....................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 11
Item 2. Changes in Securities............................................ 11
Item 3. Defaults Upon Senior Securities.................................. 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 11
Item 5. Other Information................................................ 12
Item 6. Exhibits and Reports on Form 8-K................................. 12
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1998--$468,959;
1997--$488,923).................................... $ 476,532 $ 495,566
Equity securities--at fair value: (cost: 1998--
$13,913; 1997--$10,921)............................ 24,245 20,424
Short-term investments.............................. 159,731 119,025
---------- ----------
Total investments.................................. 660,508 635,015
Cash................................................. 5,570 21,801
Accrued investment income ........................... 7,812 15,799
Premiums in course of collection..................... 257,831 252,193
Reinsurance balances receivable...................... 337,597 368,949
Reinsurance recoverable on paid losses............... 139,991 83,225
Deferred policy acquisition costs.................... 104,726 102,124
Property and equipment............................... 17,968 18,093
Income tax receivable................................ -- 5,609
Other assets......................................... 40,320 39,358
Goodwill............................................. 92,474 96,141
---------- ----------
Total assets....................................... $1,664,797 $1,638,307
========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses................. $ 599,846 $ 596,797
Unearned premiums................................... 378,081 365,052
---------- ----------
977,927 961,849
Accrued income taxes................................. 5,678 --
Reinsurance balances payable......................... 85,210 56,897
Other liabilities.................................... 34,360 67,610
Short term debt...................................... 70,000 45,000
Long term debt....................................... 98,349 98,602
---------- ----------
Total liabilities.................................. 1,271,524 1,229,958
Commitments and contingencies
Deferrable Capital Securities........................ 100,000 100,000
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none
issued.............................................. -- --
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1998--18,964,322 shares; 1997--18,970,695... 190 190
Additional paid-in capital........................... 162,076 162,550
Unrealized investment gains, net of applicable taxes. 9,920 9,829
Retained earnings.................................... 148,622 165,087
Receivable from issuance of restricted stock......... (2,193) (3,891)
Treasury stock....................................... (25,342) (25,416)
---------- ----------
Total stockholders' equity......................... 293,273 308,349
---------- ----------
Total liabilities and stockholders' equity......... $1,664,797 $1,638,307
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30 JUNE 30
------------------ --------------------
1998 1997 1998 1997
-------- -------- -------- ----------
(RESTATED)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net premiums written................. $169,291 $137,186 $301,175 $235,858
(Increase) decrease in unearned pre-
miums............................... (5,215) (3,469) 2,193 (9,165)
-------- -------- -------- --------
Net premiums earned.................. 164,076 133,717 303,368 226,693
Net investment income................ 8,800 7,178 18,100 13,325
Other, including realized gains and
losses.............................. 1,843 (78) 3,093 236
-------- -------- -------- --------
Total revenues..................... 174,719 140,817 324,561 240,254
Expenses:
Losses incurred...................... 87,876 57,682 175,504 114,194
Loss adjustment expenses incurred.... 21,024 7,058 28,739 10,708
Policy acquisition expenses.......... 60,120 39,937 89,026 57,370
Operating expenses................... 17,330 6,975 34,586 14,574
Premium taxes and fees............... 3,560 1,021 6,695 3,267
Interest on debt..................... 3,345 2,249 6,453 4,608
Goodwill............................. 1,612 362 3,281 667
-------- -------- -------- --------
Total expenses..................... 194,867 115,284 344,284 205,388
Income (loss) before income taxes and
deferrable capital securities........ (20,148) 25,533 (19,723) 34,866
Income taxes.......................... (7,571) 9,059 (7,362) 11,116
Deferrable capital securities inter-
est, net of income tax............... 1,362 1,386 2,724 2,309
-------- -------- -------- --------
Net income (loss).................. $(13,939) $ 15,088 $(15,085) $ 21,441
======== ======== ======== ========
Basic net income (loss) per common
share............................... $ (.76) $ .81 $ (.82) $ 1.15
======== ======== ======== ========
Diluted net income (loss) per common
share............................... $ (.76) $ .80 $ (.82) $ 1.14
======== ======== ======== ========
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)..................... $(13,939) $ 15,088 $(15,085) $ 21,441
Other comprehensive income, net of
tax:
Unrealized holding gains (losses) on
available-for-sale securities....... (48) 2,280 226 602
Less realized gains on available-for-
sale securities..................... -- 282 135 107
-------- -------- -------- --------
(48) 1,998 91 495
-------- -------- -------- --------
Comprehensive income (loss)........... $(13,987) $ 17,086 $(14,994) $ 21,936
======== ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
------------------------
1998 1997
------------ ---------------
(RESTATED)
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net income (loss)................................ $ (15,085) $ 21,441
Adjustments to reconcile net income to cash from
operating activities:
Change in:
Loss and LAE reserves.......................... 3,049 8,938
Unearned premium reserve....................... 13,029 15,519
Reinsurance balances payable................... 28,313 44,365
Accrued income taxes........................... 11,521 (167)
Other liabilities.............................. (33,249) 6,895
Premiums in course of collection............... (5,639) (8,746)
Reinsurance balances receivable................ 31,351 (39,586)
Reinsurance recoverable on paid losses......... (56,766) (24,887)
Other assets................................... 2,402 (11,639)
Policy acquisition costs deferred............... (66,867) (30,577)
Policy acquisition costs amortized.............. 64,264 34,987
Amortization and depreciation................... 10,946 1,600
Investment gains................................ (135) (107)
(Gain) Loss on disposition of property, plant
and equipment.................................. 173 (118)
------------ ------------
Net cash provided from (used in) operating
activities.................................... (12,693) 17,918
Investing Activities:
Investments sold or matured:
Fixed maturities available for sale-matured,
called.......................................... 78,386 48,614
Equity securities................................ -- 2,291
Investments acquired:
Fixed maturities available for sale.............. (59,820) --
Equity securities................................ (4,119) (5,669)
Net increase in short-term investments............ (40,706) (141,679)
Additions to property, plant and equipment........ (2,237) (884)
Dispositions of property, plant and equipment..... 292 208
------------ ------------
Net cash used in investing activities........... (28,204) (97,119)
Financing Activities:
Issuance of deferrable capital securities........ -- 100,000
Issuance (repayment) of long and short term debt. 24,747 (21,977)
Dividends paid................................... (1,379) (1,394)
Capital contributions from exercising options.... 1,298 1,553
------------ ------------
Net cash provided from financing activities..... 24,666 78,182
Decrease in cash.................................. (16,231) (1,019)
Cash at beginning of year......................... 21,801 4,637
------------ ------------
Cash at end of period............................. $ 5,570 $ 3,618
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited financial statements have
been prepared in conformity with generally accepted accounting principles and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of results for such
periods. The results of operations and cash flows for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the restated financial
statements and related notes which have been issued by the Company and filed
with the Securities and Exchange Commission (see Note B below). Amounts in the
prior financial statements presented have been adjusted in order to conform to
the restatement. There were no adjustments to the Company's Statement of
Operations for the three months ended June 30, 1997.
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.
Income per share: Basic weighted average common shares outstanding for the
six month period ended June 30, 1998 and 1997 was 18,454,982 and 18,590,852,
respectively. Basic weighted average common shares outstanding for the three
month period ended June 30, 1998 and 1997 was 18,453,010 and 18,599,900,
respectively. Basic EPS is computed by dividing income available to common
stockholders by the weighted average common shares outstanding for the period.
Diluted EPS is calculated by adding to shares outstanding the additional net
effect of potentially dilutive securities or contracts which could be
exercised or converted into common shares except when the additional shares
would reduce net loss per share. Diluted weighted average shares outstanding
for the six month period ended June 30, 1998 and 1997 was 18,454,982 and
18,453,010, respectively. Diluted weighted average shares outstanding for the
three month period ended June 30, 1998 and 1997 was 18,453,010 and 18,921,221,
respectively.
Recently Issued Accounting Standards: In June 1997, the FASB issued
Financial Accounting Statement No. 130, Reporting Comprehensive Income.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances arising from non-owner sources. The Company adopted FAS130 on
January 1, 1998.
NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its quarterly report on Form 10-Q for the period
ended March 31, 1998 with the Securities and Exchange Commission, the Company
became aware of certain inappropriate reductions of reserves and over
statements of premium income in the Company's reinsurance business that had
been recorded in the fourth quarter of 1997 and the first quarter of 1998. The
Company promptly commenced an internal investigation to determine the exact
scope and amount of such reductions and estimations. Based on the information
discovered in that investigation, the Company has restated its previously
issued financial statements to make the necessary corrections.
During its internal investigation the Company and its independent auditors
also re-evaluated the accounting methodology being utilized to recognize
earned premium income in its reinsurance business. The Company had
historically reported certain assumed reinsurance premiums as earned in the
year in which the related reinsurance contracts were entered even though the
terms of those contracts frequently bridged two years.
4
<PAGE>
The Company has now determined that reinsurance premiums should be
recognized as earned over the contract period. Therefore, the Company has
corrected the error in its accounting methodology which includes a revision of
the actuarial methodology on which anticipated reinsurance premiums and losses
were calculated.
The Company has now issued restated financial statements for each of the
three years in the period ended December 31, 1997 which have been audited by
the Company's independent auditors and unaudited restated financial statements
for the three months ended March 31, 1998, which were filed with the
Securities and Exchange Commission as exhibits to a current report on Form 8-K
dated August 19, 1998.
As a result of the restatement described above, the Company made the
following adjustments to the Company's consolidated statements of operations
and comprehensive income for the six months ended June 30, 1997 and cumulative
adjustments to the December 31, 1997 Balance Sheet.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------
AS PREVIOUSLY AS
REPORTED RESTATEMENTS RESTATED
------------- ------------ --------
<S> <C> <C> <C>
Revenue.................................... $272,898 $(32,644) $240,254
Losses..................................... 128,227 (14,003) 114,194
Loss adjustment expenses incurred.......... 10,708 -- 10,708
Policy acquisition expenses................ 64,747 (7,377) 57,370
Operating Expenses......................... 14,574 -- 14,574
Premium taxes and fees..................... 3,267 -- 3,267
Interest on debt........................... 4,608 -- 4,608
Goodwill amortization...................... 667 -- 667
Income taxes............................... 16,145 (5,029) 11,116
Deferrable capital securities interest, net
of income tax............................. 2,309 -- 2,309
-------- -------- --------
Net income............................... $ 27,646 $ (6,205) $ 21,441
======== ======== ========
Basic net income per common share........ $ 1.49 $ 1.15
======== ========
Diluted net income per common share...... $ 1.46 $ 1.14
======== ========
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
RESTATEMENTS THROUGH
DECEMBER 31, 1997
--------------------
<S> <C>
Premiums in course of collection........................... $(78,962)
Reinsurance balances receivable............................ 53,415
Reinsurance recoverable on paid losses..................... 951
Deferred acquisition costs................................. 825
Other assets............................................... 9,484
Reserves for losses and lae................................ 74,991
Reinsurance balances payable............................... (17,569)
Other liabilities.......................................... 15,290
---------
Total pretax............................................. (86,999)
Tax effect on above items.................................. 29,845
---------
$ (57,154)
=========
</TABLE>
NOTE C--CONTINGENCIES
Litigation: Commencing in June 1998, the Company and several of its current
and former officers and directors were named in several purported class action
law suits in the United States District Court for the Northern District of
Alabama and in one purported class action law suit in the Circuit Court of
Jefferson County, Alabama. The complaints allege various violations of the
federal and state securities laws and seek unspecified but potentially
significant damages. The Company is presently evaluating these complaints and
is unable, at this time, to determine the potential financial impact of the
litigation.
5
<PAGE>
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 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.
Regulatory: The Company's insurance subsidiaries are subject to regulation
by the insurance departments of states in which they are licensed and
undergoes examinations by those departments. Vesta Fire is currently
undergoing an examination by the Alabama Department. This examination could
result in adjustments to Vesta Fire's statutory statements, including
policyholder surplus. Management does not believe that such adjustments, if
any, would have a material impact on the Company's financial position or
results of operations.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Vesta Insurance Group, Inc. (the "Company" or "Vesta") 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. In both its reinsurance and primary insurance operations, the Company
focuses principally on property coverages and private passenger automobile, for
which ultimate losses generally can be more promptly determined than on general
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.
Comparison of Second Quarter 1998 to Second Quarter 1997
Net loss for the quarter ended June 30, 1998 was $13.9 million versus $15.1
million of net income for the quarter ended June 30, 1997. On a diluted per
share basis, net loss for the second quarter of 1998 was $(.76) per share
versus net income of $.80 per share for the second quarter of 1997.
Premiums, Loss and LAE--Primary Insurance
Gross premiums written for primary insurance increased by $67.7 million or
115.6% to $126.3 million for the quarter ended June 30, 1998, from $58.6
million for the quarter ended June 30, 1997. Included in the $67.7 million
increase in gross premiums written for primary insurance was $69.7 million of
gross premiums written by the Shelby Insurance Companies ("Shelby"). The
remaining decrease of $2.0 million was primarily due to declining volume in the
commercial lines.
Net premiums written for primary insurance increased by $44.7 million or
123.8% to $80.8 million for the quarter ended June 30, 1998, from $36.1 million
for the quarter ended June 30, 1997. Included in the $44.7 million increase in
net premiums written was $43.1 million of net premiums written by Shelby. The
remaining increase of $1.6 million was primarily due to increases in personal
lines. Net premiums earned for primary insurance increased $46.4 million or
177.8% to $72.5 million for the quarter ended June 30, 1998, from $26.1 million
for the quarter ended June 30, 1997.
Loss and loss adjustment expenses ("LAE") for primary insurance increased by
$38.8 million, or 298.5%, to $51.8 million for the quarter ended June 30, 1998,
from $13.0 million for the quarter ended June 30, 1997. Included in the $38.8
million increase in loss and loss adjustment expenses was $30.8 million in
losses and LAE incurred by Shelby. The loss and LAE ratio for primary insurance
for the quarter ended June 30, 1998 was 71.4% as compared to 49.7% for the
quarter ended June 30, 1997. The increase in the loss ratio is primarily
attributable to the Company's increased writings of personal automobile lines
as a result of the acquisition of Shelby, which experienced a 73% loss and LAE
ratio, and an increase of $1.2 million in catastrophe losses.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance decreased by $17.4 million, or 12.0%,
to $127.1 million for the quarter ended June 30, 1998, from $144.5 million for
the quarter ended June 30, 1997. The decrease in gross premiums written is
primarily attributable to pricing pressure in the reinsurance market due to
increased competition and market capacity, the Company's unwillingness to
support underpriced business, and cedants retaining more business. Net premiums
written for reinsurance decreased by $12.5 million, or 12.4%, to $88.5 million
for the quarter ended June 30, 1998, from
7
<PAGE>
$101.0 million for the quarter ended June 30, 1997. Net premiums earned
decreased $16.0 million, or 14.9% to $91.6 million for the quarter ended June
30, 1998, from $107.6 million for the quarter ended June 30, 1997.
Loss and loss adjustment expenses ("LAE") for reinsurance increased by $5.4
million, or 10.4%, to $57.1 million for the quarter end June 30, 1998, from
$51.7 for the quarter end June 30, 1997. The loss and LAE ratio for reinsurance
for the quarter ended June 30, 1998 was 62.4% as compared to 48.1% for the
quarter ended June 30, 1997. The increase in the loss ratio is primarily a
result of decreases in earned premiums due to pricing pressures, market
competition and an increase of $2.0 million in catastrophe losses.
Net Investment Income. Net investment income increased by $1.6 million, or
22.5%, to $8.8 million for the quarter ended June 30, 1998, from $7.2 million
for the quarter ended June 30, 1997. The weighted average yield on invested
assets (excluding realized and unrealized gains) was 6.2% for the quarter ended
June 30, 1998, compared with 5.5% for the quarter ended June 30, 1997. The
increase in net investment income is primarily attributable to the increase in
average invested assets due to invested assets acquired in the Shelby
acquisition.
Policy Acquisition Expenses and Other Expenses. Policy acquisition expenses
increased by $20.2 million, or 50.6%, to $60.1 million for the quarter ended
June 30, 1998, from $39.9 million for the quarter ended June 30, 1997. The
increase in policy acquisition expenses is primarily attributable to the
increase in net written premiums. Other expenses include operating expenses not
directly related to the generation of premium revenue, premium taxes and fees,
interest on debt and goodwill amortization. Operating expenses increased by
$10.4 million. The increase is primarily attributable to the increase in
information systems expenses related to the assimilation and administration of
the Shelby operations following its acquisition on June 30, 1997 and the
Company's year 2000 compliance efforts. The $2.5 million increase in premium
taxes is primarily attributable to the increase in primary gross written
premiums. These factors caused the underwriting expense ratio to increase from
35.8% in the second quarter of 1997 to 49.4% in the second quarter of 1998. The
increase in goodwill amortization is primarily attributable to the $83 million
of goodwill acquired on June 30, 1997 in connection with the Shelby
acquisition.
Federal Income Taxes. Federal income tax expense decreased by $16.6 million
to $(7.6) million for the quarter ended June 30, 1998. This decrease was due
primarily to the decrease in operating income.
Comparison of Six Months Ended June 30, 1998 with Six Months Ended June 30,
1997.
The first six months of 1998 resulted in a net loss of $15.1 million, a
decrease of $36.5 million from the $21.4 million in income reported for the
same period in 1997.
Premiums, Loss and LAE - Primary Insurance
Gross premiums written for primary insurance increased by $147.9 million, or
145.3%, to $249.7 million for the six months ended June 30, 1998 from $101.8
million for the six month period ended June 30, 1997. Included in the $147.9
million increase in gross premiums written was $139.0 million of gross premiums
written by Shelby. The remaining increase of $8.9 million was primarily
attributable to the transfer of business from assumed reinsurance to personal
lines following the acquisition of Vesta County Mutual. Net premiums written
for primary insurance increased by $95.4 million, or 150.9%, to $158.7 million
for the six month period ended June 30, 1998 from $63.2 million for the six
month period ended June 30, 1997. Included in the $95.4 million increase was
$84.3 million of net premiums written by Shelby. Net earned premiums increased
$102.6 million, or 202.0%, to $153.5 million for the six month period ended
June 30, 1998, from $50.8 million for the six month period ended June 30, 1997.
8
<PAGE>
Loss and loss adjustment expense ("LAE") for primary insurance increased by
$78.8 million, or 301.9%, to $104.9 million for the six months ended June 30,
1998, from $26.1 million for the six months ended June 30, 1997. Included in
the $78.8 million increase in loss and LAE was $59.6 million of loss and LAE
incurred by Shelby. The loss and LAE ratio for primary insurance for the six
months ended June 30, 1998 was 68.3% as compared to 51.3% for the six months
ended June 30, 1997. The increase in the loss and LAE ratio is primarily
attributable to the Company's increased writings of personal automobile lines
(53.8% of total premiums in 1998 as compared to 28.5% of total premiums in
1997) due to the acquisition of Shelby and an increase of $4.2 million in
catastrophe losses.
Premiums, Loss and LAE - Reinsurance
Gross premiums written for reinsurance decreased by $35.6 million, or 13.1%,
to $236.8 million for the six months ended June 30, 1998, from $272.4 million
for the six months ended June 30, 1997. The decrease in gross premiums written
is primarily attributable to pricing pressures and competition in the
reinsurance market as well as the transfer of business from assumed reinsurance
to personal lines following the acquisition of Vesta County Mutual. Net
premiums written for reinsurance decreased $30.1 million, or 17.4%, to $142.5
million for the six months ended June 30, 1998, from $172.6 million for the six
months ended June 30, 1997. Net premiums earned decreased $26.0 million, or
14.8% to $149.9 million for the six months ended June 30, 1998, from $175.9
million for the six months ended June 30, 1997.
Loss and loss adjustment expenses ("LAE") for reinsurance increased $.5
million, or .5%, to $99.3 million for the six months ended June 30, 1998, from
$98.8 million for the six months ended June 30, 1997. The loss and LAE ratio
for reinsurance for the six months ended June 30, 1998 was 66.3% as compared to
56.2% for the six months ended June 30, 1997. The increase in the loss ratio is
primarily a result of decreases in earned premiums due to pricing pressures,
market competition and an increase of $2.2 million in catastrophe losses.
Policy Acquisition Expenses and Other Expenses. Policy acquisition expenses
increased $31.7 million, or 55.2%, to $89.0 million for the six month period
ended June 30, 1998, from $57.4 million for the six month period ended June 30,
1997. The increase in policy acquisition expense is primarily attributable to
the increase in net written premiums. Operating expenses increased by $20.0
million due to increase in information systems and other expenses related to
the assimilation and administration of the Shelby operations following its
acquisition on June 30, 1997 and the Company's year 2000 compliance efforts.
The $3.4 million increase in premium taxes and fees is primarily attributable
to the increase in primary gross written premiums. The increase in goodwill
amortization is primarily attributable to the $83.0 million of goodwill
acquired on June 30, 1997 in connection with the Shelby acquisition.
Net Investment Income. Net investment income increased by $4.8 million, or
36.1%, to $18.1 million for the first six months of 1998, from $13.3 million
for the first six months of 1997. The weighted average pre-tax yield on
invested assets (excluding realized and unrealized gains) was 6.1% for the six
month period ended June 30, 1998, compared with 5.6% for the six month period
ended June 30, 1997. The increase in net investment income is primarily
attributable to the increase in average invested assets relating to the
increase in invested assets from the Shelby acquisition.
Federal Income Taxes. Federal income taxes decreased by $18.5 million to
$(7.4) million for the six month period ended June 30, 1998. This decrease was
primarily due to the decrease in operating income.
9
<PAGE>
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 regulated 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 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. Based
upon restrictions presently in effect, the maximum amount available for payment
of dividends to the Company by its insurance subsidiaries in 1998 without prior
approval of regulatory authorities is estimated to be approximately $31.8
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 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.
During the first six month period of 1998, the Company paid approximately
$1.4 million in dividends on its common stock, and it is expected that the
Company will pay approximately $2.8 million for all of 1998. 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 $4.25 million on the $100
million of 8.525% Capital Securities due 2027 issued by Vesta Capital Trust I.
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. In order to provide
further liquidity, the Company increased its $100 million line of credit to
$200 million effective April 8, 1997. As of the Balance Sheet date, the Company
has borrowed $70 million under this line of credit for general corporate
purposes and for a capital contribution of $25 million to the Company's
principal insurance subsidiary, Vesta Fire Insurance Corporation. 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 earnings before interest and taxes
available for the payment of interest and dividend expense (the "Fixed Charge
Ratio"), cause each insurance subsidiary to maintain a certain total adjusted
capital and that limits the amount of indebtedness of the Company. Subsequent
to the period ended June 30, 1998, the Company's banks agreed to amend the
Fixed Charge Ratio as of the last day of the fiscal quarter ended June 30, 1998
and waive any Event of Default arising from noncompliance with such covenant as
of June 30, 1998. As an inducement to the Company's banks to enter into such
amendment and waiver, the Company has agreed not to request any additional
borrowings under this Credit Agreement until such time as the Company has
delivered financial statements to the banks in form and substance satisfactory
to the banks.
10
<PAGE>
On a consolidated basis, net cash provided from (used in) operations for the
six month period ended June 30, 1998 and 1997 was $(12.7) million and $17.9
million, respectively.
Total assets of the Company increased by 1.6% to $1,664.8 million in 1998,
from $1638.3 million in 1997. Cash and invested assets were $666.1 million at
June 30, 1998, increasing 1.4% from December 31, 1997.
As of June 30, 1998, the Company's investment portfolio consisted of cash and
short-term investments (24.8%), U.S. Government securities (15.1%), asset-
backed securities (11.5%), corporate bonds (23.7%), foreign government
securities (0.7%), municipal bonds (20.6%) and equity securities (3.6%).
According to Moody's rating, 96% of the Company's portfolio is rated A or
better. The Company expects current cash flow to be sufficient to meet
operating needs, although, a certain amount of invested assets has 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.
The Company is heavily dependent upon computer systems for all phases of its
operations. The year 2000 issue--common to most corporations--concerns the
inability of certain software and databases to properly recognize date
sensitive information beginning January 1, 2000. This problem could result in a
material disruption to the Company's operations, if not corrected. The Company
has assessed and developed a detailed strategy to prevent or at least minimize
problems related to the year 2000 issue. In 1997 resources were committed and
implementation began to modify the affected information systems. Total costs
related to the project are estimated to be approximately $5.7 million, of which
$1.1 million was spent in 1997. Substantially all remaining costs will be
expended in 1998 of which $2.9 million was spent in the first six months of
1998. Implementation is currently on schedule. The Company is in the beginning
stages of contacting vendors who provide products and/or services requesting
verification that they either are or will be 2000 compliant. The year 2000
issue is also a concern from an underwriting standpoint as well as regarding
the extent of liability for coverage under various general liability, property
and package insurance policies. The Company's operating subsidiaries are
adopting the ISO Exclusionary Endorsement in the states where that endorsement
is filed and approved. The degree of success of this project cannot be
determined at this time. However, management believes that the final outcome
will not have a material adverse effect on the operations of the Company.
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 on Form 10-K. If any of these assumptions or
opinion 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.
11
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
Commencing in June 1998, the Company and several of its current and former
officers and directors were named in several purported class action law suits
in the United States District Court for the Northern District of Alabama and in
one purported class action law suit in the Circuit Court of Jefferson County,
Alabama. The complaints allege various violations of the federal and state
securities laws and seek unspecified but potentially significant damages. The
Company is presently evaluating these complaints and is unable, at this time,
to determine the potential financial impact of the 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 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of stockholders held May 19, 1998, the following
matters were submitted to a vote of stockholders. (Shares Eligible to Vote
18,452,279; Shares Voted 17,050,177)
1. Election of Directors
Messrs. Ehney A. Camp III, Jr., Clifford F. Palmer, and Norman L. Rosenthal
were elected to additional three year terms on the Board of Directors.
<TABLE>
<CAPTION>
FOR WLTHHELD
---------- ---------
<S> <C> <C>
Camp.................................................... 16,101,667 948,510
Palmer.................................................. 16,008,562 1,041,615
Rosenthal............................................... 16,101,017 949,160
</TABLE>
Messrs. Walter M. Beale, Jr., Robert A. Hershberger, C.B. Hudson, Jarvis W.
Palmer and R. K. Richey continue to serve on the Board of Directors. On July
27, 1998, Messrs. Norman W. Gayle, III and James E. Tait were elected by the
Board of Directors to fill a vacancy and a newly created directorship on the
Board of Directors.
12
<PAGE>
2. Amendment to Restated Certificate of Incorporation to increase the number
of authorized shares of the Company's Common Stock
The proposal to increase the authorized shares of the Company's common stock,
par value $.01 per share, (the "Common Stock") from 32,000,000 shares to
100,000,000 shares was approved. The additional authorized shares of Common
Stock will be available for issuance by the Company's Board of Directors from
time to time, without further action or authorization by the stockholders
(except as required by law or by a national stock exchange). The Board of
Directors could make a determination to issue such shares in connection with,
among other things, (i) possible future acquisitions, (ii) the declaration of a
stock split or stock dividend, (iii) the raising of additional capital funds
through offerings of shares of Common Stock or of equity or debt securities
convertible into or exchangeable for Common Stock and (iv) the Company's
various employee benefit plans, incentive compensation plans and dividend
reinvestment plan.
<TABLE>
<CAPTION>
NON
FOR AGAINST ABSTAIN VOTE
---------- --------- ------- ----
<S> <C> <C> <C> <C>
Amendment to restated Certificate of
Incorporation to increase the number of
authorized shares of the Company's
Common Stock............................ 12,080,189 4,957,549 12,439 0
</TABLE>
3. Election of Auditors
KPMG Peat Marwick was appointed as the principal independent auditor of the
Company and its subsidiaries for the year ending December 31, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
---------- ------- -------
<S> <C> <C> <C>
KPMG Peat Marwick................................. 17,023,570 3,558 23,049
</TABLE>
ITEM 5. OTHER INFORMATLON
None.
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, dated September
1, 1993, as amended (as of June 16, 1998).
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 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)).
4.1 Indenture between the Company and Southtrust Bank of Alabama, National
Association, dated as of July 19, 1995 fled 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)).
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.2 Supplemental Indebenture between the Company and Southtrust Bank of
Alabama, National Association, dated July 19, 1995 (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)).
4.3 Indenture dated as of January 31, 1997, between the Company and First
Union National Bank of North Carolina, as trustee (filed as an exhibit
to the Company's Form 10-Q for the quarter ended March 31, 1997, filed
on May 13, 1997 and incorporated herein by reference (File No. 1-
12338)).
4.4 Amended and Restated Declaration of Trust, dated as of January 31,
1997, of Vesta Capital Trust I (filed as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997
and incorporated herein by reference (File No. 1-12338)).
4.5 Capital Securities Guarantee Agreement, dated as of January 31, 1997,
between the Company and First Union National Bank of North Carolina,
as trustee (filed as an exhibit to the Company's Form 10-Q for the
quarter ended March 31, 1997, filed on May 13, 1997 and incorporated
herein by reference (File No. 1-12338)).
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 December 31, 1993, filed on
March 28, 1994 and incorporated herein by reference (File No. 1-
2338)).
10.2 Marketing and Administrative Services Agreement between Liberty
National Fire Insurance Company, Liberty National Insurance
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 Corporation, Liberty
National Insurance Corporation and Vesta Insurance 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 reference (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 (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)).
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)).
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 December 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)).
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 reference (File No. 1-
12338)).
10.14 Agency Agreement between Liberty National Fire Insurance Company,
Vesta Insurance Corporation, Sheffield Insurance Corporation, and
Overby-Seawell 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)).
10.15 Commercial/Personal Property Risk Excess Reinsurance Contracts, dated
July 1, 1993, constituting the Company~s Direct Per Risk Treaty
Program, between Vesta Fire Insurance Corporation, Sheffield Insurance
Corporation, Vesta Insurance Corporation, Vesta Lloyds Insurance
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,
1997.
10.17 Specific Regional Catastrophe Excess Contracts, dated January 1, 1996,
constituting the Company's Regional Property Catastrophe 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, 1998.
10.18 Casualty Excess of Loss Reinsurance Agreements, dated January 1, 1998,
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 Employers Reinsurance Corporation, (filed as an exhibit to
the Company's Form 10-Q for the quarter ended March 31, 1998, filed on
May 13 and incorporated herein by reference (File No. 1-12338)).
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 Insurance Corporation,
Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
Hawaiian Insurance & Guaranty Company, 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, 1997.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.20 Amendment to Catastrophe Reinsurance Contracts, dated January 1, 1996,
constituting the Company's Direct Property Catastrophe Program,
between Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
Hawaiian Insurance & Guaranty Company, 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, 1998.
10.21 Amended and Restated 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 National Bank of North
Carolina (as agent), dated April 8, 1997 (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997, filed on May
13, 1997, and incorporated herein by reference (File No. 1-12338)).
10.22 Quota Share Reinsurance Contract, effective July 1, 1996, covering all
lines of business written by Vesta Fire Insurance Corporation and its
subsidiary and affiliated companies and various reinsurers (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)). Renewed July 1, 1997.
10.23 Stock Purchase Agreement between Anthem Casualty Insurance Group,
Inc., and Vesta Insurance Group, Inc., dated April 23, 1997 (filed as
an exhibit to the Company's Form 10-Q for the year ended December 31,
1997, filed on May 13, 1997 and incorporated herein by reference (File
No. 1-12338)).
10.24 Business Transfer and Management Agreement between Vesta Fire
Insurance Corporation and its affiliated companies and CIGNA Property
and Casualty Insurance Company and its affiliated companies, dated
January 28, 1998 (filed as an exhibit to the Company's Form 10-K for
the year ended December 31, 1997, filed on March 27, 1998 (File No. 1-
12338)).
10.25 Agreement for Data Processing Services between Shelby Insurance
Company and Policy Management Systems Corporation, dated January 1,
1998.
</TABLE>
- --------
*These are the Company's compensatory plans.
B)REPORTS ON FORM 8-K.
The Company reported that it was conducting an internal investigation into
accounting irregularities that affected previously reported earnings for
the first quarter of 1998 and the fourth quarter of 1997 on Form 8-K filed
with the Securities and Exchange Commission on June 4, 1998.
The Company reported that it concluded its internal investigation into the
accounting irregularities and that the Company will correct the method of
accounting by which it recognizes earned premium income in its reinsurance
business, including a revision of the actuarial information on which
anticipated reinsurance premiums and losses were calculated on Form 8-K
filed with the Securities and Exchange Commission on July 1, 1998.
16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
"HEREUNTO DULY AUTHORIZED.
VESTA INSURANCE GROUP, INC.
Date: August 19, 1998 /s/ James E. Tait
_____________________________________
James E. Tait
Principal Financial Officer
/s/ Mary Beth Heibein
_____________________________________
Mary Beth Heibein
Controller and Principal
Accounting Officer
17
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "VESTA INSURANCE GROUP, INC.", FILED IN THIS OFFICE ON THE SIXTEENTH DAY OF
JUNE, A.D. 1998, AT 12 O'CLOCK P.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY
RECORDER OF DEEDS.
[Seal of Delaware] /s/ Edward J. Freel
-------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9141646
DATE: 06-16-98
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 12:00 PM 06/16/1998
991232184 - 2343202
------------
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
VESTA INSURANCE GROUP, INC.
------------
Vesta Insurance Group, Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation a
resolution was duly adopted setting forth the proposed amendment to the Restated
Certificate of Incorporation of the Corporation, declaring such amendment to be
advisable and calling for the presentation of the proposed amendment to the
stockholders of the Corporation at the next annual meeting. The resolutions
setting forth the proposed amendment is as follows:
RESOLVED, that Article IV, Section (A) of the Corporation's Restated
Certificate of Incorporation be revised to read as follows:
"(A) Authorized Stock. The total number of shares of stock which the
Corporation shall have the authority to issue is 105,000,000,
consisting of (i) 100,000,000 shares of common stock, par value $.01
per share (hereinafter referred to as "Common Stock") and (ii)
5,000,000 shares of preferred stock, par value $.01 per share
(hereinafter referred to as "Preferred Stock")."
SECOND: That the annual meeting of the stockholders of the Corporation was
duly called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to the Restated Certificate of Incorporation to be executed on this
15th day of June, 1998.
VESTA INSURANCE GROUP, INC.
/s/ Donald W. Thornton
----------------------
Donald W. Thornton
Senior Vice President, General Counsel
and Secretary
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF
"VESTA INSURANCE GROUP, INC.", FILED IN THIS OFFICE ON THE FIRST DAY OF
SEPTEMBER, A.D. 1993, AT 10 O'CLOCK A.M.
[Delaware Seal] /s/ Edward J. Freel
-------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 8300561
DATE: 01-24-97
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 10:00 AM 09/01/1993
723244016 - 2343202
RESTATED
CERTIFICATE OF INCORPORATION
OF
VESTA INSURANCE GROUP, INC.
1. The name of the corporation (which is hereinafter referred to as the
"Corporation") is "Vesta Insurance Group, Inc."
2. The original Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on July 9, 1993 under the
name Vesta Insurance Group, Inc.
3. This Restated Certificate of Incorporation has been duly proposed by
resolutions adopted and declared advisable by the Board of Directors of the
Corporation, duly adopted by written unanimous consent of the stockholders of
the Corporation in lieu of a meeting and vote and duly executed and acknowledged
by the officers of the Corporation in accordance with the provisions of
Sections 103, 228, 242 and 245 of the General Corporation Law of the State of
Delaware and, upon filing with the Secretary of State in accordance with
Section 103, shall thenceforth supersede the original Certificate of
Incorporation and shall, as it may thereafter be amended in accordance with its
terms and by law, be the Certificate of Incorporation of the Corporation.
4. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read in its entirety as follows:
<PAGE>
ARTICLE I
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Vesta Insurance Group, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware,
County of New Castle. The name of the Corporation's registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware (the "GCL").
<PAGE>
ARTICLE IV
(A) Authorized Stock. The total number of shares of stock which the
----------------
Corporation shall have authority to issue is 37,000,000 shares, consisting of
(i) 32,000,000 shares of Common Stock, par value $.01 per share (hereinafter
referred to as "Common Stock"), and (ii) 5,000,000 shares of Preferred Stock,
par value $.01 per share (hereinafter referred to as "Preferred Stock").
(B) Preferred Stock. The Board of Directors is hereby authorized to create
---------------
and provide for the issuance of one or more series of the Preferred Stock from
time to time and, by filing a certificate pursuant to the GCL (hereinafter
referred to as a "Preferred Stock Designation"), to establish the number of
shares to be included in each such series, and to fix the designations,
preferences and relative, participating, optional or other special rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred
<PAGE>
Stock Designation) increase or decrease (but not below the number of shares
thereof then outstanding).
(iii) Whether dividends, if any, shall be cumulative or noncumulative,
the preference or relation which such dividend, if any, shall bear to the
dividends payable on any other class or classes or of any other series of
capital stock, and the dividend rate of the series.
(iv) Conditions and dates upon which dividends, if any, shall be
payable.
(v) The redemption rights and price or prices, if any, for shares of
the series.
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(vii) The amounts payable on and the preferences, if any, of shares of
the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the corporation.
(viii) Whether the shares of the series shall be convertible or
exchangeable into shares of any other class or series, or any other
<PAGE>
security, of the Corporation or any other corporation, and, if so, the
specification of such other class or series or such other security, the
conversion or exchange price or prices or rate or rates, any adjustments
thereof, the date or dates at which such shares shall be convertible or
exchangeable and all other terms and conditions upon which such conversion
or exchange may be made.
(ix) Restrictions on the issuance of shares of the same series or of
any other class or series.
(x) The voting rights, if any, of the holders of shares of the series,
whether as a class or otherwise, with respect to the election of Directors
or otherwise.
(xi) Any other relative rights, preferences and limitations of that
series.
(C) Common Stock. The Common Stock shall be subject to the express terms of
------------
the Preferred Stock and any series thereof. Each share of Common Stock shall
have the right to cast one vote for each share for the election of Directors and
on all other matters upon which stockholders are entitled to vote. Except as
may be provided in this Certificate of Incorporation or in a Preferred Stock
Designation, the holders of shares of Common Stock shall be entitled to
<PAGE>
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in stock or otherwise.
(D) Vote. Except as may be provided in this Certificate of Incorporation
----
or in a Preferred Stock Designation, or as may be required by law, the Common
Stock shall have the exclusive right to vote for the election of Directors and
for all other purposes, and holders of shares of Preferred Stock shall not be
entitled to receive notice of any meeting of stockholders at which they are not
entitled to vote.
(E) Record Holders. The Corporation shall be entitled to treat the person
--------------
in whose name any share of its stock is registered as the owner thereof for all
purposes and shall not be bound to recognize any equitable or other claim to, or
interest in, such share on the part of any other person, whether or not the
Corporation shall have notice thereof, except as may be required by law.
ARTICLE V
The Board of Directors is hereby authorized to create and issue, whether or
not in connection with the issuance and sale of any of its stock or other
securities or property, rights entitling the holders thereof to purchase from
the Corporation shares of stock or other securities of the Corporation or any
<PAGE>
other corporation, recognizing that, under certain circumstances, the creation
and issuance of such rights could have the effect of discouraging third parties
from seeking, or impairing their ability to seek, to acquire a significant
portion of the outstanding securities of the Corporation, to engage in any
transaction which might result in a change of control of the Corporation or to
enter into any agreement, arrangement or understanding with another party to
accomplish the foregoing or for the purpose of acquiring, holding, voting or
disposing of any securities of the Corporation. The times at which and the terms
upon which such rights are to be issued will be determined by the Board of
Directors and set forth in the contracts or instruments that evidence such
rights. The authority of the Board of Directors with respect to such rights
shall include, but not be limited to, determination of the following:
(A) The initial purchase price per share or other unit of the stock or
other securities or property to be purchased upon exercise of such rights.
(B) Provisions relating to the times at which and the circumstances under
which such rights may be exercised or sold or otherwise transferred, either
together with or separately from any other stock or other securities of the
Corporation.
<PAGE>
(C) Provisions which adjust the number or exercise price of such rights or
amount or nature of the stock or other securities or property receivable upon
exercise of such rights in the event of a combination, split or recapitalization
of any stock of the Corporation, a change in ownership of the Corporation's
stock or other securities or a reorganization, merger, consolidation, sale of
assets or other occurrence relating to the Corporation or any stock of the
Corporation, and provisions restricting the ability of the Corporation to enter
into any such transaction absent an assumption by the other party or parties
thereto of the obligations of the Corporation under such rights.
(D) Provisions which deny the holder of a specified percentage of the
outstanding stock or other securities of the Corporation the right to exercise
such rights and/or cause the rights held by such holder to become void.
(E) Provisions which permit the Corporation to redeem or exchange such
rights, which redemption or exchange may be within the sole discretion of the
Board of Directors, if the Board of Directors reserves such right to itself.
(F) The appointment of a rights agent with respect to such rights.
<PAGE>
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of at least 80 percent of the voting power of
the then outstanding Voting Stock (as defined below), voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article V. For the purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of Directors.
ARTICLE VI
(A) In furtherance of, and not in limitation of, the powers conferred by
law, the Board of Directors is expressly authorized and empowered:
(i) to adopt, amend or repeal the Bylaws of the Corporation, provided,
--------
however, that the Bylaws adopted by the Board of Directors under the powers
-------
hereby conferred or previously conferred may be altered, amended or
repealed by the Board of Directors or by the stockholders having voting
power with respect thereto, provided, further, that in the case of
-----------------
amendments by stockholders, the affirmative vote of the holders of at least
80 percent of the voting power of the then outstanding Voting Stock, voting
together as a single class, shall be required to alter, amend or repeal the
Bylaws; and
<PAGE>
(ii) from time to time to determine whether and to what extent, and
at what times and places, and under what conditions and regulations, the
accounts and books of the Corporation, or any of them, shall be open to
inspection of stockholders; and, except as so determined, or as expressly
provided in this Certificate of Incorporation or in any Preferred Stock
Designation, no stockholder shall have any right to inspect any account,
book or document of the Corporation other than such rights as may be
conferred by law.
(B) The Corporation may in its Bylaws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with subparagraph (i) of paragraph (A) of this Article VI.
<PAGE>
ARTICLE VII
Subject to the rights of the holders of any series of Preferred Stock or
any other series or class of stock as set forth in the Certificate of
Incorporation to elect additional Directors under specific circumstances or to
consent to specific actions taken by the Corporation, any action required or
permitted to be taken by the stockholders of the Corporation must be effected at
a duly called annual or special meeting of stockholders of the Corporation and
may not be effected by any consent in writing in lieu of a meeting of such
stockholders. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article VII.
ARTICLE VIII
(A) Subject to the rights of the holders of any series of Preferred Stock
or any other series or class of stock as set forth in the Certificate of
Incorporation to elect additional Directors under specific circumstances, the
number of Directors of the Corporation shall be fixed by the Bylaws of the
Corporation and may be increased or decreased from time to time in such a manner
as may be prescribed by the Bylaws.
<PAGE>
(B) Unless and except to the extent that the Bylaws of the Corporation
shall so require, the election of Directors of the Corporation need not be by
written ballot.
(C) In the event that, and at such time as, the number of Directors fixed
by or in the manner provided in the Bylaws is three (3) or more, the Directors,
other than those who may be elected by the holders of any series of Preferred
Stock or any other series or class of stock as set forth in the Certificate of
Incorporation, shall be divided into three classes as nearly equal in number as
possible, and designated as Class I, Class II and Class III. Class I Directors
shall be initially elected for a term expiring at the 1994 annual meeting of
stockholders, Class II Directors shall be initially elected for a term expiring
at the 1995 annual meeting of stockholders, and Class III Directors shall be
initially elected for a term expiring at the 1996 annual meeting of
stockholders. Members of each Class shall hold office until their successors are
elected and qualified. At each succeeding annual meeting of the stockholders of
the Corporation, the successors of the Class of Directors whose term expires at
that meeting shall be elected by a plurality vote of all votes cast at such
meeting to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election, and until their
successors are elected and qualified.
<PAGE>
(D) Subject to the rights of the holders of any series of Preferred Stock
or any other series or class of stock as set forth in the Certificate of
Incorporation to elect additional Directors under specific circumstances, any
Director may be removed from office at any time, but only for cause and only by
the affirmative vote of the holders of at least 80 percent of the voting power
of the then outstanding Voting Stock, voting together as a single class.
(E) Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article VIII.
ARTICLE IX
A Director or an Officer of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director or an Officer, except for liability (i) for any
breach of the Director's or Officer's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the GCL, or (iv) for any transaction from
<PAGE>
which the Director or Officer derived an improper personal benefit. No amendment
or repeal of this Article IX shall adversely affect any right or protection of
a Director or an Officer of the Corporation existing hereunder in respect of any
act or omission occurring prior to such amendment or repeal.
ARTICLE X
Except as may be expressly provided in this Certificate of Incorporation,
the Corporation reserves the right at any time and from time to time to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation or a Preferred Stock Designation, and any other provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted, in the manner now or hereafter prescribed herein or by law,
and all powers, preferences and rights of whatsoever nature conferred upon
stockholders, Directors or any other persons whomsoever by and pursuant to this
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the right reserved in this Article X, provided, however, that
-----------------
no Preferred Stock Designation shall be amended after the issuance of any shares
of the series of Preferred Stock created thereby, except in accordance with the
terms of such Preferred Stock Designation and the requirements of law.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of
Incorporation to be signed by its President and attested by its Secretary and
has caused its corporate seal to be hereunto affixed, this 31st day of August,
1993.
VESTA INSURANCE GROUP, INC.
By ________________________
President
Attest: _______________________
Assistant Secretary
<PAGE>
AGREEMENT FOR DATA PROCESSING SERVICES
THIS AGREEMENT is effective as of January 22, 1998, by and between Policy
Management Systems Corporation ("PMSC") a South Carolina Corporation with
principal offices at One PMSC Center, Blythewood, South Carolina 29016 (Post
Office Box Ten, Columbia, South Carolina, 29202), and Shelby Insurance Company
("Customer") having its principal place of business at 175 Mansfield Avenue
Shelby, Ohio 44875.
WHEREAS Customer is a licensee of PMSC's Series II PMS, BCMS, CHS and AIS
Systems and uses said Systems to process Customer's and its Authorized
Companies' property and casualty insurance business, and
WHEREAS, Customer is desirous of PMSC providing certain data processing and
other related services for Customer and its Authorized Companies specified in
Attachment No. 1 to the Master License Agreement by and between PMSC and
Customer dated with an effective date of December 31, 1992, and Addendum No. 3
to such Attachment No. 1 (collectively the "License Agreement"), and
WHEREAS, PMSC wishes to provide such services for Customer and said Authorized
Companies, and
WHEREAS, the parties herein wish to reduce their agreement to writing;
NOW, THEREFORE, that for and in consideration of the premises and undertakings
hereinafter set forth, Customer and PMSC hereby agree as follows:
1. DEFINITIONS
The following words shall have the following meanings in this Agreement unless
the context hereof indicates otherwise:
1.1 SYSTEM: An assembly of computer programs and related documentation
identified in Exhibit A and more specifically defined therein.
1.2 RELEASE OF A SYSTEM: An edition of a System which may include one or more
individual versions developed by PMSC.
1.3 TERMINAL OPERATOR: An individual who is proficient in the entry of data
into an electronic data processing system via remote computer terminals for
processing by a System.
1.4 IMPLEMENTATION PLANNING SESSION ("IPS"): A joint planning session between
PMSC and Customer, During the IPS PMSC and Customer shall mutually (a)
adopt a plan (hereinafter "Implementation Plan") for Customer's
implementation of the System, and (b) identify and allocate between PMSC
and Customer those tasks and responsibilities required to accomplish the
Implementation Plan.
1.5 CUSTOMIZATION: The coding and loading of the GTAM Tables into a System and
the defining and loading of the Generalized Edits, System Reference Files
and System Support Files into a System, and the performance of the other
tasks specified as "Customizations" in Exhibit B to meet Customer's
individual requirements. (An "Uncustomized" System is a System which has
undergone no Customization; conversely, a "Customized" System has undergone
at least some Customization.)
1.6 MODIFICATION: The making of program changes or additions to a System to
make it conform to Customer's particular specifications. (An "Unmodified"
System is a System which has undergone no Modification; conversely, a
"Modified" System has undergone at least some Modification.)
1.7 PROCESSING CUSTOMER: A PMSC licensee to whom PMSC provides services under
an agreement for data processing services.
1 of 24
<PAGE>
1.8 Banc System: An Unmodified System used by PMSC to process the data of its
Processing Customers.
1.9 Production System: A Base System which has been Customized and Modified
pursuant to this Agreement and made available to Customer for processing of
its live data.
1.10 Test System: A Base System which includes one or more Customizations,
Modifications, or other changes not yet integrated into a particular
Processing Customer's Production System.
1.11 Other Software: Any applications software other than a System which is used
to process Customer's data as of the effective date of this Agreement.
1.12 Enhancement: Any addition, change, and/or modification to a System which
PMSC may from time to time develop and make available to its licensees
pursuant to the Maintenance, Enhancements, Services Availability (MESA)
provisions of its license agreements.
2. DUTIES OF PMSC
2.1 Transaction Services: PMSC and Customer will mutually write a plan for
transferring Customer's Production System and Other Software to PMSC's data
center ("Transition Plan"). The Production System will be installed in
PMSC's MVS mainframe operating environment. PMSC will monitor the
progression of the Transition Services against the project schedule and
keep Customer appraised of project progression on a monthly basis.
Transition Services will include the following:
(i) Operating Systems Programming - would include the installation or
modification of any IBM or third party vendor software required for
the Customer.
(ii) Scheduling Processing Times - would include the automatic scheduling
of all production and test cycles on an automated scheduling
package. Flow charts for the Production and Test Systems will also
be created and maintained to monitor scheduling changes.
(iii) Library Management - would entail the installation and conversion of
the Customer's execution JCL, procs, source code and object code
onto the PMSC mainframe.
(iv) Necessary Computer Mainframe Equipment - would include installing
any additional hardware as required to support the Customer.
(v) Necessary Magnetic Storage Media - would include installation of
DASD devices, if required, to store and retrieve the Customer's
data.
(vi) 24 Hour Security Management - providing the installation and
continual maintenance of security for the Customer's data. This
entails establishing RACF access to production data, and adding,
changing or deleting user access to the Production System.
(vii) Production Processing - establish and maintain a production
environment for the Customer's systems. This will include the
initial loading of all of the Customer's data files, programs,
procs, JCL and other components needed to process the Customer's
production in a batch environment.
2.1.1 Production CICS - establish the Customer's production of CICS region
to stimulate parallel testing for the migration of the data to
PMSC's mainframe. This region will become the Customer's production
CICS once migration testing and final sign-off by the Customer are
completed.
2.1.2 Test Cycles - would include the running of simulated parallel and
stand alone cycles to assure that data integrity and system
functions are equal to those in the Customer's existing in-house
environment.
2.1.3 Test CICS/TSO - establish a test CICS region for the Customer to
use to test changes before moving them to a production environment.
TSO accessibility will also be provided to the Customer to allow
access to all of the
2 of 24
<PAGE>
programs and files required to maintain the test and Production
System.
2.1.4 Processing of OTHER SOFTWARE - would include installing and
testing any non-PMSC software that the Customer desires to
execute on the PMSC mainframe. This would also include loading
all necessary data files, programs, procs and JCL required to
simulate the Customer's existing environment for such software,
PMSC will provide any testing as requested by the Customer to
assure that the software has been properly installed and
functions equal to such software in Customer's existing
environment.
2.1.5 Long Line Network Management - evaluate the capacity needs of the
Customer for line transmission volume, speed, and connectivity at
both the mainframe and Customer's site and any other related
sites. Determine the optimal line configuration that will allow
the Customer to reach desired response time results at the most
cost effective price.
2.2 PMSC shall be entitled, in its sole discretion and upon reasonable notice,
to perform or cause to be performed by any one or more of its subsidiaries
any or all of its duties and obligations under this Agreement and the
Exhibits hereto.
2.3 In order to facilitate the services to be provided pursuant to this
Agreement, PMSC shall provide the necessary personnel, computer mainframe,
equipment, and magnetic storage media required to provide the Services
hereunder. If the Services are provided at a data center other than PMSC's
Blythewood data center, the performance level of Services will be the same
as or better than the level provided at PMSC's Blythewood data center.
2.4 PMSC shall process Customer's transactions as described in Exhibit A
utilizing both the Customized and Modified System described in said Exhibit
and Other Software. PMSC shall provide the following related support
services to Customer:
2.4.1 Production CICS: PMSC will provide to Customer, in accordance
with Exhibit C, on-line access to the on-line portions of
Customer's production Systems.
2.4.2 Production Cycles:
(a) Daily Production Cycles:
PMSC will process Customer's transactions using the
Production System daily batch cycle for each business day
Monday through Friday. PMSC will use its best efforts to
provide complete and balanced output from daily batch cycles
prior to the beginning of Customer's next business day.
(b) Weekly Production Cycles
PMSC will process Customer's transactions using the
Production System weekly batch cycles each week. PMSC will
use its best efforts to provide complete and balanced output
from weekly batch cycles prior to the start of Customer's
next business week.
(c) Monthly Production Cycles
PMSC will process Customer's transactions using the
Production System monthly batch cycle once per month. PMSC
will use its best efforts to provide complete and balanced
output from monthly batch cycles prior to the beginning of
the sixth day following the day Customer closes its books
each month.
2.4.3 Statistical and Regulatory Reporting Support: Customer will have
access to the data in the Production System via a dedicated
telecommunication line to enable Customer to prepare summary
reports and transmittals based upon Customer's data contained in
and processed by the Production System for mandatory submission
to state insurance regulators and statistical bureaus. Customer
will be responsible for ensuring such reports and transmittals
will be prepared on a monthly, quarterly, semi-annual, or annual
basis to meet
3 of 24
<PAGE>
Customer's scheduled mandatory reporting.
2.4.4 Modification Processing: PMSC will process Customer's
Modifications which PMSC may develop and implement pursuant to
Section 4 below.
2.4.5 Test CICS: PMSC will provide Customer on-line CICS access to the
on-line portions of Customer's Test System to facilitate the
testing of the System.
2.4.6 Test Cycles: PMSC will provide Customer test cycles for
Customer's Test System to facilitate the testing of the System.
2.4.7 Processing and Maintenance of Other Software: PMSC will process
Customer's data utilizing Other Software. In addition, and with
Customer's assistance, PMSC shall maintain and test such Other
Software.
2.5 PMSC shall establish and maintain reasonable safeguards against the
destruction or loss of Customer's data in the possession of PMSC, which
safeguards shall at least be equivalent to those which PMSC provides and
maintains for its corporate affiliates. Customer and PMSC will mutually
agree upon the frequency that back-up tapes will be removed from PMSC's
data center to an off-site storage facility.
2.6 PMSC agrees to assist Customer in disposing of any computer hardware which
Customer no longer needs after the execution of this Agreement. As part of
the disposal assistance, PMSC agrees to assume the rights and financial
responsibilities under the following hardware leases: (i) Customer's lense
for the IBM CMOS mainframe model 2003-135; (ii) Customer's lease for the
related RAMAC DASD; and (iii) Customer's lease for the EMC2 DASD.
3. DUTIES OF CUSTOMER
3.1 Customers shall furnish at no cost to PMSC experienced management,
supervisory and other personnel, including Terminal Operators, as
necessary, to implement, operate, and coordinate use of the System at
Customer's location. Customer will be responsible for all printing and
mailing responsibilities.
3.2 Customer shall also furnish at no cost to PMSC, and the employees PMSC
hires from Customer, equipment, office space, telephones, office supplies,
supplies and materials necessary to facilitate the use of the System at
Customer's location. The said equipment, supplies and materials include,
but are not limited to, video terminals, control units, modems, printers,
and other input/output devices, paper and forms. If necessary, Customer
shall also provide at no cost to PMSC for data entry by means other than
video terminals at Customer's locations, and System's output by means other
than printers at Customer's location. IF PMSC provides output by means
other than printers at Customer's location, Customer shall pay PMSC for
such output on a time and materials basis. The equipment and office space
contemplated by this Section 3.2 is the equipment and office space Customer
utilizes as of the effective date of this Agreement.
3.3 If, as a result of Customer's failure or other failure beyond the control
of PMSC, data is not furnished to PMSC for processing in accordance with
PMSC's established processing schedule, PMSC shall reschedule and process
Customer's data as promptly as reasonably possible, Customer shall pay
PMSC for any processing necessitated by such rescheduling on a time and
materials basis.
3.4 Customer will use its best efforts to test and authorize for incorporation
into the Production System all Modifications, Enhancements, and all
Customizations made to the Test System not later than 30 days of their
first availability for testing or within written mutually agreed upon
testing time frame. To the extent that Customer fails to authorize or
unreasonably delays the use of said Modifications, Enhancements or
Customizations in its Production System, Customer shall pay PMSC on a time
and materials basis for the additional maintenance of Customer's Test
System caused by the delay.
3.5 Customer acknowledges that in order for PMSC to perform the work projects
being conducted by Customer's employees listed on Exhibit B hereto ("Work
Projects"), 75% of Customer's employees listed on such Exhibit B must
accept PMSC's offer of employment made in conjunction with this Agreement.
Each such employment offer will be for a salary at least equal to such
employee's current salary with Customer. If 75% of such employees do not
4 of 24
<PAGE>
accept PMSC's employment offers, the parties agree that they will mutually
agree to adjust the Services to be provided hereunder to compensate for the
shortfall in employees available to PMSC for providing the Work Projects.
The scope of such adjustment will be based on the number and/or nature of
Customer's employees who do not accept PMSC's job offers and are not
available to provide Services hereunder. PMSC agrees that it will work
diligently to replace such individuals as quickly as is commercially
reasonable in order to perform the Work Projects as set forth in this
Agreement.
3.6 PMSC agrees to assign the employees hired from Customer by PMSC to
Customer's current data center location for at least 180 days from the
effective date hereof. PMSC will execute a mutually acceptable lease with
Customer governing the use by PMSC of Customer's location, which lease may
be terminated by either party, with or without cause, at any time after the
first 180 days, provided the terminating party provides the other party
with at least 90 days notice prior to such termination. Customer agrees
that PMSC will not be required to pay Customer any lease fees or other
charges and, Customer agrees to provide PMSC with the support as described
in Section 3.2 of this Agreement.
3.7 Customer represents that as of the date of this Agreement the Other
Software used for processing its business is listed in Exhibit D hereto.
Within 90 days of the execution of this Agreement, PMSC will identify which
of the Other Software licenses will be required to provide the Services
defined in this Agreement. Customer acknowledges that it is Customer's
responsibility to obtain authorization from the third party vendors for
PMSC to use such Other Software to process Customer's business hereunder,
and Customer shall be responsible for any charges or fees required by third
party vendors to allow such use by PMSC including charges for continuing
maintenance and use of the Other Software or discontinuing Customer's
license. PMSC agrees to notify the third party vendors of the requirement
for PMSC to use such Other Software and assist Customer in mitigating any
fees payable for such Other Software. PMSC shall have no responsibility to
third party vendors of the Other Software which is not used by PMSC to
provide the Services hereunder.
4. ADDITIONAL CUSTOMIZATION OR MODIFICATION OF THE SYSTEM
4.1 In the event Customer desires PMSC to accomplish Customization of a System
in addition to that provided for herein and in the Exhibits hereto or
Modification of a System, such Customization or Modification shall be
performed under the following conditions:
4.1.1 Customer shall furnish to PMSC written Instructions necessary to
fully describe the scope of the Customization or Modification
involved.
4.1.2 After receipt of such written instructions from Customer, PMSC
shall submit to Customer, in the form of a proposal, the written
description of the project, anticipated time schedules and
additional charges necessary to implement and subsequently
process such Customization or Modification for Customer.
4.1.3 After PMSC's receipt of Customer's written approval of PMSC's
proposal, PMSC shall perform such Customization or Modification
and Customer shall assist PMSC as necessary in the support of
accomplishing such Customization or Modification.
4.1.4 Customer promises and agrees to pay for such Customization and
Modification as set forth in PMSC's approved proposal plus all
reasonable travel, living and out-of-pocket expenses incurred by
PMSC's personnel in performing such services.
4.2 YEAR 2000 PROJECT: PMSC agrees to assume Customer's current project of
-----------------
migrating from the PMS System, versions 4 and 6, to the PMS System, version
7, to enable the Production System to make the date specific program code
produce accurate dates in the Year 2000 ("Year 2000 Project"). The Year
2000 Project will consist of the following:
4.2.1 PMSC will attempt to hire Customer's key technical people who
have designed and initiated the Year 2000 Project and,
5 of 24
<PAGE>
PSMC will assign such key employees as well as other required technical
and management personnel to work towards the successful completion of the
Year 2000 Project. Customer agrees to provide sufficient personnel at
Customer's expense necessary to ensure that the test matrix for System
Testing is developed and implemented in accordance with the time frames
set forth in the project plan and, Customer will assign additional
personnel as necessary to ensure such timely completion if it appears that
timely completion will slip outside of such time frames.
4.2.2 PMSC will be responsible for following and managing the project and
testing. PMSC will work with Customer to make changes or improvements to
the project plan as necessary as the project progresses.
4.2.3 PMSC and Customer will conduct bi-weekly conference calls to monitor the
progress of the Year 2000 Project. If the project appears to be outside of
the completion times frames, then PMSC and Customer will mutually agree
upon the appropriate actions to be taken to realign the progress of the
project within the stated times frames. This may include assigning
additional technical personnel to the Year 2000 Project and delaying all
other projects related to this Agreement to maximize the work effort for
timely completion of the Year 2000 Project. For the purposes of this
Agreement, the parties mutually agree that for timely completion of the
Year 2000 Project, it is critical that user and System Testing commence on
or before June 1 1998.
4.2.4 Customer acknowledges that it started the Year 2000 Project and designed
the project plan to govern the migration to a version of the Production
System that produces accurate dating, sorting, indexing, calculating and
processing in the year 2000, including leap years. Notwithstanding
anything to the contrary in this Article 4, Customer understands and
agrees that PMSC's liabilities for the Year 2000 Project are limited as
expressed in Articles 9 and 10 of this Agreement.
4.3 Customer promises and agrees to pay PMSC for all services performed and
resources used by PMSC in performing its obligations pursuant to this
Article 4 on a time and materials basis plus all reasonable travel. Living
and out-of pocket expenses incurred by PMSC's personnel in performing such
services.
5. TRADE, SECRET AND PROPRIETARY RIGHTS
5.1 Customer acknowledges that the System and all Enhancements thereto,
including new versions and Release of the System and the related
documentation, further including but not limited to all training and
procedural materials developed by PMSC in conjunction with the use of the
System by Customer and any additions, supplements, or Modifications to the
System (collectively referred to as "Materials") which may be developed
specifically for Customer through the reimbursed or unreimbursed efforts
of PMSC's employees, agents or the joint efforts of Customer and PMSC are
trade secrets and the exclusive property of PMSC. Customer hereby
transfers and assigns to PMSC any and all rights in and to any of the
Materials which Customer may have (except for the license rights)
including any copyrights thereto.
5.2 PMSC agrees that Customer shall have the right to use, in its own
operations, such training and procedural materials and such additions,
supplements, or Modifications to a System developed in conjunction with or
for Customer pursuant to this Agreement. In the event that this Agreement
is terminated, but Customer maintains in full force and effect a License
Agreement for the use of the said System. Customer shall have the right to
use any additions, supplements or Modifications to the System developed
for Customer pursuant hereto for so long as the said License Agreement
shall remain in effect.
5.3 Customer promises and agrees not to disclose or otherwise make System,
including but not limited to any additions, supplements, Customizations or
Modifications to the System, available to any person other than employees
of Customer required to have such knowledge for normal use of the System.
Customer agrees to obligate each such employee to a level of care
sufficient to protect the System, including but not limited to any
additions, supplements,
6 of 24
<PAGE>
Customizations or Modifications to the System, from unauthorized
disclosure. The obligations of Customer under this Section 5 shall continue
after this Agreement is terminated.
6. PRICE AND PAYMENT
6.1 In consideration of PMSC providing data processing and other related
services pursuant to this Agreement, Customer promises and agrees to pay
all the charges in the manner and method provided herein and as more
specifically set forth in the Exhibits during the term of this Agreement.
6.2 In addition, Customer agrees to pay all telecommunication line and
equipment charges and reasonable travel, living and out-of-pocket expenses
incurred by PMSC's personnel in performing the services to be provided and
pursuant to the Exhibits.
6.3 PMSC shall have the right at any time during the term hereof to increase
the charges relating to the communication line and equipment as set forth
herein and in the Exhibits by an amount equal to any increase which PMSC
may be require to pay to the supplier of such communication line during the
term of this Agreement.
6.4 Beginning January 1, 1999, the charges identified in Exhibit B shall be
increased that January 1 and each January 1 of the term, or any extensions
thereof, to PMSC's then current standard rates and charges, but in an event
shall the percentage of such increase exceed one-half (1/2) of the
percentage increase in the United States Consumer Price Index, published by
the United States Bureau of Labor Statistics, since the latter of the
effective date of this Agreement or the effective date of any price
increase to Customer by PMSC pursuant to the provisions of this paragraph.
6.5 In the event PMSC offers new Releases of a System in accordance with the
License Agreement by and between the parties and Customer elects to utilize
such new Release of such System in the processing of Customer's data, then
Customer shall be charged for the additional services required to implement
such new Release and for additional processing requirements relating to
said new Release at a rate to be agreed upon by PMSC and Customer. If
Customer elects not to utilize such an offered new Release and PMSC
provides additional services to maintain the Release of the System which
Customer is then currently utilizing, then within a reasonable period of
time following Customer's election not to utilize such new Release,
Customer shall reimburse PMSC for such additional services on a time and
materials basis.
6.6 All changes hereunder incurred on a time and materials basis shall be
computed and adjusted according to the provisions of Exhibit B.
6.7 All invoices hereunder are due upon presentation and payable in United
States dollars, PMSC agrees to mail invoices for each calendar month
during the term of this Agreement within the first ten business days of
the following calendar month. A late charge of 1.5% per month shall be due
and payable on any amount not received by PMSC within 30 days immediately
following Customer's receipt of PMSC's invoice.
6.8 Customer shall remain liable for all charges required under this Agreement
and any Exhibit which are unpaid as of the date of its termination.
7. TAXES
Customer agrees to pay all ????? and taxes that are now or may become applicable
to the Services rendered hereunder, the transmission of data and any
communication line provided by PMSC, or its use, lease, operation, control,
transportation or value pursuant to this Agreement, or are measured by payments
made under it, or are required to be collected by PMSC or paid by PMSC to tax
authorities. This provision includes but is not limited to sales, use, and
personal property taxes, or any other form of tax based on services performed
and the communication or storage of data, but does not include taxes based on
net income.
8. TERM AND TERMINATION
8.1 This Agreement shall commence upon the above written effective date and
shall remain in full force and effect continuously thereafter for 60 full
calendar months. Except as otherwise
7 of 24
<PAGE>
expressly provided herein and in the Exhibits, may extension of the term
hereof must be in writing and mutually agreed to by both PMSC and Customer.
8.1.1 Notwithstanding the above, upon at least 180 days prior written
notice, Customer may terminate this Agreement on the last day of the
36th or 48th calendar month.
8.2 Either party may terminate this Agreement upon breach by the other party of
any one or more of the terms and conditions of this Agreement or the
Exhibits. The party so failing shall be notified in writing by the other
party of the failure and, unless a satisfactory resolution has been agreed
upon in writing within 60 days of said written notification, the
nonbreaching party may terminate this Agreement.
8.3 In the event either party makes a general assignment for the benefit of
creditors or files a voluntary petition in bankruptcy or petitions for
reorganization or arrangement under the bankruptcy laws, or if a petition
in bankruptcy is filed against either party and remains undismissed for a
period of 30 days, or if a receiver or trustee is appointed for all or any
part of the property and assets of either party, the other party may
terminate the within Agreement.
8.4 Upon any termination or expiration of this Agreement, PMSC agrees to
provide support in transferring Customer's data and the Production System
to Customer's Authorized Location. Customer agrees to pay PMSC on a time
and materials basis for such assistance by PMSC in repatriating the
processing to Customer's Authorized Location.
9. WARRANTIES
9.1 PMSC and/or its subsidiary shall use reasonable care in processing
Customer's transactions and in performing related services as set forth in
this Agreement. PMSC and/or its subsidiary shall be responsible only to the
extent of (a) correcting at its expense any nonconformities between the
Production System and its documentation which are due to PMSC's machines,
operators, or programmers and (b) reprocessing at its expense data which
may be processed in error due to the sole fault of PMSC's machines,
operators or due to a nonconformity of the Production System to its
documentation.
9.2 Customer warrants and represents that the Other Software is year 2000
compliant, and will accurately search, index, compile and calculate dates
in the year 2000, including leap years. Other than damage amounts provided
for Customer under Section 10.3 hereof, Customer shall indemnify and hold
PMSC harmless from and against any loss, liability, claim or damage
incurred by PMSC or Customer arising or resulting from the (i) Year 2000
Project to be performed pursuant to this Agreement, (ii) Other Software,
and/or (iii) Customer's use or possession of any equipment supplied by
PMSC, Customer covenants to comply with all governmental laws, ordinances,
regulations and orders applicable to the installation, use, possession or
operation of any equipment or service supplied by PMSC hereunder.
9.3 Customer represents and warrants that the project plan for the migration to
Version 7 of the System and the Year 2000 Project is comprehensive and
capable of timely completion and, that as of the effective date hereof, the
migration and Year 2000 Project is on target for timely and successful
completion.
10. LIMITATION OF LIABILITY
10.1 EVEN IF ALL OTHER REMEDIES FAIL OF THEIR ESSENTIAL PURPOSES, PMSC SHALL
NEVER BE LIABLE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES SUCH AS,
BUT NOT LIMITED TO, LOSS OF ANTICIPATED PROFITS OR, PAYMENTS TO THIRD
PARTIES IN CONNECTION WITH, OR ARISING OUT OF THE SERVICES PROVIDED FOR IN
THIS AGREEMENT, EVEN IS PMSC HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES. THIS SECTION 10.1 WILL NOT BE CONSTRUED AS PRECLUDING RECOVERY BY
CUSTOMER OF ACTUAL DIRECT DAMAGES UNDER SECTION 10.3 BELOW.
10.2 THE PARTIES HERETO AGREE THAT THERE ARE NO UNDERSTANDINGS, AGREEMENTS,
REPRESENTATIONS OR
8 of 24
<PAGE>
WARRANTIES EXPRESS OR IMPLIED INCLUDING ANY REGARDING MERCHANTABILITY,
FITNESS OR FITNESS FOR A PARTICULAR PURPOSE NOT SPECIFIED HEREIN RESPECTING
THIS AGREEMENT, THE SERVICES OR THE EQUIPMENT DESCRIBED HEREIN OR IN ANY
EXHIBIT MADE A PART HEREOF, THIS AGREEMENT STATES THE ENTIRE OBLIGATION OF
PMSC IN CONNECTION WITH THIS TRANSACTION.
10.3 BOTH PARTIES ACKNOWLEDGE THAT (A) CUSTOMER DESIGNED THE PROJECT PLAN, (B)
CUSTOMER PERFORMED THE REQUIREMENTS STUDY RELIED UPON IN ITS DESIGN AND
PERFORMANCE OF THE YEAR 2000 PROJECT, AND PSMC IS ASSUMING THE
RESPONSIBILITY TO MANAGE AND PERFORM THE YEAR 2000 PROJECT WHICH WAS
STARTED UNDER CUSTOMER'S DIRECTION BASED UPON THE FOREGOING
ACKNOWLEDGEMENTS, CUSTOMER'S REPRESENTATIONS AND WARRANTIES IN SECTION 9.3,
AND THE PARTIES' ASSESSMENT OF THE RISKS INVOLVED WITH THE SERVICES AND
YEAR 2000 PROJECT, THE PARTIES HERETO AGREE TO LIMIT PMSC'S LIABILITIES
UNDER THIS AGREEMENT TO THE FOLLOWING:
10.3.1 EXCEPT FOR PMSC'S SEPARATE LIABILITY TO CUSTOMER FOR THE YEAR
2000 PROJECT, AS LIMITED IN SECTION 10.3.2 BELOW, AND EVEN IF THE
REMEDIES/WARRANTIES IN SECTION 9.1 ABOVE OR, ALL OTHER REMEDIES
ARE FOUND TO FAIL OF THEIR ESSENTIAL PURPOSES OR ARE FOUND
INSUFFICIENT, PMSC SHALL NEVER BE LIABLE TO CUSTOMER IN THE
AGGREGATE OVER THE TERM HEREOF IN EXCESS OF (I) THE LESSER OF THE
AMOUNT OF ACTUAL DIRECT DAMAGES AWARDED AGAINST PMSC, OR
$750,000.00, AND, (II) FOR PERFORMANCE LEVEL DEFICIENCIES, THE
LIQUIDATED DAMAGES AS SET FORTH IN EXHIBIT C HERETO; EXCEPT FOR
PMSC'S SEPARATE LIABILITY TO CUSTOMER FOR THE YEAR 2000 PROJECT,
AS LIMITED IN SECTION 10.3.2 BELOW, CUSTOMER SHALL ASSUME AND BE
RESPONSIBLE FOR ANY ADDITIONAL LIABILITIES OR DAMAGES IN EXCESS
OF SUCH $750,000.00.
10.3.2 PSMC AND CUSTOMER AGREE THAT NOTWITHSTANDING ANYTHING IN THIS
AGREEMENT TO THE CONTRARY, AND EVEN IF THE REMEDIES/WARRANTIES IN
SECTION 9.1 ABOVE OR, ALL OTHER REMEDIES ARE FOUND TO FAIL OF
THEIR ESSENTIAL PURPOSES OR ARE FOUND INSUFFICIENT, PMSC'S
LIABILITIES UNDER THIS AGREEMENT FOR THE RISKS ASSOCIATED WITH
UNTIMELY AND UNSUCCESSFUL COMPLETION OF THE YEAR 2000 PROJECT
SHALL NEVER EXCEED IN THE AGGREGATE OVER THE TERM HEREOF IN
EXCESS OF $1,000,000.00 AND, CUSTOMER ACKNOWLEDGES AND SHALL
ASSUME AND BE RESPONSIBLE FOR ANY ADDITIONAL LIABILITIES OR
DAMAGES IN EXCESS OF SUCH $1,000,000.00, INCLUDED IN THE
FOREGOING $1,000,000.00 LIMIT, PMSC AGREES TO PAY CUSTOMER
$10,000,00 LIQUIDATED DAMAGES FOR EACH DAY OR PARTIAL DAY THAT
THE MIGRATED SYSTEM IS NOT READY TO START SYSTEM TESTING AFTER
JUNE 15, 1998; ANY LIQUIDATED DAMAGES OWED TO CUSTOMER UNDER THIS
SECTION 10.3.2 SHALL COMMENSURATELY REDUCE THE AMOUNT OF THE
$1,000,000.00 LIMIT THAT PMSC SHALL BE LIABLE FOR UNDER THIS
SECTION 10.3.2.
11. FORCE MAJEURE
PMSC or its subsidiary shall not be liable or deemed to be in default for any
delay or failure in performance under this agreement or interruption of service
9 of 24
<PAGE>
resulting , directly or indirectly, from acts of God, civil or military
authority, labor disputes, shortages of suitable parts, materials, labor or
transportation, or any similar cause beyond the reasonable control of PMSC.
12. GENERAL
12.1 Customer and PMSC warrant that while this Agreement is in effect, neither
will directly or indirectly induce any employee of the other to terminate
his or her employment; nor will either, without prior written consent of
the other, offer employment to any employee of the other, or to former
employees during the six (6) month period immediately following such
employee's termination.
12.2 All schedules that may be set forth directly or by reference anywhere in
this Agreement or the Exhibits are conditioned upon plans and
specifications agreed upon by the parties as of the date of execution of
this Agreement. Any subsequent modifications of said plans or
specifications shall entitle PMSC at its option to adjust and/or extend
such schedules in a reasonable manner.
12.3 All notices which are required to be given or submitted pursuant to this
Agreement shall be in writing and shall be either delivered in person or
sent by certified mail, return receipt requested, to the address set forth
herein or to such other address as the parties may from time to time
designate in writing for such purposes. Notices shall be deemed to have
been given at the time when personally delivered or, if mailed in a
certified post-paid envelope, upon the fifth day after the date such
notice shall be postmarked. All notices to PMSC shall be addressed to the
attention of the General Counsel.
12.4 Customer and PMSC covenant and promise not to disclose the terms and
conditions of this Agreement and any Exhibits hereto, to any third party,
except as required in the normal conduct of business or as expressly
agreed to by the other party hereto.
12.5 This Agreement and any Exhibits made a part hereof: (a) constitute the
entire agreement between the parties and supersede and merge any and all
prior discussions, representations, negotiations, correspondence, writings
and other agreements and together state the entire understanding and
agreement between PMSC and Customer with respect to data processing
services; (b) may be amended or modified only in writing agreed to and
signed by PMSC and Customer; and (c) shall be deemed to have been entered
into and executed in the State of South Carolina and shall be construed,
performed and enforced in all respects in accordance with the laws of that
State.
12.6 Neither party hereto shall be deemed to have waived any rights or remedies
accruing to it hereunder unless such waiver is in writing and signed by
such party. No delay or omission by either party hereto in exercising any
right shall operate as a waiver of said right on any future occasion. All
rights and remedies hereunder shall be cumulative and may be exercised
singularly or concurrently.
12.7 The descriptive headings of this Agreement are intended for reference only
and shall not affect the construction or interpretation of this Agreement.
12.8 Wherever the singular of any term is used herein it shall be deemed to
include the plural wherever the plural thereof may be applicable.
12.9 Whenever the phrase "business days" is used it shall mean Customer's
normally scheduled work days, Customer's holidays excepted.
12.10 Customer shall not assign this Agreement or any of its rights hereunder
without the prior written consent of PMSC.
12.11 If any provision of this Agreement or any Exhibit hereto or the
application thereof to any party or circumstances shall, to any extent,
now or hereafter be or become invalid or unenforceable, the remainder of
this Agreement shall not be affected thereby and every other provision of
this Agreement shall be valid and enforceable, to the fullest extent
permitted by law.
10 of 24
<PAGE>
PMSC and Customer certify by their undersigned
authorized representatives that they have read this
Agreement, including all Exhibits and Schedules, and
agree to be bound by its terms and conditions.
PMSC
POLICY MANAGEMENT SYSTEMS CORPORATION
By: /s/ Stephen G. Morrison
----------------------------------
(Authorized Signature)
(in non-black ink, please)
STEPHEN G. MORRISON
----------------------------------
(Name)
Executive Vice President
and General Counsel
----------------------------------
(Title)
1-29-98
----------------------------------
(Execution Date)
Originally signed by Stephen G. Morrison
on 1/22/98
CUSTOMER
SHELBY INSURANCE COMPANY
By: /s/ Barry A. Patrick
----------------------------------
(Authorized Signature)
(in non-black ink, please)
BARRY A. PATRICK
----------------------------------
(Name)
EXEC. VICE PRESIDENT
----------------------------------
(Title)
1/22/98
----------------------------------
(Execution Date)
11 of 24
<PAGE>
EXHIBIT A
TO THE
AGREEMENT FOR DATA PROCESSING SERVICES
BETWEEN
POLICY MANAGEMENT SYSTEMS CORPORATION
AND
SHELBY INSURANCE COMPANY
1. SYSTEM:
1.1 SYSTEM: The Release and version of the Series II Systems set forth
below will be used to process transactions described in Section 2
below.
PMS 5.3, Version 4, Version 6 and Version 7
BCMS
CHS
AIS
2. TRANSACTION DESCRIPTION:
Customer's property and liability insurance, for personal and commercial
transactions will be initially processed hereunder using the indicated
Release and version of the System as modified pursuant to this Agreement.
PMSC shall process said transactions using the System identified under
Section 1 above only so long as the Customer maintains a license in full
force and effect, including MESA, for each aforementioned System.
12 of 24
<PAGE>
EXHIBIT B
TO THE
AGREEMENT FOR DATA PROCESSING SERVICES
BETWEEN
POLICY MANAGEMENT SYSTEMS CORPORATION
AND
SHELBY INSURANCE COMPANY
PROCESSING CHARGES:
A. The Monthly Charges for processing Customer's transactions using the
Release and version of the System specified in Exhibit A, shall be payable
monthly and shall consist of the charges outlined below;
1. Commencing upon Customer's first use of the Production System for the
processing of Customer's live data following completion of the
Transition Services outlined in Section 2.1 of the Agreement, and
continuing thereafter throughout the remainder of the term of the
Agreement, Customer agrees to any PMSC a Monthly Processing Charge.
The processing services covered by the Monthly Processing Charges and
the other assigned tells and any additional related charges are
delineated on Schedule 1 to this Exhibit B. The Monthly Processing
Charge (as defined below in Table 1) shall be determined based upon
the direct written premium ("DWP") processed on the Production System
for that month times the applicable Percentage Factors, which are
sequentially applied. Notwithstanding the above, the Minimum Monthly
Processing Charge shall be $50,000.00. If Customer's parent
corporation, Vesta Fire Insurance Corporation ("Vesta") enters into a
data processing agreement with PMSC for processing Customer's and
Vesta's Insurance business, and migrates Customer's insurance business
from the Production System to the POINT computer software system
("POINT Software") licensed to Vesta by PMSC, then PMSC will reduce
the Minimum Monthly Processing Charge commensurate with the ramp-up of
the processing under the new processing agreement; provided that the
Minimum Monthly Processing Charge will not be reduced lower than what
is required to cover PMSC's expenses in performing its duties under
the Agreement.
TABLE 1
DIRECT WRITTEN PREMIUMS PERCENTAGE FACTORS
----------------------- ------------------
$0 - $100,000,000 0.86%
$100,000,001 - $165,000,000 0.83%
$165,000,001 - $212,000,000 0.77%
$212,000,001 - $275,000,000 0.76%
$275,000,001 - $359,000,000 0.73%
Greater than $359,000,000 0.70%
NOTWITHSTANDING ANYTHING IN THE AGREEMENT TO THE CONTRARY, PMSC AGREES
NOT TO INCREASE THE ABOVE PERCENTAGE FACTOR RATES PURSUANT TO SECTION
6.4 OF THE AGREEMENT FOR THE FIRST 36 MONTHS OF THE AGREEMENT.
2. Monthly communication lines charges (which shall be pass-through
commencing upon installation of such lines).
B. The Services described below shall be provided on a "time and materials"
basis. Charges for Services provided on a time and materials basis shall be
computed using the rates and charges set forth in Table 2 below:
13 of 24
<PAGE>
EXHIBIT B (Cont.)
1. Test (i.e. non production) CICS for any Test Systems over and above the one
included in the Monthly Processing Charge.
2. All test cycles of any software for any Test Systems over and above the one
included in the Monthly Processing Charge.
3. Processing of Customer's business data other than according to the
processing schedule provided in subsection 2.4.2 of the Agreement.
4. Carry forward of Customer's Modifications in Customer's Systems.
5. Implementation, maintenance and processing of Other Software added after
the effective date of the Agreement.
6. Processing of Customer's Modifications added after the effective date of
the Agreement, except as otherwise expressly agreed.
7. Customizations and Modifications made by PMSC to the System.
8. Performing the Year 2000 Project.
9. Transition Services
TABLE 2
TIME AND MATERIALS RATES*
SERVICE RATE
------- ----
MVS CPU Priority-Minute (1) $90.00
MVS CPU Prime-Minute (1)(2) $18.00
MVS CPU CICS-Minute (1) $18.00
MVS CPU Other-Minute (1) $18.00
DB2 CPU Surcharge-Minute (1) $19.48
TSO Connect-Hour $ .04
Tape Mount $ 3.36
Tape EXCP - Per 1000 $ .06
Tape Storage - Retained $ .02
Tape Removed $30.00
Tape Returned $ 7.50
DASD EXCP - Per 1000 $ .21
DASD Storage - Per Megabyte $ .25
Local Page Print - Per Image $ .09
Remote Page Print - Per Image $.0044
Local Print - Per 1000 Lines $ 1.97
Remote Print - Per 1000 Lines $ .09
Local Microfiche - Per 1000 Lines $ .60
Charges for on-line Availability outside of Standard Availability
$200.00/Hour.
PERSONNEL RATES
- ---------------
14 of 24
<PAGE>
EXHIBIT B (CONT.)
1. For the first 168 person-months of PMSC personnel services on the
Production System, Customer will pay PMSC $9,100.00 per person-month.
2. After the first 168 person-months of PMSC personnel services on the
Production System, and for personnel services on the POINT Software,
Customer will pay PMSC $11,500.00 per month. Customer commits to use a
minimum of 648 person-months of PMSC's personnel services on the
Production System or POINT Software within the first 36 calendar months
of the Agreement. If Customer does not use at least 648 person-months
of personnel services within such 36 calendar month period, then PMSC
will invoice Customer for the difference between 648 person-months and
the actual number of person-months used times $11,500.00. After
Customer uses the 648 person-months of personnel services, Customer
will pay PMSC $11,500.00 per person-month for services on the
Production System under this Agreement and $14,500.00 per person-month
for services on the POINT Software. The raises for the 168 person-month
commitment and the 648 person-month commitment above will not be
adjusted pursuant to Section 6.4 of the Agreement. However, the
$11,500.00 and $14,500.00 rates that apply to services after the 168
and 648 person-month commitments shall be adjusted pursuant to Section
6.4 of the Agreement.
3. Customer agrees to pay PMSC a bonus equal to 10% of the aggregate
Service Charges paid to PMSC by Customer associated with the migration
to the Version 7 of the Systems if the migrated Systems are ready to
enter production processing as the Production Systems on or before
October 1, 1998; however, the foregoing bonus will not exceed
$150,000.00. Such bonus shall be due and payable within 30 days of
Customer's receipt of an invoice therefor.
______________________________
/(1)/ Based on IBM 9021 - 9X2
/(2)/ 8:00 a.m to 5:00 p.m. Eastern Standard Time business days.
/(3)/ A Person Month shall equal 160 hours of personnel time and a partial
person-month shall be invoiced and payable on a pro-rata basis.
. AFTER THE FIRST 36 MONTHS OF THE AGREEMENT, AND UPON 30 DAYS PRIOR WRITTEN
NOTICE, PMSC MAY ADJUST THE NON-PERSONNEL RATES FOR THE SERVICES
IDENTIFIED IN THIS TABLE 2 TO ITS THEN CURRENT STANDARD RATES AND CHARGES
FOR THE SERVICES AND USE OF ITS EQUIPMENT.
15 of 24
<PAGE>
SCHEDULE I
TO
EXHIBIT B
TO THE
AGREEMENT FOR DATA PROCESSING SERVICES
BETWEEN
POLICY MANAGEMENT SERVICES CORPORATION
AND
SHELBY INSURANCE CORPORATION
- --------------------------------------------------------------------------------
RESPONSIBILITY GRID PRICING METHOD RESPONSIBILITY COMMENT
FUNCTION
- --------------------------------------------------------------------------------
1. Dedicated PMSC account manager % of DWP PMSC
- --------------------------------------------------------------------------------
2. Apply to PMSC base programs
TIBS, enhancements, regulatory % of DWP PMSC
and statutory changes when
available from PMSC development
- --------------------------------------------------------------------------------
3. Correct production system non-
conformities on PMSC system % of DWP PMSC
- --------------------------------------------------------------------------------
4. Provide on-line mainframe
computer access to customer % of DWP PMSC
employees during normal business
hours
- --------------------------------------------------------------------------------
5. Provide schedule computer
operations to process policy % of DWP PMSC
transactions on PMSC and other
approved mainframe systems
- --------------------------------------------------------------------------------
6. Provide data communications
management and planning % of DWP PMSC
- --------------------------------------------------------------------------------
7. Provide mainframe security
management and maintenance % of DWP PMSC
- --------------------------------------------------------------------------------
8. Provide mainframe data
management % of DWP PMSC
- --------------------------------------------------------------------------------
9. Provide maintenance of mainframe
computer equipment and operating % of DWP PMSC
systems
- --------------------------------------------------------------------------------
10. Plan for introduction of new
technology % of DWP PMSC
- --------------------------------------------------------------------------------
16 of 24
<PAGE>
- --------------------------------------------------------------------------------
11. Payment of costs associated
with the transfer of a Direct cost of Customer
third party system software Customer
license from the Customer
data center to a PMSC
data center
- --------------------------------------------------------------------------------
12. Report to statistical bureaus Contract services
Direct cost of Customer available through
Customer PMSC's Bureau
Services Area
- --------------------------------------------------------------------------------
13. Provide scheduled computer
operations for test systems Time & PMSC/
in addition to those stated Materials Customer
in the Agreement
- --------------------------------------------------------------------------------
14. PMSC expenses incurred No Charge - PMSC
exercising due diligence PMSC
Marketing
activity
- --------------------------------------------------------------------------------
15. Conversions from one system
to another system Time & PMSC/
Materials Customer
- --------------------------------------------------------------------------------
16. Interfaces from one system Existing
to another system Time & PMSC/ interfaces to be
Materials Customer convered in
Processing size
charge.
- --------------------------------------------------------------------------------
17. Output to media other than Includes
paper Time & PMSC/ microfiche,
Materials Customer microfilm or
image.
- --------------------------------------------------------------------------------
18. Provide scheduled computer
operations to process Time & PMSC
transactions on systems not Materials
approved for inclusion in the
processing size charge
- --------------------------------------------------------------------------------
19. Implementation of new
application systems Time & PMSC/
Materials Customer
- --------------------------------------------------------------------------------
20. Retrofit of old modifications
to new PMSC base programs Time & PMSC
Materials
- --------------------------------------------------------------------------------
21. Production of reports not
output by systems as of Time & PMSC
contract date Materials
- --------------------------------------------------------------------------------
22. Development activity related
to projects approved by Time & PMSC
Customer Materials
- --------------------------------------------------------------------------------
23. Provide on-line mainframe
computer access to Customer Time & PMSC
employees outside of normally Materials
scheduled hours
- --------------------------------------------------------------------------------
17 of 24
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
24. Move applications systems from
the Customer's data center to a Time & Materials PMSC/
PMSC data center Customer
- ----------------------------------------------------------------------------------------------------------------
25. Installation and recurring monthly Direct pass through Customer
charges for data communications
lines and equipment linking
PMSC and locations of Customer.
- ----------------------------------------------------------------------------------------------------------------
26. Operation and maintenance of
print facilities at locations of Direct cost of Customer
Customer Customer
- ----------------------------------------------------------------------------------------------------------------
27. Customer internal hardware
purchases Direct cost of Customer
Customer
- ----------------------------------------------------------------------------------------------------------------
28. Maintenance and operation of
hardware and software for Direct cost of Customer
personal computers and local area Customer
networks
- ----------------------------------------------------------------------------------------------------------------
29. Maintenance of wiring from local Direct cost of Customer
terminals at Customer locations to Customer
the terminal communications
controller device
- ----------------------------------------------------------------------------------------------------------------
30. Forms printing/assembly for
production processing Direct cost of Customer
Customer
- ----------------------------------------------------------------------------------------------------------------
31. Paper and preprinted forms stock
to support printer requirements Direct cost of Customer
Customer
- ----------------------------------------------------------------------------------------------------------------
32. Travel expenses of PMSC
employees Direct cost of Customer
Customer
- ----------------------------------------------------------------------------------------------------------------
33. License fees to PMSC for
application software Direct cost of Customer
Customer
- ----------------------------------------------------------------------------------------------------------------
34. Federal Express invoices for
deliveries of PMSC print, tapes, Direct cost of Customer
etc. Customer
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
18 of 24
<PAGE>
Exhibit C
to the
Agreement For Data Processing Services
between
Policy Management Systems Corporation
and
Shelby Insurance Company
ON-LINE AVAILABILITY:
1. On-line access to the Production System data shall normally be available to
Customer 7:00 a.m. to 7:00 p.m. EST on business days ("Standard
Availability").
On-line access outside of the above period shall be at PMSC's standard
rates for such services as set forth in Table 2 of Exhibit B.
On-line access shall mean access to Customer's data via remote terminal at
Customer's site.
A. The following are the Performance Levels for the Services under this
Agreement.
(1) PRODUCTION CICS - RESPONSE
Performance Level: 5.0 seconds, 90% of all transactions as
measured from the network equipment
terminating the line at Customer's site on
the outgoing trip to the same network
equipment terminating the line at Customer's
site on the incoming trip during hours of
availability.
Correction Period: 4 weeks
Amount Withheld: $7,000.00/per month
(2) PRODUCTION CICS - AVAILABILITY
Performance Level: 95% as reported in PMSC's standard weekly
report of System Availability during the
normal business hours of 7:00 A.M. EST and
7:00 P.M. EST.
Correction Period: 4 weeks
Amount Withheld: $5,000.00/per month
(3) DAILY PRODUCTION CYCLES
Performance Level: 85% of cycles completed.
Correction Period: 4 weeks
Amount Withheld: $5,000.00/per month
19 of 24
<PAGE>
(4) DAILY PRODUCTION CYCLE OUTPUT
Performance Level: Output of 85% cycles available to start printing
by 7:00 a.m. Eastern time of the next business
day.
Correction Period: 4 weeks
Amount Withheld: $5,000.00/per month
(5) MONTHLY PRODUCTION CYCLE
Performance Level: Cycle completed and output available to start
printing prior to 7:00 a.m. Eastern time of the
6th calendar day.
Correction Period: 30 days
Amount Withheld: $2,000.00/per month
B. In the event that PMSC's performance of the herein referenced Services fall
outside of the Performance Level for that Service set forth above, and such
Performance Level is not achieved during the Correction Period specified
for said service, Customer may withhold payment of amounts due PMSC under
this Agreement equal to the Amount Withheld stated for said service for
each partial month following the Correction Period that said Performance
Level is not achieved. Upon PMSC's achieving said Performance Level
Customer agrees to promptly resume paying PMSC all amounts accruing
hereunder; however, Customer may retain the amount withheld pursuant to
the terms of this Section without obligation thereafter to pay said amount
to PMSC.
C. In addition to the conditions stated above all of the following conditions
must be met prior to withholding any amounts:
(1) Customer shall have implemented and shall have been in compliance with
PMSC's guidelines concerning equipment and communication lines which
shall be developed to achieve that Performance Levels. The
Performance Levels will only apply to live production processing with
the Production System.
(2) Customer shall give written notice to PMSC's General Counsel with a
copy to the Senior Vice President responsible for the services under
this Agreement of any failure to meet the Performance Levels
specified in this Agreement.
(3) A designee of Customer and a designee of PMSC shall meet to review
perceived problems and set forth a corrective plan. Such meeting may
be by telephone.
(4) If a corrective plan cannot be agreed upon by both parties, then
Customer may withhold from the Monthly Processing Charge the amount
specified herein for the corresponding Performance Level subject to
the limitation set forth below.
(5) Performance Levels for "On-Line Response Time" and "On-Line
Availability" referenced hereinabove will be calculated on a rolling 4
week average. Response Time will be measured from the instant the data
exits the network equipment terminating the line at Customer's site on
the outgoing trip to the same network equipment terminating the line
at Customer's site on the incoming trip.
20 of 24
<PAGE>
(6) Performance Levels for "Daily Cycles" and "Daily Output" will be
calculated on a rolling daily average over a 4 week period.
(7) Upon Customer's notification of service outside of the Performance
Level for "On-Line Response Time" or "On-Line Availability" the
rolling Performance Level average calculations in C.5 and C.6 above
shall be suspended with Performance Levels calculated and reviewed on
a daily average basis during the respective Correction Periods. When
performance returns to Performance Levels at or above those specified
herein, the Performance Levels in C.5 and C.6 shall thereafter be
calculated on the rolling average basis.
21 of 24
<PAGE>
EXHIBIT D
to the
Agreement For Data Processing Services
between
Policy Management Systems Corporation
and
Shelby Insurance Company
SOFTWARE
VENDOR PRODUCT COMMENTS
Boole & Babbage CMT Monitor
IBM CMOS software Schedule of software not
provided
IVANS Subscription
Chicago Soft MVS QuikRef
Computer Associates Enterprise Agreement-
Schedule of software not
provided
Intertest XA/ESA
Netman
Examine
Novell Unicenter
CA Optimizer
PMSC AIS
Version 7
Series III
BCMS
CHS
Compuware File/AbendAid
Document Systems Silver Plume
H&W Wizard Mail
22 of 24
<PAGE>
Image Science DocuMerge
Intersolve Version Manager
Princeton Version Merger
SAS SAS License identified two
products-SAS Base &
SAS DB2
Insurance Ref Sys. Silver Plume
Sterling Software Comparex
Pitney Bowes Maxi Finalist Bar Code
Unitech U/ACR Batch Balancing
Mainware HourGlass 2000
Merril Consultants MXG Software
MicroFocus MicroFocus COBOL
Xerox XPAF License
Technologic Software Comet
Mobius Management Systems Mobius License indicates two
products- Infopak and
Documerger
Kodak Imaglink
Xactware Xactimate
23 of 24
<PAGE>
EXHIBIT E
to the
Agreement For Data Processing Services
between
Policy Management Systems Corporation
and
Shelby Insurance Company
SHELBY EMPLOYEES
1. Houseworth, William T.
2. Hoff, Michael E.
3. MacCormick, J. Brad
4. Wills, Elizabeth R.
5. Tanner, Rebecca A.
6. Neal, Gray L.
7. Dodge, Catherine S.
8. Young, Laura A.
9. Alt, Tamara J.
10. Utz, Denise L.
11. McQuillan, Terry L.
12. Crist, Timothy M.
13. Paurrier, Daniel J.
14. Davis, Charlotte J.
15. Johnson, Katherine
16. Kisling, Susan M.
17. Wagner, Joyce A.
18. King, Vella J.
19. Wagner, Karen S.
20. Collins, Kenneth
21. Simmons, Lisa A.
22. Ensman, Donna K.
23. Stevens, Debora A.
24. Atkins, Maryellen
25. Arnold, Dennis A.
26. Mawhorr, Ronald
27. Anderson, Karen A.
28. Grimm, Kimberly D.
29. Albert, Lorna J.
30. Albert, Todd E.
31. Hostetler, Angela R.
24 of 24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 476,532
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,245
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 660,508
<CASH> 5,570
<RECOVER-REINSURE> 139,991
<DEFERRED-ACQUISITION> 104,726
<TOTAL-ASSETS> 1,664,797
<POLICY-LOSSES> 599,846
<UNEARNED-PREMIUMS> 378,081
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 98,349
190
0
<COMMON> 0
<OTHER-SE> 293,273
<TOTAL-LIABILITY-AND-EQUITY> 1,664,797
303,368
<INVESTMENT-INCOME> 18,100
<INVESTMENT-GAINS> 135
<OTHER-INCOME> 2,958
<BENEFITS> 204,243
<UNDERWRITING-AMORTIZATION> 89,026
<UNDERWRITING-OTHER> 41,281
<INCOME-PRETAX> (19,723)
<INCOME-TAX> (7,362)
<INCOME-CONTINUING> (12,361)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,085)
<EPS-PRIMARY> (.82)
<EPS-DILUTED> (.82)
<RESERVE-OPEN> 596,797
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 599,846
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
