<PAGE>
As filed with the Securities and Exchange Commission on November 5, 1999.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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VESTA INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 6711 63-1097283
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
3760 River Run Drive
Birmingham, Alabama 35243
(205) 970-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Donald W. Thornton, Senior Vice President--General Counsel and Secretary
Vesta Insurance Group, Inc.
3760 River Run Drive
Birmingham, Alabama 35243
(205) 970-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
With Copies to:
James F. Hughey, Jr. John K. Molen
John W. McCullough Bradley Arant Rose & White LLP
Balch & Bingham LLP 2001 Park Place, Suite 1400
1901 Sixth Avenue North, Suite 2600 Birmingham, Alabama 35203
Birmingham, Alabama 35203 (205) 521-8000
(205) 251-8100
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Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act Registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the
same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of each class of Proposed Proposed
securities to be Amount to be maximum offering maximum aggregate Amount of
registered Registered price per share(1) offering price(1) Registration Fee(1)
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<S> <C> <C> <C> <C>
Common Stock........... 5,130,000 $4.34 $22,264,200 $6,190
</TABLE>
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(1) Estimated solely for purposes of calculating the Registration Fee pursuant
to Rule 457(c) and based upon the average of the high and low sales prices
reported on the New York Stock Exchange for November 2, 1999.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1999
PROSPECTUS
5,130,000 SHARES
VESTA INSURANCE GROUP, INC.
COMMON STOCK
The shares of Vesta Insurance Group, Inc. common stock are being offered by
our largest single stockholder, Torchmark Corporation and its wholly owned
subsidiaries. Prior to our initial public offering in November, 1993, Torchmark
Corporation owned 100% of our shares of common stock. The selling stockholder
may sell these shares from time to time in open market transactions, in
privately negotiated transactions, or in an underwritten offering.
We will not receive any portion of the proceeds from the sale of these
shares.
We have agreed to bear certain expenses in connection with the registration
and sale of the shares being offered by the selling stockholder.
The shares have been listed with the New York Stock Exchange and will be
traded with our other outstanding shares under the symbol "VTA."
The selling stockholder will determine the price of the shares independent of
Vesta. On November 2, 1999, the last sale price of the common stock on the New
York Stock Exchange was $4 5/16 per share.
The shares offered in this prospectus involve a high degree of risk. You
should carefully consider the "risk factors" described beginning on page 10 in
determining whether to purchase the shares being offered hereby.
-----------
Neither the SEC nor any State Securities Commission has approved or
disapproved of these securities, or determined that this prospectus is truthful
or complete. Any representation to the contrary is a criminal offense.
-----------
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You should
not rely on any unauthorized information. This prospectus does not offer to
sell or buy any shares in any jurisdiction in which it is unlawful.
The information contained in this prospectus is current as of the date of
this prospectus. You should not assume that the information in this prospectus
or any prospectus supplement is accurate as of any date other than the date on
the front of those documents.
The date of this Prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 15
Use of Proceeds.......................................................... 15
Price Range of Common Stock and Dividend Policy.......................... 15
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 33
Management............................................................... 53
Executive Compensation and Other Transactions with Management............ 57
Changes in Registrant's Certifying Accountant............................ 66
Largest Single and Selling Stockholder................................... 67
Description of Capital Stock............................................. 67
Plan of Distribution..................................................... 75
Validity of Securities................................................... 75
Experts.................................................................. 75
Index to Financial Statements............................................ 76
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the
U.S. Securities and Exchange Commission (the "SEC"). Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms.
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 1995. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of Reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission, including
its most recent Annual Report of Form 10-K. If any of these assumptions or
opinions prove incorrect, any forward-looking statements made on the basis of
such assumptions or opinions may also prove materially incorrect in one or more
respects.
2
<PAGE>
PROSPECTUS SUMMARY
This section summarizes the more detailed information in this prospectus,
and you should read all of such information carefully and in its entirety.
Our Business
Overview
Who we are. We are a holding company for nine insurance companies and six
non-insurance companies which provide various management services to our
insurance companies. Our lead insurance subsidiary is Vesta Fire Insurance
Corporation, which we refer to as "Vesta Fire." Because we conduct our business
through several subsidiaries, we refer to our entire group of companies as
"we," "us" or "our company."
What we do. We sell Personal Lines insurance, which means we sell insurance
products primarily to individuals covering their homes (including their
contents), their private passenger automobiles and certain potential
liabilities attendant to their ownership of such property. We are licensed to
sell these insurance products in 49 states.
What we have done. We recently decided to discontinue two business
segments--Reinsurance assumed and Commercial Lines insurance--which have
historically generated the majority of our premium volume. Reinsurance is
essentially an agreement by one insurance company (which we refer to as the
reinsurer) to assume specified risks of loss on insurance policies issued by
another insurance company. Our Commercial Lines insurance products covered a
variety of commercial assets and risks. As we explain later in this Summary
under the captions "Recent Adverse Business Developments" and "Strategy,"
recent adjustments to our statutory capital and surplus and related downgrades
in our ratings by A.M. Best Company dramatically impacted our ability to
compete in the commercial insurance and Reinsurance markets. Accordingly, we
decided to discontinue our Reinsurance and Commercial Lines business segments
effective during 1999.
Where we are going. For fiscal
year 1999, our principal business
segment will be Personal Lines.
Although our historical results of
operations (including the audited and
unaudited consolidated financial
statements contained in this
prospectus) reflect significant
premium volume in our Reinsurance and
Commercial Lines segments, we expect
to lose substantially all of this
premium volume during 1999. The pie
chart to the right illustrates the
Gross Premiums Written by our
remaining Personal Lines segment as a
percentage of our total Gross
Premiums Written (including
Commercial Lines and Reinsurance)
during 1998.
[Gross Premiums Written-Combined (1998) Graph Appears Here]
Looking beyond 1999, we believe
that Personal Lines will continue to
be our dominant business segment,
although we may seek to develop other
business segments which may be
profitable to our company in light of
any changed circumstances that may
exist from time to time.
3
<PAGE>
Personal Lines Insurance Products
We offer four types of Personal Lines insurance products:
. Personal Auto
. Homeowners
. Financial Services
. Other
Personal Auto. We offer personal automobile insurance for individual drivers
covering the risk of property damage to their private passenger automobiles and
potential liability which may arise from their driving related accidents. For
underwriting purposes, we classify individuals as either preferred, standard or
non-standard drivers, based primarily on their age and driving records. Rates
are based upon the driver's classification, the type of automobile insured,
geographic location and other factors. Our exposure on personal automobile
insurance policies is typically limited to $500,000 or less.
Homeowners. We sell insurance covering residential properties and their
contents. The majority of residential properties we insure are valued between
$40,000 and $250,000, although we insure higher valued homes up to $10 million.
Financial Services. We provide specialty insurance products to financial
institutions covering property (automobiles or residences) which has been
pledged as collateral to secure a loan or mortgage, in the event the borrower
fails to insure the property. These specialty products also provide coverage
for properties that have been repossessed or are in the process of foreclosure.
Other. We sell other insurance products to individuals for a variety of
special risks.
Business Mix
The fundamental measurement of our
business volume is Gross Premiums
Written, which represents the amount
of premiums we should collect from
our customers over the term of the
insurance policies we sell to them.
Although we cede some of these
premiums to reinsurers and still more
is reserved to administer and pay
claims made on those policies, we
measure our business mix in terms of
Gross Premiums Written. The pie chart
to the right illustrates the Gross
Premiums Written by type of product
as a percentage of total Gross
Premiums Written by our Personal
Lines segment during 1998. Likewise,
we discuss sales data below (which
includes renewals of existing
policies and issuances of new
policies) in terms of Gross Premiums
Written.
[Gross Premiums Written-Personal Lines (1998) Graph Appears Here]
Personal Auto. We sold $223 million in Personal Auto insurance products
during 1998, representing 64% of the total Personal Lines insurance products
sold during 1998. During the first six months of 1999, we sold $98 million in
Personal Auto insurance products, representing 68% of the total Personal Lines
insurance products sold during the same period. These results of the first six
months of 1999 represent a decrease in Personal Auto business of $23 million,
or 19%, from the first six months of 1998.
Homeowners. We sold $94 million in Homeowners insurance products during
1998, representing 27% of the total Personal Lines insurance products sold
during 1998. During the first six months of 1999, we sold
4
<PAGE>
$49 million in Homeowners insurance products, representing 34% of the total
Personal Lines insurance products sold during the same period. These results
represent an increase in Homeowners business of $1 million, or 2%, from the
first six months of 1998.
Financial Services. We sold $21 million in Financial Services insurance
products during 1998, representing 6% of the total Personal Lines insurance
products sold during 1998. During the first six months of 1999, we sold $(3)
million in Financial Services insurance products. These results represent a
decrease in Financial Services business of $14 million from the first six
months of 1998.
Other. We sold $9 million in Other insurance products during 1998,
representing 3% of the total Personal Lines insurance products sold during
1998. During the first six months of 1999, we sold $1 million in Other
insurance products, representing .7% of the total Personal Lines insurance
products sold during the same period. These results represent an increase in
Other business of $.7 million, or 233%, from the first six months of 1998.
Business Retention and Development
We offer our Personal Lines insurance products through approximately 3800
independent agents in 42 states. As we discuss elsewhere in this prospectus,
the success of our Personal Lines segment depends largely upon our ability to
make it as easy as possible for these independent agents to do business with
us. To accomplish this goal, we are pursuing three significant technological
projects:
. paperless underwriting and processing system, which will make policy
information more readily available in electronic format;
. a computerized agency download system which will update agencies'
management systems with current policy data; and
. an internet-based interactive inquiry, application and endorsement
service, which will put policy, billing and claims information at
agents' fingertips and provide them with direct access to our policy
issuance systems.
We believe that the successful development and implementation of these
technological advances will help us retain our existing business and attract
new business in our Personal Lines segment.
We measure our retention of existing business by our renewal retention
ratio, which measures the number of policy renewals in a given period as a
percentage of total policies previously issued and eligible for renewal in that
period. Our renewal retention ratio for our Shelby business was 90% for the
second quarter of 1999, 91% for the first quarter of 1999 and 92% for the
fourth quarter of 1998. Though similar retention data is not available for all
of our Personal Lines business, other data indicates that the Shelby results
are representative of our Personal Lines renewal retention ratios, generally.
We measure our attraction of new business by the number of new policy
applications received in any given period, which we compare to the number of
new policy applications received in the corresponding prior year period. During
the first six months of 1999, new policy applications in our Personal Lines
segment declined by approximately 45%, as compared to the first six months of
1998.
Reinsurance Ceded
We seek to manage our risk exposure on the policies which we issue through
the purchase of reinsurance. When we purchase reinsurance for our policies
issued, we essentially "cede" to the reinsurer a portion of the risk associated
with those policies, as well as a commensurate portion of the gross premiums
written associated with those policies (the gross premiums written less the
amount of premiums ceded to the reinsurer are known as "net premiums written").
The reinsurer then becomes liable to repay us for losses we pay on those
policies to the extent of the ceded risk).
5
<PAGE>
When we receive a claim for a loss on a policy which we have "reinsured", we
pay the claim and seek to recover the amount paid from the reinsurer. In
accordance with generally accepted accounting principles, we report these
amounts as assets on our balance sheet, although we may not have collected such
amounts from the reinsurers. See "Risk Factors--We Face a Risk of Non-
Collection of Reinsurance Recoverables..."
Recent Adverse Business Developments
We faced four major adverse business developments during 1998 and the first
half of 1999:
. Accounting Irregularities. In June 1998, we discovered certain
accounting irregularities in our reported results for the fourth quarter
of 1997 and the first quarter of 1998. We promptly commenced an internal
investigation which resulted in a reduction of net income of
approximately $13.6 million in the fourth quarter of 1997 and first
quarter of 1998.
. Correction of prior accounting method. In 1998, we corrected the
methodology by which we recognized earned premiums in our Reinsurance
segment. This resulted in a restatement of our historical financial
statements and a decrease in reported net income of approximately $49
million for the years 1993 through 1997.
. Reduced statutory surplus of Vesta Fire. In 1997, Vesta Fire reported
statutory capital and surplus of approximately $355 million. During
1998, the Alabama Department of Insurance completed its examination of
this filing and adjusted the reported amount down to $100.8 million.
Although we were able to cure many of the technical deficiencies which
led to the adjustments, certain of the adjustments were based on
accounting methods which needed to be corrected and were not immediately
curable. Using the basis of accounting established in the examination,
we reported Vesta Fire's 1998 statutory capital and surplus as $217.3
million, after giving effect in 1998 to $125.8 million of "uncurable"
adjustments arising from the examination.
. A.M. Best ratings. A.M. Best Company, which rates insurance companies
based on factors of concern to policyholders, recently lowered its
rating on our insurance subsidiaries to "B" (Fair), after having already
lowered it to "B++" (Very Good) from "A-" (Excellent).
Strategy
During the last quarter of 1998 and the first quarter of 1999, we analyzed
the profitability of our Reinsurance, Commercial Lines and Personal Lines
segments in light of the adverse business developments described above. In the
course of our analysis, we determined that the corrective actions necessary to
return our Commercial Lines segment to profitability could not be justified in
the current commercial insurance marketplace. We also determined that we could
no longer retain or expand our Reinsurance portfolio. As a result of these
conclusions, we decided to discontinue our Commercial Lines and Reinsurance
segments. Moving forward, we will concentrate solely on retaining and expanding
the business in our Personal Lines segment and on reducing expenses to an
appropriate level given our narrowed operating strategy.
Commercial Lines Segment (discontinued)
The insurance needs of commercial enterprises are as diverse as the products
and services that those enterprises provide. In the past, we have sold
insurance products to meet as many of those needs as we could while still
making a profit. Since commercial insurance products cannot be neatly
subdivided (as can Personal Lines products), we report financial results of our
Commercial Lines segment on an aggregate basis only. In 1998, gross premiums
written for our Commercial Lines segment aggregated $124 million, or
approximately 16% of our consolidated gross premiums written in all of our
business segments.
In light of our recent decision to discontinue our Commercial Lines segment,
we are not writing any new commercial insurance business effective after July
1, 1999. The Company will continue to earn premium and incur losses on those
commercial policies that are in force on July 1, 1999 until those policies
expire.
6
<PAGE>
Reinsurance Assumed Segment (discontinued)
Reinsurance is a contractual arrangement whereby one insurance company (the
ceding company) transfers to another insurance company (the reinsurer) all or a
portion of the risk or risks that the ceding company has assumed under the
insurance policy or policies it has issued. Like the Commercial Lines segment,
we report financial results of our Reinsurance assumed segment on an aggregate
basis only. In 1998, gross premiums written for our Reinsurance assumed segment
aggregated $288 million, or approximately 38% of our consolidated gross
premiums written for all of our business segments.
In light of our recent decision to discontinue our Reinsurance assumed
segment, we will not write any new Reinsurance business effective after January
1, 1999. On March 24, 1999, the Company entered into an agreement to transfer
certain of its reinsurance assumed business to Hartford Fire Insurance Company
(Hart Re). The agreement calls for the Company to reinsure its North American
assumed business underwritten in the Birmingham office with a January 1, 1999
effective date to Hart Re under a 100% quota share treaty and for the Company
to use its best efforts to novate the policies to Hart Re and encourage
renewals with Hart Re for policies not novated. The Company is exiting the
Reinsurance assumed business with this transaction and continued conversion or
commutation and termination of all other assumed reinsurance business. The
Company will continue to earn premium and incur losses on certain Reinsurance
assumed contracts until the contracts are terminated through conversion or
commutation.
Note on Future Accounting for Business Segments
As we have explained, for 1999 and beyond we expect our dominant business
segment to be Personal Lines. However, we will continue to account for
Reinsurance and Commercial Lines as separate business segments for two reasons.
First, each of these business segments will continue to have liabilities
associated with insurance policies and contracts which we wrote in the past. In
addition, we recently sought to acquire a large grouping of insurance policies
(which we refer to as a book of business) from CIGNA. We captured the premium
revenue on this book of business initially by reinsuring 100% of CIGNA's risk
of loss on those policies, with the anticipation of renewing those policies in
our own Personal Lines business as they expire. During the term of our
Reinsurance arrangements with CIGNA, accounting rules require us to continue to
report this business in the Reinsurance segment.
7
<PAGE>
RECENT DEVELOPMENTS
Vesta County Mutual. In June of 1999, we entered into an $11.2 million
agreement with Employers Reinsurance Corporation to sell it the authority and
the right to control and manage the affairs of Vesta County Mutual Insurance
Company. This transaction was consummated on September 10, 1999.
Preferred Stock/Short Term Debt Refinancing. On June 27, 1999, we entered
into a Convertible Preferred Stock Purchase Agreement with the Birmingham
Investment Group, LLC. Pursuant to this agreement, which was consummated on
September 30, 1999, we sold 2,950,000 shares of our Series A Convertible
Preferred Stock at a purchase price of $8.50 per share, for an aggregate
purchase price of $25,075,000 in cash. Each share of preferred stock has a
cumulative dividend rate of 9%, compounded semi-annually, and is convertible
into two shares of our common stock, subject to adjustment. The preferred stock
will automatically be converted into shares of common stock at the date at
which our common stock achieves an average closing price of $8.00 per share for
twenty consecutive trading days.
The Birmingham Investment Group, LLC is a single purpose limited liability
company formed for the purpose of acquiring these shares of our preferred
stock. The majority of the members of the Birmingham Investment Group are
directors of and were original investors in The Banc Corporation, a publicly
traded bank holding company headquartered in Birmingham, Alabama, or its
banking subsidiaries. Two members of the Birmingham Investment Group, LLC,
James A. Taylor and Larry D. Striplin, Jr. joined our board of directors upon
closing.
Also on June 27, 1999, we received a commitment from The Banc Corporation
and its subsidiary, The Bank, to refinance $20 million of our current revolving
credit facility. The new facility, which was also consummated on September 30,
1999, has an initial term of two-years. See, "Management's Discussion and
Analysis--Liquidity."
The agreements described above generated proceeds of approximately $56
million, which was used to payoff our prior credit facility which was to become
due on July 1, 2000.
The issuance and sale of the preferred stock essentially replaced $25
million of the Company's existing short term debt with equity. The related
revolving credit facility provided by The Banc Corporation and The Bank
refinanced an additional $20 million of such short term debt on terms which
management believes are more favorable to the Company.
8
<PAGE>
Summary Financial Data
The following information summarizes certain selected consolidated financial
information of the Company for its fiscal years ended December 31, 1994, 1995,
1996,1997 and 1998, and for the six months ended June 30, 1998 and 1999. For
complete financial information concerning the Company, see the Company's
Consolidated Financial Statements, including the Notes thereto, included herein
at page F-3.
(Amounts in Thousands Except Per Share and Percentage Data)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
------------------------------------------------------ --------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- ------------- ---------- --------- ---------
(restated)(4)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data*
Gross Premiums
Written............... $327,106 $518,059 $651,771 $ 866,051 $ 759,021 $ 486,590 $ 186,391
Net Premiums Written... 232,110 390,504 468,056 526,475 491,590 301,177 153,451
Net Premiums Earned.... 232,352 313,078 439,336 517,658 509,693 303,369 225,340
Net Investment Income.. 12,999 17,972 23,148 35,960 35,058 18,100 16,305
Gain on Sale of
Business.............. -- 15,000
Investment Gains
(Losses).............. (695) 276 32 3,283 3,272 -- --
Other.................. 100 216 188 2,094 5,473 3,093 9,205
-------- -------- -------- ---------- ---------- --------- ---------
Total Revenues......... 244,756 331,542 462,704 558,995 553,496 324,562 265,850
-------- -------- -------- ---------- ---------- --------- ---------
Losses and LAE
Incurred.............. 134,557 198,962 251,783 298,638 395,322 204,291 145,209
Policy Acquisition and
Other Underwriting
Expenses.............. 82,264 93,983 145,703 180,464 255,994 130,307 89,929
Loss on Asset
Impairment............ -- -- -- -- 74,496 -- --
Amortization of
Goodwill.............. -- 264 484 4,007 6,609 3,280 540
Interest Expense....... 1,708 5,273 10,059 10,859 14,054 6,453 7,103
-------- -------- -------- ---------- ---------- --------- ---------
Total Losses and
Expenses.............. 218,529 298,482 408,029 493,968 746,475 344,331 242,781
-------- -------- -------- ---------- ---------- --------- ---------
Income (Loss) From
Operations Before
Income Tax............ 26,227 33,060 54,675 65,027 (192,979) (19,769) 23,069
Income Taxes
(benefit)............. 7,352 10,468 17,862 23,116 (57,244) (7,379) 7,049
Deferrable capital
securities interest,
net of income tax..... -- -- -- 5,051 5,449 2,724 2,724
-------- -------- -------- ---------- ---------- --------- ---------
Net income (loss)...... $ 18,875 $ 22,592 $ 36,813 $ 36,860 $ (141,184) $ (15,114) $ 13,296
Basic Earnings Per
Share(2)(3)........... $ 1.00 $ 1.20 $ 1.95 $ 1.98 $ (7.61) $ (0.82) $ 0.71
Shares used in per
share
calculation(2)(3)..... 18,812 18,842 18,860 18,600 18,548 18,455 18,686
Diluted Earnings Per
Share continuing
operations(2)(3)...... $ 1.00 $ 1.19 $ 1.92 $ 1.93 $ (7.61) (0.82) 0.71
Shares used in per
share
calculation(2)(3)..... 18,834 18,970 19,157 19,053 18,548 18,455 18,686
Cash dividends per
share................. .15 .13 .20 .15 .15
Balance Sheet Data (at
end of period)
Total Investments and
Cash.................. $300,186 $422,516 $427,276 $ 656,816 $ 634,668 666,079 570,935
Total Assets........... 479,325 735,758 871,385 1,636,859 1,347,702 1,657,828 1,105,124
Reserves For Losses and
LAE................... 110,297 168,502 173,275 596,797 504,911 596,154 426,594
Long Term Debt......... 28,000 98,163 98,279 98,602 98,302 198,349 98,325
Total Liabilities...... 258,703 488,499 599,466 1,239,523 1,089,675 1,362,155 844,579
Deferrable Capital
Securities............ -- -- -- 100,000 100,000 -- 100,000
Stockholders' Equity... 220,622 247,259 271,919 297,336 158,027 295,673 160,545
Certain Financial Ratios
and Other Data
GAAP
Loss and LAE Ratio..... 57.9% 63.6% 57.3% 57.7% 77.6% 67.3% 64.4%
Underwriting Expense
Ratio................. 35.4 30.0 33.2 34.9 50.2 43.0% 39.9%
-------- -------- -------- ---------- ---------- --------- ---------
Combined Ratio......... 93.3% 93.6% 90.5% 92.6% 127.8% 110.3% 104.3%
======== ======== ======== ========== ========== ========= =========
SAP(1)
Loss and LAE Ratio..... 54.0% 57.2% 57.9% 65.6% 90.4% 78.5% 73.1%
Underwriting Expense
Ratio................. 35.4 33.4 31.8 51.7 42.1 46.2% 44.3%
-------- -------- -------- ---------- ---------- --------- ---------
Combined Ratio......... 89.4% 90.6% 89.7% 117.3% 132.5% 124.7% 117.4%
======== ======== ======== ========== ========== ========= =========
Net Premiums Written to
Surplus Ratio......... 1.18x 1.44x 1.53x 1.49x 2.81x 0.88 0.68
Surplus................ $212,507 $318,997 $352,695 $ 317,875 $ 220,210 341,196 227,246
</TABLE>
- -------
* As a result of an internal investigation begun in the second quarter of
1998, the Company determined that certain inappropriate reductions of
reserves and overstatements of premium income in the Company's reinsurance
business had been recorded in the fourth quarter of 1997 and the first
quarter of 1998. Based on the information discovered in that investigation,
the Company has restated its previously issued financial statements in
August 1998 to make the necessary corrections. In addition, the Company has
revised its statutory accounting for its assumed reinsurance business to
reflect only accident/calendar year information. Effective with its year
end 1997 statutory filings, the adjustments reversed, in the form of a one-
time charge, the cumulative effect of the Company's prior practice of
making estimates for reinsurance assumed on a combined underwriting and
accident year basis, the accounting practice consistently applied over
prior years. On a GAAP basis, the correction was accounted for by restating
prior financial statements.
(1) Statutory data have been derived from the financial statements of the
Company prepared in accordance with SAP and filed with insurance regulatory
authorities.
(2) Restated for 3-for-2 stock split paid on January 22, 1996.
(3) Effective as of December 31, 1997, the Company adopted FASB 128. The prior
periods have been restated. See Note R of Notes to Consolidated Financial
Statements.
(4) The Company determined, subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in FAS 113. The Company
erroneously recorded the initial gain on this contract in 1997 and adjusted
its previously issued financial statements to appropriately defer and
recognize such gain. See Note B of Notes to Consolidated Financial
Statements for further discussion.
9
<PAGE>
RISK FACTORS
You should carefully consider the specific risk factors set forth below.
We have recently restated our financial statements and the impact of the
restatements has, and may continue to, hurt our business.
GAAP statements. During 1998 and the first quarter of 1999, we discovered
several accounting irregularities or errors which affected the timing and
dollar amount of premium revenue which we had previously reported as earned by
our Reinsurance assumed segment in fiscal year 1997 and prior periods. As a
result of our investigation into these errors and irregularities, in August
1998, the Company restated its financial results for fiscal 1997, 1996 and
1995, and for the first quarter of 1998 and publicly disclosed the results of
this restatement in a Form 8-K filed with the Securities and Exchange
Commission on August 19, 1998. During the course of auditing our 1998 results,
we determined that a further restatement of 1997 results would be necessary to
correct the accounting for a particular Reinsurance ceded contract. We publicly
disclosed the results of this further restatement in our Form 10-K filed with
the Securities and Exchange Commission in April of 1999. The net effect of
these restatements was to reduce our previously reported stockholder's equity
by approximately $86.0 million through September 30, 1998.
Statutory statements. In 1997, Vesta Fire reported statutory capital and
surplus of approximately $355 million. During 1998, the Alabama Department of
Insurance completed its examination of this filing and adjusted the reported
amount down to $100.8 million. Although we were able to cure many of the
technical deficiencies which led to the adjustments, certain of the adjustments
were based on accounting methods which needed to be corrected and were not
immediately curable. Using the basis of accounting established in the
examination, we reported Vesta Fire's 1998 statutory capital and surplus as
$217.3 million, after giving effect in 1998 to $125.8 million of "uncurable"
adjustments arising from the examination. The Alabama Department of Insurance
recently completed a follow-up target examination on selected financial
information which resulted in adjustments of approximately $9 million. Of those
adjustments, which were as of December 31, 1998, the Company subsequently cured
$5.2 million with no material impact on surplus.
Uncertain Impact on Personal Lines. Although we believe that our current
reported results of operations and financial condition (on both a GAAP and
statutory basis) are reliable, lingering customer and agent uncertainty about
our financial condition may continue to have an adverse effect on our ability
to sell Personal Lines insurance products.
We are highly leveraged, and this leverage may adversely effect us in the
future.
We owe approximately $219 million in debt (including short-term debt, long-
term debt and deferrable capital securities) as of September 30, 1999. As of
June 30, 1999, our stockholders' equity was approximately $160.5 million and
our statutory capital and surplus was approximately $231.3 million. This
equates to a debt-to-equity ratio of approximately 1.4-to-1. This level of
indebtedness could have important consequences to our company, including:
. limiting our ability to obtain additional financing in the future,
thereby limiting our ability to increase our premium capacity;
. limiting our flexibility in reacting to competitive and other changes in
the industry and economic conditions generally; and
. limiting our ability to improve our ratings by A.M. Best and other
rating agencies.
10
<PAGE>
Our Lack of Availability of Short-Term Borrowings May Create Operational
Problems
We have drawn down the maximum amount available under our revolving credit
facilities, and we can not borrow any additional money under these facilities
until the existing amounts owed thereunder are repaid. Until such repayments
have been made we anticipate a lack of available short-term borrowings which
could create a variety of operational problems, including a short-term
inability to pay expenses or service debt while certain cash revenues (for
example, premiums or Reinsurance recoverables) are in the course of collection.
Our Current A.M. Best Ratings May Hurt Our Ability to Retain and Expand Our
Business
Our ability to retain our existing business or to attract new business
depends largely on our rating by A.M. Best Company. As we have discussed, the
recent downgrade in our A.M. Best ratings to "B" (fair) has already
necessitated the discontinuation of our Reinsurance and Commercial Lines
segments, and it may negatively impact our ability to renew existing business
or attract new business in our Personal Lines segment until we can improve the
rating. In order to improve the rating (which is a key component of our near-
term business plan), we believe we must accomplish three goals:
. increase statutory capital and surplus
. lower our debt-to-capital ratio
. demonstrate an ability to operate profitably
Obviously, each of these three goals is related to our future operating
performance which is subject to a host of uncertainties and risk factors
discussed herein, and we may not be able to achieve these goals. Moreover, A.M.
Best Company has ultimate discretion over its rating assignments. If A.M. Best
downgrades our rating any further, we will likely lose significant premium
volume in our remaining Personal Lines segment.
The Personal Lines Insurance Business is Highly Competitive, and We May Not be
Able to Compete Effectively Against Larger, Better Capitalized Companies
The Personal Lines insurance business is highly competitive. We believe that
individuals and their agents consider three main factors in purchasing Personal
Lines insurance:
. price
. ability to pay claims/A.M. Best rating
. convenience/agent relationships
Pricing. We may not be able to compete with many of our competitors on the
basis of price. We price our insurance based on estimated profit margins, and
we do not expect to be able to significantly reduce our current estimated
profit margins in the near future. Many of our competitors, however, are better
capitalized than we are and may be able to withstand significant reductions in
their estimated profit margins. If our competitors decided to target our
customer base by offering lower priced insurance, we may not be able to respond
competitively.
Ability to pay claims/A.M. Best rating. Our A.M. Best rating is widely
recognized as the leading indicator of our ability to pay claims and is a
critical component of our competitive profile. Many of our competitors have
A.M. Best ratings better than ours. Our rating will be a compelling factor to
many individuals and their agents considering whether to renew their insurance
with us or buy replacement insurance from us.
Convenience/Agent relationships. Our relationship with our independent
agents is perhaps the most important component of our current competitive
profile. Because we do business with so many agents (approximately 3800
agencies in 42 states), we must be able to offer these agents innovative
solutions to their daily problems and be able to respond to their needs as
quickly as possible in order to develop their loyalty. Although we are
currently pursuing three important technological projects in our Personal Lines
segment to accomplish this goal, we can not be sure that these projects will
adequately meet these agents' needs or keep
11
<PAGE>
pace with our competitors' technological advances. If these independent agents
find it easier to do business with our competitors, it would be difficult to
renew our existing business or attract new business in our Personal Lines
segment. See, "Business Competition."
We Depend On Agents Who May Discontinue Sales of Our Policies at Any Time.
As discussed above, we rely heavily on independent agents to renew our
existing business and to attract new business in our Personal Lines segment.
Because we do business with approximately 3800 agencies in 42 states, we can
not rely on their loyalty to our company. Although we believe we enjoy good
relationships with our independent agents and are striving to make doing
business with us as easy as possible, we can not be sure that these agents will
continue to sell our insurance to the individuals they represent in light of
our current A.M. Best rating and other competitive forces described above. See,
"Business--Personal Lines Business Segment--Marketing" and "--Growth Strategy."
Current Circumstances May Cause a Failure to Renew Our Policies
We believe that some of our Homeowners insurance may not be renewed in light
of our current A.M. Best rating. Unlike the other divisions of our Personal
Lines segment, some Homeowners policies are subject to mortgagee requirements
that the insurer be rated B+ or better by A.M. Best. If we can not restore our
A.M. Best rating to B+ or better before such homeowners business comes up for
renewal, we will likely lose such business. At this time, we can not estimate
what portion of our homeowners business, if any, is subject to such mortgagee
requirements. Any loss of Homeowners business may also have a collateral
adverse effect on our Personal Auto business.
We recently acquired a large book of business from CIGNA, and we have not
had historical relationships with the agents responsible for placing this
business with CIGNA. We initially captured the premiums associated with this
business through a Reinsurance arrangement. As the policies in this book of
business expire, however, our ability to retain the associated premium revenues
depends on our ability to persuade the new individual insureds, or their
agents, to renew the insurance with us in our own Personal Lines business.
Although CIGNA has agreed to use its best efforts to assist us in these
renewals, we have no legal right to such renewals, and the lack of historical
relationships with the agents responsible for this business may make it more
difficult for us to renew them in our Personal Lines segment.
We Have Recently Experienced a Decrease in New Policy Applications
The growth of our Personal Lines segment depends upon increasing new policy
applications. During the first six months of 1999, we experienced a decline in
new policy applications of approximately 45%, as compared to the first six
months of 1998. Although we believe that this reflects a temporary uncertainty
about our financial condition and results of operations that may dissipate as
we move forward, we can not predict whether new policy applications will return
to past levels. If new policy application levels do not rise in the near
future, we may not be able to generate sufficient premium volume to operate
profitably. See, "Management's Discussion and Analysis--Comparison of Six
Months Ended June 30, 1999 with Six Months Ended June 30, 1998."
We May Not Achieve Significant Anticipated Expense Reductions Related to a
Recent Consolidation of Operations
Our ability to operate profitably depends heavily on our ability to
successfully consolidate our Personal Lines operations in our Birmingham
headquarters and otherwise reduce our operating expenses. We acquired a
substantial portion of our Personal Lines segment by purchasing the Shelby
Insurance Company (named for its location in Shelby, Ohio) and its affiliated
property and casualty insurers ("Shelby") in 1997. Since that time, we have
experienced difficulty managing overhead associated with this business as it
has been conducted out of the Shelby facility. In the second quarter of 1999,
we announced our intention to close the Shelby facility and consolidate all
Personal Lines operations in our Birmingham headquarters. If we are not able to
successfully and efficiently consolidate these operations or if we fail to
achieve the expense reductions we anticipate from such consolidation, we may
not be able to operate profitably.
12
<PAGE>
We Face a Risk of Non-Collection of Reinsurance Recoverables Involving
Substantial Amounts
Although we reinsure a significant portion of potential losses on the
policies which we issue, we initially pay all claims (as adjusted) and seek to
recover the reinsured losses from our reinsurers. Although we report as assets
the amount of claims paid which we expect to recover from reinsurers (in
accordance with generally accepted accounting principles), we can never be
certain that we will be able to collect those amounts. Sometimes the reinsurer
is unable to pay, and other times the reinsurer may dispute our calculation of
the amounts recoverable. If reinsurers can not or do not pay the amounts which
we believe are recoverable under our Reinsurance contracts, we may not be able
to operate profitably. See, "Business--Reinsurance Ceded."
As discussed elsewhere in this prospectus, the Company corrected its
accounting for assumed reinsurance business through restatement of its
previously issued financial statements. Similar corrections were made on a
statutory accounting basis through recording cumulative adjustments in Vesta
Fire Insurance Corporation 1997 statutory financial statements. The impact of
this correction has been reflected in amounts ceded under the Company's 20
percent whole account quota share treaty which was terminated on June 30, 1998
on a run-off basis. The Company believes such treatment is appropriate under
the terms of this treaty and has calculated the quarterly reinsurance billings
presented to the treaty participants accordingly. The aggregate amount included
herein as recoverable from such reinsurers totaled $75.4 million at December
31, 1998. The Company collected $34.5 from NRMA Insurance Ltd ("NRMA"), the
largest participant on the treaty through the draw down of a letter of credit
which NRMA was required to post since it is a foreign reinsurer. NRMA filed a
lawsuit in the United States District Court for the Northern District of
Alabama contesting the Company's claim and the validity of the treaty, and is
seeking return of the $34.5. The Company filed a demand for arbitration as
provided for in the treaty and has filed a motion to compel arbitration which
is currently pending in the United State District Court action. The Company
also recently filed for arbitration against the other two participants on the
treaty. While management believes its interpretation of the treaty's terms and
computations based thereon are correct, these matters are in their early stages
and their ultimate outcome cannot be determined at this time.
Our Financial Results will be Adversely Impacted if Our Loss Reserves Prove to
be Inadequate
State laws require our insurance subsidiaries to maintain reserves to cover
their estimated ultimate liability for losses and loss adjustment expenses
("LAE") with respect to reported and unreported claims incurred. To the extent
that reserves prove to be inadequate in the future, we would have to increase
our reserves and incur a charge to earnings in the period such reserves are
increased, which could have a material adverse effect on our financial
condition and results of operations. The establishment of appropriate reserves
is an inherently uncertain process, and we can not be sure that ultimate losses
will not materially exceed our loss and LAE reserves. Reserves are estimates
involving actuarial and statistical projections at a given time of what we
expect to be the cost of the ultimate settlement and administration of claims
based on facts and circumstances then known, estimates of future trends in
claims severity and other variable factors such as inflation. See, "Business--
Reserves."
We Rely on Dividends From Subsidiaries Which are Subject to Regulatory
Restrictions
We conduct all of our operations through subsidiaries, and our ability to
meet our debt service and other obligations is dependent, in large part, upon
the receipt of dividends from our direct and indirect subsidiaries. Under
applicable state insurance laws, our subsidiaries are limited in the amounts
that they are permitted to pay as dividends on their capital stock. See,
"Business--Regulation--Restrictions on Dividends to Stockholders."
Potential Year 2000 Problems With Our Software or Operating Systems May
Adversely Affect Our Business
Many existing computer programs utilized globally use only two digits to
identify a year in the date field. These programs, if not corrected, could fail
or create erroneous results after the century date changes on January 1, 2000
or when otherwise dealing with dates later than December 31, 1999. The failure
to correct a material Y2K problem could result in an interruption in, or a
failure of, our normal business operations,
13
<PAGE>
including the disruption or delay in premium or claim processing and the
disruption in service to our customers and their agents.
We have implemented a comprehensive "Y2K" compliance program and believe
that our internal systems are Year 2000 compliant or will be upgraded or
replaced in connection with previously planned changes to information systems
prior to the need to comply with Year 2000 requirements. As of June 30, 1999,
we had spent approximately $7.0 million to make our systems Y2K compliant, and
we estimate that we will spend an additional $.5 million to complete our Y2K
readiness efforts. Although we believe that our Year 2000 compliance program is
designed to appropriately identify and address those Year 2000 issues that are
subject to our reasonable control, there can be no assurance that our efforts
in this regard will be fully effective or that Year 2000 issues will not have a
material adverse effect on our business, financial condition or results of
operations. See, "Management's Discussion and Analysis--Year 2000."
We are also concerned that our customers and third-party service providers
may experience Y2K related problems which could affect our business, financial
condition and results of operations. If our insured customers experience Y2K
related losses, we may have liability to them for such losses under various
Commercial Lines policies written in the past, although we believe any such
liability would be minimal. In addition, we contract with third-party service
providers for a variety of services, including policy management and processing
for all business written by the Shelby companies. Should any of our significant
third-party service providers fail to be Y2K compliant, we could experience an
interruption in our normal business operations. We are uncertain as to the
extent our customers and third-party service providers may be affected by Year
2000 issues. Due to the general uncertainty inherent in the Y2K problem, such
failures could materially and adversely affect the Company's financial
condition and results of operations.
The foregoing information constitutes a Year 2000 Readiness Disclosure
pursuant to the Year 2000 Information and Readiness Disclosure Act.
14
<PAGE>
THE COMPANY
Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property/casualty insurance companies ("Vesta Group"), which
offers treaty Reinsurance and primary insurance on personal and commercial
risks. The Company was incorporated in Delaware on July 9, 1993, to be the
holding company for the property and casualty insurance subsidiaries of
Torchmark Corporation ("Torchmark"). Prior to its initial public offering of
common stock in November 1993, the Company was a wholly owned subsidiary of
Torchmark. The Company's principal property and casualty subsidiary is Vesta
Fire. The Company's principal executive offices are at 3760 River Run Drive,
Birmingham, Alabama 35243, and its telephone number is (205) 970-7000.
USE OF PROCEEDS
The shares are being offered for sale by Torchmark, the selling stockholder.
The Company will not receive any proceeds from the sale of the shares.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Market Prices. Since November 11, 1993, the Vesta's common stock has been
traded on the New York Stock Exchange under the symbol "VTA." Prior to November
11, 1993, there was no established public trading market for the common stock.
The stock began trading on November 11, 1993, at $16.67 per share.
Quarterly high and low market prices of the Company's common stock in 1997,
1998 and 1999 were as follows:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ------ ------
<S> <C> <C>
1997
March 31...................................................... $41.50 $30.88
June 30....................................................... 49.00 32.75
September 30.................................................. 59.00 43.63
December 31................................................... 64.50 54.88
1998
March 31...................................................... $64.75 $52.13
June 30....................................................... 59.00 20.00
September 30.................................................. 22.13 6.75
December 31................................................... 9.88 5.00
1999
March 31...................................................... $ 5.86 $ 4.00
June 30....................................................... 6.00 4.00
</TABLE>
Dividend Policy and History. The declaration and payment of dividends will
be at the discretion of the Company's Board of Directors and will depend upon
many factors, including the Company's financial condition and earnings, the
capital requirements of the Company's operating subsidiaries, legal
requirements and regulatory constraints. The Company may not pay dividends to
its common stockholders if it has elected to defer interest payments related to
the 8.525% Capital Securities issued by Vesta Capital Trust I. See "Management
Discussion and Analysis-- Liquidity."
15
<PAGE>
The dividends paid by the Company on its common stock for the past three
years were as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Ended 1997 1998 1999
------------- ---- ---- ----
<S> <C> <C> <C>
March 31...................................................... $697 $691 $-0-
June 30....................................................... 697 687 -0-
September 30.................................................. 701 695 -0-
December 31................................................... 702 697
</TABLE>
Alabama imposes restrictions on the payment of dividends to the Company by
the Company's insurance subsidiary in excess of certain amounts without prior
regulatory approval. See, "Business--Regulation--Restrictions on Dividends to
Stockholders."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following information summarizes certain selected consolidated financial
information of the Company for its fiscal years ended December 31, 1994, 1995,
1996, 1997 and 1998, and for the three months ended June 30, 1998 and 1999. The
summary below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
audited consolidated financial statements included herein at page F-3.
(Amounts in Thousands Except Per Share and Percentage Data)
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
------------------------------------------------------ Ended
June 30,
--------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- ------------- ---------- --------- ---------
(restated)(4)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data*
Gross Premiums
Written............... $327,106 $518,059 $651,771 $ 866,051 $ 759,021 $ 486,590 $ 186,391
Net Premiums Written... 232,110 390,504 468,056 526,475 491,590 301,177 153,451
Net Premiums Earned.... 232,352 313,078 439,336 517,658 509,693 303,369 225,340
Net Investment Income.. 12,999 17,972 23,148 35,960 35,058 18,100 16,305
Gain on Sale of
Business.............. -- 15,000
Investment Gains
(Losses).............. (695) 276 32 3,283 3,272 -- --
Other.................. 100 216 188 2,094 5,473 3,093 9,205
-------- -------- -------- ---------- ---------- --------- ---------
Total Revenues......... 244,756 331,542 462,704 558,995 553,496 324,562 265,850
-------- -------- -------- ---------- ---------- --------- ---------
Losses and LAE
Incurred.............. 134,557 198,962 251,783 298,638 395,322 204,291 145,209
Policy Acquisition and
Other Underwriting
Expenses.............. 82,264 93,983 145,703 180,464 255,994 130,307 89,929
Loss on Asset
Impairment............ -- -- -- -- 74,496 -- --
Amortization of
Goodwill.............. -- 264 484 4,007 6,609 3,280 540
Interest Expense....... 1,708 5,273 10,059 10,859 14,054 6,453 7,103
-------- -------- -------- ---------- ---------- --------- ---------
Total Losses and
Expenses.............. 218,529 298,482 408,029 493,968 746,475 344,331 242,781
-------- -------- -------- ---------- ---------- --------- ---------
Income (loss) From
Operations Before
Income Tax............ 26,227 33,060 54,675 65,027 (192,979) (19,769) 23,069
Income Taxes
(benefit)............. 7,352 10,468 17,862 23,116 (57,244) (7,379) 7,049
Deferrable capital
securities interest,
net of income tax..... -- -- -- 5,051 5,449 2,724 2,724
-------- -------- -------- ---------- ---------- --------- ---------
Net income (loss)...... $ 18,875 $ 22,592 $ 36,813 $ 36,860 $ (141,184) $ (15,114) $ 13,296
Basic Earnings Per
Share(2)(3)........... $ 1.00 $ 1.20 $ 1.95 $ 1.98 $ (7.61) $ (0.82) $ 0.71
Shares used in per
share
calculation(2)(3)..... 18,812 18,842 18,860 18,600 18,548 18,455 18,686
Diluted Earnings Per
Share continuing
operations(2)(3)...... $ 1.00 $ 1.19 $ 1.92 $ 1.93 $ (7.61) (0.82) 0.71
Shares used in per
share
calculation(2)(3)..... 18,834 18,970 19,157 19,053 18,548 18,455 18,686
Cash dividends per
share................. .15 .13 .20 .15 .15
Balance Sheet Data (at
end of period)
Total Investments and
Cash.................. $300,186 $422,516 $427,276 $ 656,816 $ 634,668 666,079 570,935
Total Assets........... 479,325 735,758 871,385 1,636,859 1,347,702 1,657,828 1,105,124
Reserves For Losses and
LAE................... 110,297 168,502 173,275 596,797 504,911 596,154 426,594
Long Term Debt......... 28,000 98,163 98,279 98,602 98,302 198,349 98,325
Total Liabilities...... 258,703 488,499 599,466 1,239,523 1,089,675 1,362,155 844,579
Deferrable Capital
Securities............ -- -- -- 100,000 100,000 -- 100,000
Stockholders' Equity... 220,622 247,259 271,919 297,336 158,027 295,673 160,545
Certain Financial Ratios
and Other Data
GAAP
Loss and LAE Ratio..... 57.9% 63.6% 57.3% 57.7% 77.6% 67.3% 64.4%
Underwriting Expense
Ratio................. 35.4 30.0 33.2 34.9 50.2 43.0% 39.9%
-------- -------- -------- ---------- ---------- --------- ---------
Combined Ratio......... 93.3% 93.6% 90.5% 92.6% 127.8% 110.3% 104.3%
======== ======== ======== ========== ========== ========= =========
SAP(1)
Loss and LAE Ratio..... 54.0% 57.2% 57.9% 65.6% 90.4% 78.5% 73.1%
Underwriting Expense
Ratio................. 35.4 33.4 31.8 51.7 42.1 46.2% 44.3%
-------- -------- -------- ---------- ---------- --------- ---------
Combined Ratio......... 89.4% 90.6% 89.7% 117.3% 132.5% 124.7% 117.4%
======== ======== ======== ========== ========== ========= =========
Net Premiums Written to
Surplus Ratio......... 1.18x 1.44x 1.53x 1.49x 2.81x 0.88 0.68
Surplus................ $212,507 $318,997 $352,695 $ 317,875 $ 220,210 341,196 227,246
</TABLE>
- --------
* As a result of an internal investigation begun in the second quarter of
1998, the Company determined that certain inappropriate reductions of
reserves and overstatements of premium income in the Company's reinsurance
business had been recorded in the fourth quarter of 1997 and the first
quarter of 1998. Based on the information discovered in that investigation,
the Company has restated its previously issued financial statements in
August 1998 to make the necessary corrections. In addition, the Company has
revised its statutory accounting for its assumed reinsurance business to
reflect only accident/calendar year information. Effective with its year
end 1997 statutory filings, the adjustments reversed, in the form of a one-
time charge, the cumulative effect of the Company's prior practice of
making estimates for reinsurance assumed on a combined underwriting and
accident year basis, the accounting practice consistently applied over
prior years. On a GAAP basis, the correction was accounted for by restating
prior financial statements.
(1) Statutory data have been derived from the financial statements of the
Company prepared in accordance with SAP and filed with insurance regulatory
authorities.
(2) Restated for 3-for-2 stock split paid on January 22, 1996.
(3) Effective as of December 31, 1997, the Company adopted FASB 128. The prior
periods have been restated. See Note R of Notes to Consolidated Financial
Statements.
(4) The Company determined, subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in FAS 113. The Company
erroneously recorded the initial gain on this contract in 1997 and adjusted
its previously issued financial statements to appropriately defer and
recognize such gain. See Note B to Consolidated Financial Statements for
further discussion.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company presently writes primary insurance on selected Personal Lines
risks only. In the past, the Company's Personal Lines segment emphasized
writing property coverages more than liability. With the addition of the
liability coverage inherent in the sizable book of Personal Auto business we
acquired with Shelby (See, "Business--Recent Acquisitions") the Company's
Personal Lines business is now more evenly balanced between risks of property
damage (which is susceptible to faster determination of loss but is highly
unpredictable) and casualty exposure (which is more predictable but takes
longer to determine).
In the past, the Company also wrote primary insurance on a variety of
Commercial Lines risks, as well as treaty Reinsurance for small and mid-size
insurance companies and regional specific Reinsurance for large insurance
companies. In each of these segments, the Company focused principally on
property coverages, for which ultimate losses generally can be more promptly
determined than on casualty risks.
The Company's revenues from operations are derived primarily from net
premiums earned on risks written or reinsured by the Company, investment income
and investment gains or losses while expenses consist primarily of payments for
claims losses and underwriting expenses, including agents' commissions and
operating expenses.
Significant factors influencing results of operations include the supply and
demand for property and casualty insurance and Reinsurance, as well as the
number and magnitude of catastrophic losses such as hurricanes, windstorms,
fires and severe cold weather. Premium rate levels are affected by the
availability of insurance coverage which is influenced by levels of surplus in
the industry and other factors. Increases in surplus have generally been
accompanied by increased price competition among property and casualty
insurers. Pricing in this business has weakened due to increased Reinsurance
market capacity.
For its Reinsurance segment, the Company had historically made estimates for
its Reinsurance reports received subsequent to a period end on a combined
underwriting and accident year basis for both statutory and GAAP purposes. As a
result of a routine examination by the Alabama Department of Insurance, the
Company agreed to revise the accounting for its Reinsurance business for
statutory purposes. Effective with its year end 1997 statutory filings, Vesta
Fire revised its statutory accounting for its assumed Reinsurance business to
reflect only accident/calendar year information. The adjustments essentially
reversed, in the form of a one-time charge, the cumulative effect of the
accounting practice consistently applied over prior years. On a GAAP basis, the
correction was accounted for by restating prior financial statements.
The Company determined, subsequent to the issuance of the 1997 financial
statements, that a specific Reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in Financial Accounting Standards
Board ("FASB") Statement 113. The Company erroneously recorded a gain on this
contract in the fourth quarter of 1997 and adjusted its previously issued
financial statements to appropriately defer and recognize such gain in future
periods. See Note B of the consolidated financial statements for further
discussion.
The Company seeks to manage its risk exposure by adjusting the mix and
volume of business written in response to changes in price, by maintaining
extensive Reinsurance and retrocessional programs and by applying the Company's
knowledge of primary insurance markets to its Reinsurance business.
The Company has historically followed a practice of maintaining low
retentions in its primary and Reinsurance business to reduce the variability of
its earnings. The Company's loss reserve levels historically have remained
relatively stable from year to year despite changes in premium volume. The
Company is continuing to cede portions of insurance risks while using its
capital base to gradually increase, on a selective basis, its retention of
certain property risks.
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Because catastrophe loss events are by their nature unpredictable,
historical results of operations may not be indicative of results of future
operations. The Company markets its primary personal insurance products
throughout the United States. While the Company seeks to reduce its exposure to
catastrophic events through the purchase of Reinsurance, the occurrence of one
or more major catastrophes in any given period could have a material adverse
impact on the Company's results of operations and financial condition and could
result in substantial outflows of cash as losses are paid. In addition, the
increased underwritings of catastrophe related Reinsurance, and potential
residual market assessments may also lead to increased variability in the
Company's loss ratio.
Prior to the Shelby and Vesta County Mutual acquisitions (See, "Business--
Recent Acquisitions"), assumed Reinsurance was the dominant line of business,
representing 78 percent of 1996 net premiums. As a result of these
acquisitions, assumed Reinsurance represented 62 percent of 1997 gross
premiums. In 1998, Reinsurance assumed represented 38 percent of 1998 gross
premiums. This shift to increase primary writings is consistent with the
Company's strategy to focus on property coverages in all of its lines of
business while adjusting the mix and volume of its writings and retentions to
respond to change in market conditions.
On December 31, 1996 the Company terminated the 75% pro rata Reinsurance
contract on its homeowners and dwelling lines of business (excluding our
Hawaiian subsidiary, the Hawaiian Insurance and Guaranty Co., Ltd. ["HIG"])
produced through independent agents and also on its homeowners and dwelling
lines of business in the financial services business. The cancellation enabled
the Company to increase its net writings in the Personal Lines of business.
In July of 1996, Vesta Fire entered into a pro rata Reinsurance facility
covering substantially all primary and assumed business in order to provide
capital flexibility to take advantage of growth opportunities in the future.
This Reinsurance facility had the effect of reducing net premiums written in
the second half of 1996 by $98.0 million. In 1997, the Reinsurance facility had
the effect of reducing net written premiums by $155.1 million, including
reducing Shelby net written premiums by $37.5 million. In 1998, the Reinsurance
facility had the effect of reducing net premiums written by $70.2 million.
Effective July 1, 1998, the Reinsurance facility was cancelled on a run-off
basis.
Comparison of Second Quarter 1999 to Second Quarter 1998
Net income increased by $21.7 million, or 126.2%, to $4.5 million for the
quarter ended June 30, 1999, from a loss of $17.2 million for the quarter ended
June 30, 1998. On a diluted per share basis, net income for the second quarter
of 1999 was $.24 per share versus a net loss of $.93 per share for the second
quarter of 1998. The increase in net income is primarily attributable to
improved operating results and a $4.2 million after tax increase in realized
investment gains.
Premiums, Loss and LAE--Personal Lines
Gross premiums written for personal lines decreased by $22.1 million, or
23.7%, to $71.3 million for the quarter ended June 30, 1999, from $93.4 million
for the quarter ended June 30, 1998. The decline in personal lines gross
written premiums is primarily attributable to declines in the Financial
Services, Vesta County Mutual and Hawaiian Insurance and Guaranty partially
offset by the continued rollover of certain homeowners business from the
assumed reinsurance lines.
Net premiums written for personal lines decreased by $1.8 million, or 2.8%,
to $63.1 million for the quarter ended June 30, 1999, from $64.9 million for
the quarter ended June 30, 1998. Net premiums earned for personal lines
increased $3.6 million, or 6.4% to $59.9 million for the quarter ended June 30,
1999, from $56.3 million for the quarter ended June 30, 1998. The increase in
net premiums earned was largely attributable to the termination on a run off
basis of the 20% whole account quota share treaty effective July 1, 1998.
Loss and loss adjustment expenses ("LAE") for personal lines increased by
$.8 million, or 2.2%, to $38.0 million for the quarter ended June 30, 1999,
from $37.2 million for the quarter ended June 30, 1998. The
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loss and LAE ratio for personal lines for the quarter ended June 30, 1999 was
63.4% as compared to 66.1% at June 30, 1998. The decrease in the loss and LAE
ratio is primarily attributable to rate increases for the auto and homeowners
lines in certain states and general improvement in the overall experience of
the block of business.
Premiums, Loss and LAE--Commercial Lines
Gross premiums written for commercial lines decreased by $15.3 million, or
46.6%, to $17.5 million for the quarter ended June 30, 1999, from $32.8 million
for the quarter ended June 30, 1998. The decrease in gross premiums for
commercial lines is primarily attributable to declining volume as a result of
the Company's election to exit the commercial lines business.
Net premiums written for commercial lines decreased by $4.1 million or
25.8%, to $11.8 million for the quarter ended June 30, 1999, from $15.9 million
for the quarter ended June 30, 1998. Net premiums earned for commercial lines
increased by $1.1 million, or 6.7%, to $17.4 million for the quarter ended June
30, 1999, from $16.3 million for the quarter ended June 30, 1998. The increase
in net earned premiums was largely attributable to the termination on a run off
basis of the 20% whole account quota share treaty effective July 1, 1998.
Loss and LAE for commercial lines decreased by $4.7 million, or 24.4%, to
$14.6 million for the quarter ended June 30, 1999, from $19.3 million for the
quarter ended June 30, 1998. The loss and LAE ratio for the quarter ended June
30, 1999 was 83.9% as compared to 118.4% for the quarter ended June 30, 1998.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance decreased by $113.9 million, or 89.6%
to $13.2 million for the quarter ended June 30, 1999 from $127.1 million for
the quarter ended June 30, 1998. The decrease was primarily attributable to the
Company's election to withdraw from the assumed reinsurance line of business,
the novation of certain treaties to HartRe and the continued roll over of
certain homeowners business to personal lines.
Net premiums written for reinsurance decreased by $70.5 million, or 79.8% to
$17.9 million for the quarter ended June 30, 1999 from $88.4 million for the
quarter ended June 30, 1998. The decline in net written premiums for
reinsurance is primarily attributable to the decline in gross written premiums
and the 100% reinsurance quota share treaty entered into effective January 1,
1999. Net premiums earned decreased $67.8 million, or 74.0% to $23.8 million
for the quarter ended June 30, 1999, from $91.6 million for the quarter ended
June 30, 1998.
Loss and LAE for reinsurance decreased by $37.9 million, or 66.1%, to $19.4
million for the quarter ended June 30, 1999, from $57.3 million for the quarter
ended June 30, 1998. The loss and LAE ratio for reinsurance for the quarter
ended June 30, 1999 was 81.5% as compared to 64.0% for the quarter ended June
30, 1998.
Policy Acquisition Expenses and Other Expenses
Policy acquisition expenses decreased by $46.6 million, or 73.2% to $17.1
million for the quarter ended June 30, 1999, from $63.7 million for the quarter
ended June 30, 1998. The decrease in policy acquisition expenses is primarily
attributable to declines in assumed reinsurance premiums earned. 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 decreased $1.4 million. The decline in operating expenses is
primarily attributable to declines in salary and information systems expense
related to the consolidation of the Shelby operations to Birmingham. These
factors caused the underwriting expense ratio to decrease from 49.4% in the
second quarter of 1998 to 32.7% in the second quarter of 1999. Goodwill
amortization decreased $1.3 million. The decrease in goodwill amortization is
attributable to the effect of the
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1998 fourth quarter write down of $74.5 million of goodwill acquired on June
30, 1997 in connection with the Shelby acquisition.
Net Investment Income
Net investment income decreased by $.9 million, or 10.3%, to $7.9 million
for the quarter ended June 30, 1999, from $8.8 million for the quarter ended
June 30, 1998. The weighted average yield on invested assets (excluding
realized gains) was 5.4% for the quarter ended June 30, 1999, compared with
6.1% for the quarter ended June 30, 1998. The decrease in net investment income
is primarily attributable to the decrease in average invested assets.
Federal Income Taxes
Federal income taxes increased by $11.7 million, or 125.8%, to $2.4 million
for the quarter ended June 30, 1999. The effective rate on pre-tax income
decreased from 37.1% to 29.3% for the quarter ended June 30, 1999. The decrease
in the effective rate is primarily attributable to the decrease in non-
deductible goodwill amortization.
Net Income
For the reasons discussed above, net income increased by $21.7 million, or
126.2%, to $4.5 million for the quarter ended June 30, 1999, from $(17.2)
million for the quarter ended June 30, 1998.
Comparison of Six Months Ended June 30, 1999 with Six Months Ended June 30,
1998
Net income increased by $28.4 million, or 188.1%, to $13.3 million for the
period ended June 30, 1999, from a net loss of $15.1 million for the period
ended June 30, 1998. On a diluted per share basis, net income for the period
ended June 30, 1999 was $.71 per share versus net loss of $.82 per share for
the period ended June 30, 1998. The increase in net income is primarily
attributable to a $9.8 million after tax gain from the sale of substantially
all of the reinsurance operations, a $4.2 million after tax increase in
realized investment gains and improved operating results.
Premiums, Loss and LAE--Personal Lines
Gross premiums written for personal lines decreased by $34.8 million, or
19.3%, to $145.2 million for the period ended June 30, 1999, from $180.0
million for the period ended June 30, 1998. The decline in personal lines gross
written premiums is primarily attributable to declines in the Financial
Services, Vesta County Mutual and Hawaiian Insurance and Guaranty partially
offset by the continued roll over of certain homeowners business from the
assumed reinsurance lines.
Net premiums written for personal lines increased by $2.8 million, or 2.2%,
to $129.0 million for the period ended June 30, 1999, from $126.2 million for
the period ended June 30, 1998. Net premiums earned for personal lines
increased $13.5 million, or 11.4% to $132.3 million for the period ended June
30, 1999, from $118.8 million for the period ended June 30, 1998. The increase
in net premiums written and net premiums earned was largely attributable to the
termination on a run off basis of the 20% whole account quota share treaty
effective July 1, 1998.
Loss and loss adjustment expenses ("LAE") for personal lines increased by
$6.1 million, or 7.8%, to $84.6 million for the period ended June 30, 1999,
from $78.5 million for the period ended June 30, 1998. The loss and LAE ratio
for personal lines for the period ended June 30, 1999 was 63.9% as compared to
66.1% at June 30, 1998. The decrease in the loss and LAE ratio is primarily
attributable to the implementation of rate increases in the auto and homeowners
lines in certain states and a general improvement in the overall experience of
the book of business.
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Premiums, Loss and LAE--Commercial Lines
Gross premiums written for commercial lines decreased by $27.4 million, or
39.3%, to $42.3 million for the period ended June 30, 1999, from $69.7 million
for the period ended June 30, 1998, The decrease in gross premiums for
commercial lines is primarily attributable to declining volume in the Shelby
operations as a result of the Company's election to exit the commercial lines
business.
Net premiums written for commercial lines decreased by $3.7 million or
11.4%, to $28.8 million for the period ended June 30, 1999, from $32.5 million
for the period ended June 30, 1998. Net premiums earned for commercial lines
increased by $1.3 million, or 3.7%, to $36.0 million for the period ended June
30, 1999, from $34.7 million for the period ended June 30, 1998.
Loss and LAE for commercial lines decreased by $.3 million, or 1.1%, to
$26.1 million for the period ended June 30, 1999, from $26.4 million for the
period ended June 30, 1998. The loss and LAE ratio for the period ended June
30, 1999 was 76.1% as compared to 72.5% for the period ended June 30, 1998.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance decreased by $237.9 million, or
100.5% to $(1.1)million for the period ended June 30, 1999 from $236.8 million
for the period ended June 30, 1998. The decrease was primarily attributable to
the commutation and unearned portfolio transfers of several large reinsurance
contracts, novations of certain reinsurance contracts related to the
discontinuation of the reinsurance business and the continued roll over of
certain homeowners business to personal lines.
Net premiums written for reinsurance decreased by $146.9 million, or 103.1%
to $(4.4) million for the period ended June 30, 1999 from $142.5 million for
the period ended June 30, 1998. The decline in net written premiums for
reinsurance is primarily attributable to the decline in gross written premiums,
the novation of certain reinsurance contracts and the 100% reinsurance quota
share treaty entered into effective January 1, 1999. Net premiums earned
decreased $92.9 million, or 62.0% to $57.0 million for the period ended June
30, 1998, from $149.9 million for the period ended June 30, 1998.
Loss and LAE for reinsurance decreased by $64.8 million, or 65.3%, to $34.5
million for the period ended June 30, 1999, from $99.3 million for the period
ended June 30, 1998. The loss and LAE ratio for reinsurance for the period
ended June 30, 1999 was 60.5% as compared to 66.2% for the period ended June
30, 1998. The decrease in the loss and LAE ratio was primarily due to an
increased percentage being ceded to the retrocessionares pursuant to the
Company's ceded reinsurance program including the 100% quota share reinsurance
treaty.
Policy Acquisition Expenses and Other Expenses
Policy acquisition expenses decreased by $37.7 million, or 39.4% to $58.0
million for the period ended June 30, 1999, from $95.7 million for the period
ended June 30, 1998. The decrease in policy acquisition expenses is primarily
attributable declines in assumed reinsurance premiums earned. 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 decreased $2.6 million. The decline in operating expenses is
primarily attributable to declines in salary and information systems expense
related to the consolidation of the Shelby operations. These factors caused the
underwriting expense ratio to decrease from 43.0% for the period ended June 30,
1998 to 39.9% for the period ended June 30, 1999. Goodwill amortization
decreased $2.7 million. The decrease in goodwill amortization is attributable
to the effect of the 1998 fourth quarter write down of $74.5 million of
goodwill acquired on June 30, 1997 in connection with the Shelby acquisition.
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Net Investment Income
Net investment income decreased by $1.8 million, or 9.9%, to $16.3 million
for the period ended June 30, 1999, from $18.1 million for the period ended
June 30, 1998. The weighted average yield on invested assets (excluding
realized gains) was 5.5% for the period ended June 30, 1999, compared with 6.3%
for the period ended June 30, 1998. The decrease in net investment income is
primarily attributable to a decrease in average invested assets.
Federal Income Taxes
Federal income taxes increased by $14.4 million, or 194.6%, to $7.1 million
for the period ended June 30, 1999. The effective rate on pre-tax income
decreased from 37.3% to 30.6% for the period ended June 30, 1999. The decrease
in the effective rate is primarily attributable to the decrease in non-
deductible goodwill amortization.
Net Income
For the reasons discussed above, net income increased by $28.4 million, or
188.1%, to $13.3 million for the period ended June 30, 1999, from a net loss of
$15.1 million for the period ended June 30, 1998.
Comparison of Fiscal Year 1998 to Fiscal Year 1997
Premiums, Loss and LAE--Personal Lines
Gross premiums written for Personal Lines increased by $102.3 million, or
41.8%, to $347.0 million for the year ended December 31, 1998, from $244.7
million for the year ended December 31, 1997. Included in the $102.3 increase
in gross premiums written for Personal Lines was a $101.0 million increase in
gross premiums written due to a full year of Shelby premiums in 1998 versus six
months of Shelby premiums in 1997. The remaining increase of $1.3 million was
primarily due to the transfer of business from assumed Reinsurance to Personal
Lines following the acquisition of Vesta County Mutual partially offset by
premium reductions in the Financial Services lines and HIG.
Net premiums written for Personal Lines increased by $123.6 million, or
87.5%, to $264.8 million for the year ended December 31, 1998, from $141.2
million for the year ended December 31, 1997. The increase in net premiums
written was largely attributable to the writings from Shelby and the transfer
of business from assumed Reinsurance to Personal Lines following the
acquisition of Vesta County Mutual. Net premiums earned for Personal Lines
increased $107.7 million, or 77.3%, to $247.1 million for the year ended
December 31, 1998, from $139.4 million for the year ended December 31, 1997.
Loss and LAE for Personal Lines increased by $69.7 million, or 73.2%, to
$164.9 million for the year ended December 31, 1998, from $95.2 million for the
year ended December 31, 1997. The increase in loss and loss adjustment expenses
was primarily attributable to a full year of losses for Shelby included in 1998
versus only six months of losses for Shelby in 1997. The loss and LAE ratio for
Personal Lines for the year ended December 31, 1998 was 66.7% as compared to
68.3% at December 31, 1997.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for Reinsurance decreased by $247.8 million, or
46.3%, to $287.6 million for the year ended December 31, 1998, from $535.4
million for the year ended December 31, 1997. The main contributors to the
reduction of Reinsurance gross premiums written were the continuation of
increased competition in the market place coupled with the Company's
unwillingness to follow the market price, the modification of one large treaty
and the cancellation of another large treaty. The acquisition of Vesta County
Mutual resulted in the further shift of $27 million of private passenger
automobile writings which had been recorded on the Reinsurance line in 1997 to
Personal Lines in 1998. Net premiums written for Reinsurance
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decreased $194.1 million, or 55.2%, to $157.7 million for the year ended
December 31, 1998, from $351.8 million for the year ended December 31, 1997.
Net premiums earned for Reinsurance decreased $141.1 million, or 42.1% to
$194.3 million for the year ended December 31, 1998, from $335.4 million for
the year ended December 31, 1997.
Loss and LAE for Reinsurance decreased by $3.8 million, or 2.1% to $175.7
million for the year ended December 31, 1998, from $179.5 for the year ended
December 31, 1997. The dollar amount of loss and loss adjustment expenses
incurred decreased during 1998 due to the decline in net premiums earned. The
loss and LAE ratio for Reinsurance for the year ended December 31, 1998 was
90.5% as compared to 53.5% for the year ended December 31, 1997. The increase
in the loss ratio was primarily attributable to the decreases in earned
premiums due to pricing pressures and market competition, higher ceded
Reinsurance costs in 1998 versus 1997 and an increase of $18.7 million in
catastrophe losses.
The Company determined that the recent A.M. Best ratings downgrade and the
increased competition in the Reinsurance marketplace would cause a significant
loss of Reinsurance premiums in 1999. Therefore, on March 24, 1999, the Company
transferred the majority of its Reinsurance business to Hartford Fire Insurance
Company through a 100% Reinsurance agreement, and agreed to use its best
efforts to cause such business to renew with Hartford upon expiration, in
exchange for $15 million. See Note T of the Notes to the Consolidated Financial
Statements for further discussion.
Included in the Reinsurance results for 1998, were two large 100% Quota
share Reinsurance treaties for CIGNA and HomePlus which cover selected
homeowners lines. As the covered business is renewed it will be transferred to
Vesta Fire as the issuing carrier. These treaties were not included in the sale
of the Reinsurance book of business. In 1998, these treaties accounted for
$107.4 million in gross written premiums.
Premiums, Loss and LAE--Commercial Lines
Gross premiums written for Commercial Lines increased $38.5 million, or
44.8%, to $124.4 for the year ended December 31, 1998, from $85.9 million for
the year ended December 31, 1997. The increase in gross premiums written is
primarily attributable to the $37.5 million increase in premiums related to a
full year of Shelby premiums in 1998 versus six months of Shelby premiums in
1997. Net premiums written increased $35.5 million, or 106.0%, to $69.0 million
for the year ended December 31, 1998, from $33.5 million for the year ended
December 31, 1997. Net premiums earned increased $25.5 million, or 59.4%, to
$68.4 million for the year ended December 31, 1998, from $42.9 million for the
year ended December 31, 1997.
Loss and LAE for Commercial Lines increased $30.7 million, or 127.9%, from
$24.0 million for the year ended December 31, 1997 to $54.7 million for the
year ended December 31, 1998. The loss and LAE ratio for Commercial Lines for
the year ended December 31, 1998, was 80.0% as compared to 55.9% for the year
ended December 31, 1997. The increase in loss ratio was primarily attributable
to increased market competition and catastrophe losses for the year ended
December 31, 1998.
General. Until recently, the Company provided a full spectrum of property,
liability and auto coverage for a broad range of commercial target classes,
including hotels, manufacturers, restaurants, motorcycle dealers, broadcasters
and publishers. The Company also had designed a complementary group of
insurance products for the trucking industry offered to independent owner-
operators of trucks and small fleets to cover physical damage, non-trucking
liability (non-business use of the vehicle), and cargo risks. In its Commercial
Lines business, the Company had developed particular expertise with respect to
a select group of smaller account classes, including small office, service and
retail business owners; mini-storage facilities; artisan contractor; and small
service garages. The Company concluded, however, that in the continuing
competitive marketplace, the Company could not achieve adequate pricing for
these Commercial Lines as required for profitability. Therefore, all Commercial
Lines are scheduled to be discontinued in the second quarter of 1999.
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Policy Acquisition Expenses and Other Operating Expenses
Policy acquisition expenses increased by $23.0 million, or 17.2%, to $156.0
million for the year ended December 31, 1998, from $133.0 million for the year
ended December 31, 1997. The increase in policy acquisition costs is primarily
attributable to additional marketing staff salaries and additional agents
incentives. Other operating expenses include administrative costs not directly
related to the generation of premium revenue, premium taxes and fees, interest
on debt and goodwill amortization. Administrative costs (designated as
operating expenses on the statement of operations) increased $52.5 million. The
increase in administration costs is primarily attributable to $42.0 million in
increased costs related to the Shelby operations. The remaining $10.5 million
in increased costs is related primarily to increases in information systems
costs and professional fees. The increase in premium taxes and fees is directly
related to the increase in direct premiums written. The increase in goodwill
amortization is attributable to a full year of amortization of the goodwill
related to the Shelby acquisition versus six months of amortization in 1997.
Net Investment Income
Net investment income decreased by $.9 million, or 2.5%, to $35.1 million
for the year ended December 31, 1998, from $36.0 million for the year ended
December 31, 1997. The weighted average yield on invested assets (excluding
realized and unrealized gains) was 6.0% for the year ended December 31, 1998,
compared with 5.8% for the year ended December 31, 1997.
Loss on Asset Impairment
During the fourth quarter of 1998, management evaluated goodwill pursuant to
the Company's existing policies. The evaluation indicated an impairment of
goodwill acquired as part of the Shelby acquisition. The events that led to
this conclusion include the Company's inability to integrate the Shelby
acquisition as planned and the resulting high level of expenses and the
recording of significant operating losses in 1998. As a result of these
evaluations, the unamortized goodwill attributable to the Shelby acquisition
was reduced by $74.5 million. See Note C of the Notes of the Consolidated
Financial Statements.
Federal Income Taxes
Federal income taxes decreased by $80.4 million to a benefit of $57.3
million for the year ended December 31, 1998, from $23.1 million for the year
ended December 31, 1997. This decrease was primarily due to the decrease in
operating income.
Net Income (loss)
For the reasons discussed above, net income decreased by $178.1 million, to
a loss of $141.2 million for the year ended December 31, 1998, from $36.9
million for the year ended December 31, 1997.
Comparison of Fiscal Year 1997 to Fiscal Year 1996
On December 31, 1996, the Company terminated the 75% pro rata Reinsurance
contract on its homeowners and dwelling lines of business (excluding HIG)
produced through independent agents and also on its homeowners and dwelling
lines of business in the financial services business. The cancellations enabled
the Company to increase its net writings in the Personal Lines of business.
In July of 1996, Vesta Fire entered into a pro rata Reinsurance facility
covering substantially all primary and assumed business in order to provide
capital flexibility to take advantage of growth opportunities in the future.
This Reinsurance facility had the effect of reducing net premiums written in
the second half of 1996 by $98.0 million. In 1997, the Reinsurance facility had
the effect of reducing net written premiums by $155.1 million, including
reducing Shelby net written premiums by $37.5 million.
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Premiums, Loss and LAE--Personal Lines
Gross premiums written for Personal Lines increased by $135.0 million, or
123.1%, to $244.7 million for the year ended December 31, 1997, from $109.7
million for the year ended December 31, 1996. The increase in Personal Lines
gross premiums was primarily due to the acquisition of Shelby and the transfer
of business from assumed Reinsurance to Personal Lines following the
acquisition of Vesta County Mutual.
Net premiums written for Personal Lines increased by $71.4 million, or
102.3%, to $141.2 million for the year ended December 31, 1997, from $69.8
million for the year ended December 31, 1996. Net premiums earned for Personal
Lines increased $76.2 million, or 120.6%, to $139.4 million for the year ended
December 31, 1997, from $63.2 million for the year ended December 31, 1996.
Loss and LAE for Personal Lines increased by $69.6 million, or 271.9%, to
$95.2 million for the year ended December 31, 1997, from $25.6 million for the
year ended December 31, 1996. Included in the increase in loss and LAE was
$56.8 million in losses incurred by Shelby. The loss and LAE ratio for Personal
Lines for the year ended December 31, 1997 was 68.3% as compared to 40.5% at
December 31, 1996. The increase in the loss ratio was primarily due to a shift
in writing more automobile lines because of the acquisition of Shelby and the
increased writings from Vesta County Mutual. Automobile lines generally incur
higher loss ratios than homeowners lines.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for Reinsurance increased by $37.9 million, or 7.6%,
to $535.4 million for the year ended December 31, 1997, from $497.5 million for
the year ended December 31, 1996. In 1997, the Company significantly increased
its Reinsurance writings of homeowners lines through several large contracts
including the CIGNA 100% Quota Share Reinsurance Treaty. The increased
Reinsurance writings of homeowners lines was partially offset by a decrease in
Reinsurance writings of private passenger automobile lines from 1997 to 1996.
The acquisition of Vesta County Mutual resulted in the shift of $47 million of
private passenger automobile writings which had been recorded on the
Reinsurance line to primary insurance. Additionally, the Reinsurance market
experienced increased market capacity accompanied by increased price-
competition in the private passenger automobile line of business. As a result
of these factors, the Company elected to terminate certain accounts. Net
premiums written for Reinsurance decreased $21.7 million, or 5.8%, to $351.8
million for the year ended December 31, 1997, from $373.5 million for the year
ended December 31, 1996. Net premiums earned for Reinsurance decreased $7.1
million, or 2.1% to $335.4 million for the year ended December 31, 1997, from
$342.5 million for the year ended December 31, 1996. The decreases in net
premiums written and net premiums earned are attributable to the pro rata
Reinsurance facility being in place for twelve months in 1997 versus six months
in 1996.
Loss and LAE for Reinsurance decreased by $25.5 million, or 12.4%, to $179.5
million for the year ended December 31, 1997, from $205.0 million for the year
ended December 31, 1996. The dollar amount of loss and LAE incurred decreased
during 1997 due to the decline in net premiums earned. The loss and LAE ratio
for Reinsurance for the year ended December 31, 1997, was 53.5% as compared to
59.9% for the year ended December 31, 1996. The decrease in the loss ratio was
primarily attributable to the increased Reinsurance writings of homeowners'
lines of business which generally incurs a lower loss ratio than automobile
lines.
Premiums, Loss and LAE--Commercial Lines
Gross premiums written for Commercial Lines increased by $41.3 million, or
92.7%, to $85.9 million for the year ended December 31, 1997, from $44.6
million for the year ended December 31, 1996. The increase in gross premiums
written for Commercial Lines was primarily attributable to the acquisition of
Shelby.
Net premiums written for Commercial Lines increased by $8.7 million, or
35.1%, to $33.5 million for the year ended December 31, 1997, from $24.8
million for the year ended December 31, 1996. Net premiums
26
<PAGE>
earned for Commercial Lines increased 9.2 million, or 27.3% , to $42.9 million
for the year ended December 31, 1997, from $33.7 million for the year ended
December 31, 1996.
Loss and LAE for Commercial Lines increased by $2.8 million, or 13.2%, to
$24.0 million for the year ended December 31, 1997, from $21.1 million for the
year ended December 31, 1996. The loss and LAE ratio for primary insurance for
the year ended December 31, 1997, was 55.9% as compared to 62.8% at
December 31, 1996.
Policy Acquisition Expenses and Other Operating Expenses
Policy acquisition expenses increased by $14.4 million, or 12.1%, to $133.0
million for the year ended December 31, 1997, from $118.6 million for the year
ended December 31, 1996. The increase in policy acquisition expenses was
primarily attributable to the increase in net written premiums. Other operating
expenses included administrative costs not directly related to the generation
of premium revenue, premium taxes and fees, interest on debt and goodwill
amortization. Administrative costs (designated as operating expenses on the
statement of operations) increased $17.7 million. The increase in
administration cost was primarily attributable to the assimilation and
administration of the Shelby operations. The increase in premium taxes and fees
was directly related to the increase in direct premiums written. The increase
in goodwill amortization was attributable to the $83 million of goodwill
acquired on June 30, 1997, in connection with the Shelby acquisition.
Net Investment Income
Net investment income increased by $12.9 million, or 55.4%, to $36.0 million
for the year ended December 31, 1997, from $23.1 million for the year ended
December 31, 1996. The weighted average yield on invested assets (excluding
realized and unrealized gains) was 5.8% for the year ended December 31, 1997,
compared with 5.6% for the year ended December 31, 1996. The increase in net
investment income was primarily attributable to an increase in average invested
assets relating to the Shelby acquisition.
Federal Income Taxes
Federal income taxes increased by $5.2 million, or 29.1%, to $23.1 million
for the year ended December 31, 1997 from $17.9 million for the year ended
December 31, 1996. The effective rate on pre-tax income increased from 32.7% to
35.4% for the year ended December 31, 1997.
Net Income
For the reasons discussed above, net income increased by $.1 million, or
0.3%, to $36.9 million for the year ended December 31, 1997, from $36.8 million
for the year ended December 31, 1996.
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 insurance subsidiaries comprising the Vesta Group are individually
supervised by various state insurance regulators. Vesta Fire is the principal
operating subsidiary of the Company.
Sources
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
27
<PAGE>
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.
In addition to dividends from its subsidiaries the Company determined to
seek additional equity capital and other alternative sources of funds during
1999.
On September 30 1999, the Company closed a private placement of its Series A
Convertible Preferred Stock with the Birmingham Investment Group, LLC. (the
"Group"), in which the Group purchased from the Company 2,950,000 shares of the
Company's preferred stock at $8.50 per share for an aggregate of $25.1 million.
Each share of the preferred stock is convertible into two shares of the
Company's common stock and carries a cumulative dividend rate of 9%, compounded
semi-annually. The preferred stock will automatically be converted into shares
of common stock at the date at which the common stock of the Company achieves
an average closing price of $8.00 per share for twenty consecutive trading
days.
Also on September 30, 1999, the Company established secured revolving credit
facilities (the "Credit Facilities") in the aggregate amount of $20,000,000
with The Banc Corporation and its banking subsidiary The Bank, consisting of a
$15,000,000 loan from The Bank and a $5,000,000 loan from The Banc Corporation.
The $15,000,000 loan from The Bank is secured by a pledge of a certificate of
deposit owned by the Company having a face value at least equal to the amount
of said loan. The $5,000,000 loan from the Banc Corporation is secured by (i)
an accommodation collateral assignment by J. Gordon Gaines, Inc. ("Gaines") of
certain of the proceeds to be received under its management contract, effective
January 1, 1999, with the Company's insurance subsidiaries and (ii) an
assignment of dividends which the Company may receive from Gaines. The interest
rate on principal amount outstanding under the $15,000,000 loan from The Bank
will not exceed 2% over rate earned on the certificate of deposit referenced
above; provided a higher default rate may apply. The interest rate on principal
amounts outstanding on the $5,000,000 loan from the Banc Corporation will not
exceed The Bank's prime rate. Each of the Credit Facilities include certain
financial covenants which require the Company to maintain certain minimum
financial standards. The loans outstanding under the Credit Facilities
initially mature on September 30, 2001.
As of September 30, 1999, the Company had drawn down all of the amounts
available for borrowing under the Credit Facilities.
In June 1999, the Company entered into an agreement with Employers
Reinsurance Corporation to sell the authority and the right to control and
manage the affairs of Vesta County Mutual Insurance Company for $11.2 million.
This transaction was consummated on September 10, 1999.
Uses
The principal uses of funds at the holding company level are to pay
operating expenses, principal and interest on outstanding indebtedness and
dividends to stockholders if declared by the Board of Directors. During the
last three years, the insurance subsidiaries of the Company have produced
operating results and paid dividends sufficient to fund these needs of the
Company. Except for the regulatory restrictions described above, 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 its
anticipated needs (including debt service) for at least the next twelve months.
See, "Business--Regulation."
The Company is required to make semi-annual interest payments of $4.4
million on its $100 million of 8.75% Senior Debentures due 2025 (the "Senior
Notes"). The Company is also obligated to make semi-annual interest payments of
$4.3 million on its $100 million of 8.525% Junior Subordinated Deferrable
Interest Debentures due 2007 (the "Trust Debentures") issued to Vesta Capital
Trust I in connection with its sale of
28
<PAGE>
$100 million of 8.525% Capital Securities, subject to the Company's right to
elect to defer such payments. The Company exercised its right to defer the
semi-annual payment on the Trust Debentures which became due on July 15, 1999,
and it may elect to defer future payments on these Trust Debentures as
permitted by their terms. Until such time as the Company resumes payments on
these Trust Debentures (including payment of all accrued and unpaid amounts
due), the Company will not pay any dividends to its common stockholders, nor
may it pay any dividends on its preferred stock issued to the Group on
September 30, 1999.
Upon the resumption of payments on the Trust Debentures (including payments
of all accrued and unpaid amounts due), the Company expects to declare semi-
annual dividends of approximately $1.1 million on the preferred stock issued to
the Group on September 30, 1999, together with all arrearage on such preferred
stock which accrued since September 30, 1999.
The Company must pay scheduled interest and principal payments on the
amounts borrowed under the Credit Facilities, the interest rates on which are
described above. As of September 30, 1999, approximately $20 million principal
amount was outstanding under the Credit Facilities.
On September 30, 1999, the Company repaid approximately $56 million owing
under its revolving credit facility with a group of lenders led by First Union
National Bank, as amended (the "Former Credit Facility"). This $56 million
payment was funded primarily from three sources (each of which is described
above): (i) the $11.2 million in proceeds received from the transaction
involving Vesta County Mutual, (ii) the $25 million in proceeds received from
the sale of the Preferred Stock and (iii) the $20 million borrowed under the
Credit Facilities.
Subsidiaries
The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. On a consolidated basis,
net cash (used in) operations for the six months ended June 30, 1999 and 1998,
was ($37.2) million and ($12.7) million, respectively.
The Company expects current cash flow generated by its insurance
subsidiaries to be sufficient to meet their operating needs, although invested
assets have been categorized as available for sale in the event short-term cash
needs exceed available resources. The Company adjusts its holdings of cash,
short-term investments and invested assets available for sale according to its
seasonal cash flow needs. Beginning in June of each year, the Company begins to
increase its holdings of cash and short-term investments. This practice
facilitates the Company's ability to meet its higher short-term cash needs
during the hurricane season. As of June 30, 1999 and December 31, 1998, the
Company had cash on deposit in various banking institutions in the amount of
$28.7 million and $25.3 million respectively. As of June 30, 1999, the
Company's investment portfolio consisted of short-term investments (25.7%),
U.S. Government securities (12.7%), mortgage-backed securities (14.8%),
corporate bonds (26.4%), foreign government securities (0.7%), municipal bonds
(19.4%) and equity securities (.3%).
Known Trends and Uncertainties
The financial position, results of operations and cash flows of property and
casualty insurers have historically been subject to significant fluctuations
due to competition, insurance ratings and other factors. Certain known trends
and uncertainties which may affect future results of the Company are discussed
more fully below.
Competition: The property and casualty insurance industry is highly
competitive on the basis of both price and service. In recent years there has
been a trend in the property and casualty industry toward consolidation which
could result in even more competitive pricing. The Company also faces
competition from
29
<PAGE>
foreign insurance companies, captive insurance companies and risk retention
groups. In the future, the industry, including the Company, may face increasing
insurance underwriting competition from banks and other financial institutions.
Insurance Ratings: A.M. Best, which rates insurance companies based on
factors of concern to policy holders, recently lowered its rating on the
Company's insurance subsidiaries to "B" from "A-". The Company has determined
that the downgrade will have a material impact on the Commercial and
Reinsurance lines. See "Summary" and "Risk Factors--A.M. Best Rating" for
further discussion.
Litigation: See "Business--Legal Proceedings" and "Note J to the
Consolidated Financial Statements" for discussion of the current status of
litigation.
Reliance on Performance of Reinsurers: The Company evaluates the credit
quality of the reinsurers and retrocessionares to which it cedes business. No
assurance can be given regarding the future ability of any of the Company's
reinsurers to meet their obligations. See, "Risk Factors--Uncertainty of
Reinsurance Recoverables" on page 12.
Year 2000: The failure to correct a material Year 2000 ("Y2K") problem could
result in an interruption in, or failure of, the normal business operations of
the Company including the delay in premium or claim processing and the
disruption of service to its customers. See, " --Year 2000" and "Risk Factors--
Year 2000" on page .
Inflation
The Company does not believe its results over the last three fiscal years
have been materially affected by inflation due in part to the predominantly
short-tail nature of its business. The potential adverse impacts of inflation
include: (i) a decline in the market value of the Company's fixed maturity
investment portfolio, (ii) an increase in the ultimate cost of settling claims
which remain unresolved for a significant period of time, and (iii) an increase
in the Company's operating expenses. Historically, the effect of inflation on
the Company's reserves has not been material.
Year 2000
The Company and it subsidiaries are proceeding on schedule with efforts to
make its computer systems Y2K compliant. The Company has implemented a phased
approach to transition computer systems to Y2K compliance.
The Company has completed the first six of seven phases of the transition
for its defined mission critical systems. At this time, extraneous systems are
either being discontinued or are in the remediation phase. Implementation of
Y2K compliance measure for these remaining systems is scheduled for completion
by the third quarter of 1999.
The Company began the Assessment Phase in October 1996. From that time
forward, system development and major enhancements to existing systems took Y2K
process requirements into consideration. During the Assessment Phase, a
comprehensive inventory of systems was completed and all date related fields
and code that handled these dates were identified. The Assessment Phase was
completed in December 1996.
Once the Company had an understanding of the lines of code and number of
date fields that must be addressed to ensure systems would be Y2K compliant,
the second phase, the Methodology Development Phase, began. The purpose of this
phase was to develop a methodology that would ensure the Company's systems
would be made Y2K compliant and at the same time allow the Company to continue
to address the day-to-day business needs. This phase was completed in March
1997.
Part of the Methodology Development Phase was the selection of a business
partner (BP) to assist the Company in its Y2K Compliance effort. This BP had
proven experience in the migration of applications to
30
<PAGE>
becoming Y2K compliant and would provide project management leadership and a
team of programming resources to perform the actual migration.
The third phase of the Y2K effort was the Pilot Project Phase, the purpose
of which was to test/prove the Y2K methodology developed in the prior phase.
The Company selected the Reinsurance system as the application to be made Y2K
compliant as the Pilot System Phase. This effort began in March 1997 and was
completed in June 1997.
The fourth phase of the Y2K effort was the Accounting Project Phase the
purpose of which was to verify that the methodology would support the
integration of Y2K compliant systems with non-Y2K compliant systems. Since the
accounting systems interface with the core insurance processing systems in the
transfer of information, the development of interface modules to correctly
handle the translation of dates in both formats was begun and was completed in
October 1997.
The fifth phase of the Y2K effort was the All Systems Project Phase the
purpose of which was to convert the core insurance processing systems to Y2K
compliance. Additional personnel were added to the effort for the primary
purpose of testing and validating results. This effort, which was completed on
August 3, 1998, completed the conversion/migration of all of the Company's in-
house developed systems to Y2K compliance.
The Post-Implementation Support and Assurance Phase includes continued
monitoring of Y2K compliance and executing programs to test compliance.
The Shelby Insurance Companies (SIC) had migrated its Commercial Lines,
claims, and billing applications to Policy Management Systems Corporation
(PMSC) Y2K compliant systems prior to its acquisition in 1999. SIC's Personal
Lines and miscellaneous other internally developed systems remain to be
converted to their Y2K counterpart. The migration effort was completed in
October 1998. Presently, the core insurance processing systems for SIC are Y2K
compliant but work remains with respect to miscellaneous in-house developed
systems. PMSC will continue to test all systems through 1999.
As of June 30, 1999, the Company had spent approximately $7.0 million to
make its systems Y2K compliant. The Company estimates it will incur an
additional $.5 million to complete Y2K readiness efforts (i.e., upgrade PC
hardware, servers, routers, PC related software, etc.). These costs do not
include contingency planning and implementation of contingency plans.
In January 1999, the Company began its Non-Application Y2K Compliance Phase.
This phase consists of the activities for identifying, evaluating and
remediating/replacing non mission critical hardware and software. As of March
1, 1999, inventories had been completed for hardware and corresponding systems.
External service providers have been identified and letters requesting the
status of their Y2K compliance level have been sent and responses are currently
being received.
The Company is currently developing its Y2K contingency plans for its
business areas by developing detailed plans to allow the Company to process its
business should one or more systems, internal and/or external, cause a
disruption in the normal daily processing. Such plans are scheduled to be
completed by the end of the third quarter of 1999, and tested by the user
community in October of 1999.
Conclusion. The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, the normal business operations of the
Company, including the disruption or delay in premium or claim processing and
the disruption in service to its customers. Also, the failure of significant
third-party providers of the Company and SIC to be Y2K compliant could result
in an interruption to normal business operations. Due to the general
uncertainty inherent in the Y2K problem, such failures could materially and
adversely affect the Company's financial position, results of operations and
liquidity.
The Y2K issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability and product policies. The Company believes
that minimal coverage could exist under some current liability and product
policies. This
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<PAGE>
exposure should be minimal as Commercial Lines business has historically
excluded any manufacturing risks which produce computer and computer dependent
products.
The Insurance Services Office ("ISO") recently developed policy language
providing that there is no coverage for certain Y2K occurrences. The liability
exclusion has been accepted in over forty states and a companion filing for
property has been accepted in at least twenty states at this time. Several
states have not adopted or approved the property exclusion form citing
specifically that, because there is no coverage under the current property
contracts, there is no reason to accept a clarifying endorsement. The Company
is currently addressing the Y2K issue by attaching the ISO exclusionary
language to all general liability policies with a rating classification the
Company believes could potentially have Y2K losses. The ISO exclusionary
language endorsement is included on all property policies. We believe these
actions should minimize the Company's exposure to Y2K losses.
The foregoing information constitutes a Year 2000 Readiness Disclosure
pursuant to the Year 2000 Information and Readiness Disclosure Act.
Market Risk of Financial Instruments
Vesta's principal assets are financial instruments, which are subject to the
market risk of potential losses from adverse changes in market rates and
prices. The Company's primary risk exposures are interest rate risk on fixed
maturity investments and equity price risk for domestic stocks.
Vesta manages its exposure to market risk by selecting investment assets
with characteristics such as duration, yield and liquidity to reflect the
underlying characteristics of the related insurances.
The following table sets forth the estimated market values of the Company's
fixed maturity investments and equity investments resulting from a hypothetical
immediate 100 basis point increase in interest rates and a 10% decline in
market prices for equity exposures, respectively from levels prevailing at
December 31, 1998.
<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C>
Fixed Maturity Investments................................. $445,538
Equity Investments......................................... $ 18,989
</TABLE>
The decrease in fair values based on an increase in interest rates was
determined by estimating the present value of future cash flows using various
models, primarily duration modeling.
The decrease in fair value of equity securities based on a decrease in the
market prices of all equity securities was estimated as 10% of the fair value.
32
<PAGE>
BUSINESS
General
The Company presently focuses primarily on its Personal Lines segment, which
includes Homeowners, Personal Auto, Financial Service and Other insurance
products. As discussed elsewhere in this prospectus, however, the Company has
historically maintained a Commercial Lines segment and a Reinsurance segment.
The Commercial Lines segment offered a variety of commercial property coverages
to principally small businesses. The Reinsurance segment offered treaty
Reinsurance to small and medium-sized companies and regional specific
Reinsurance for larger insurance companies located throughout the United
States. Consistent with the Company's strategy to focus on property and
personal auto coverages, the principal lines of business reinsured by the
Reinsurance segment were homeowner and commercial property coverages, non-
standard automobile insurance and collateral protection insurance. Personal
Lines are, and Commercial Lines insurance products have been, distributed
through independent agents, brokers and managing general agents. Reinsurance
products have been offered primarily through Reinsurance intermediaries and
brokers.
Recent Acquisitions
Historically, Reinsurance assumed has been the Company's dominant business
segment. Over the last three years, however, the Company has completed
significant acquisitions which have dramatically shifted its mix of business in
favor of Personal Lines.
Shelby. After the close of business on June 30, 1997, the Company completed
its acquisition of all the issued and outstanding stock of the operating
subsidiaries of Anthem Casualty Insurance Group, Inc., each of which are
property and casualty insurance companies, for an aggregate purchase price,
including expenses of $260.9 million. Anthem Casualty Insurance Company has
been renamed Shelby Casualty Insurance Company and all the subsidiaries
acquired are collectively referred to as "Shelby."
At the time of its acquisition, Shelby was a regional property and casualty
insurer with approximately $260 million in annual premiums. Shelby marketed its
insurance product through approximately 2,200 independent agencies located in
the midwest and mid-atlantic states. The majority of the business acquired
consisted of Personal Auto and Homeowners insurance in small towns and suburbs.
The remainder of the acquired business consisted primarily of small and medium
sized commercial insurance, much of which the Company has recently decided not
to renew.
CIGNA. Effective December 31, 1997, Vesta Fire entered into a business
transfer and management agreement with CIGNA Property and Casualty Insurance
Company ("CIGNA"). The agreement calls for Vesta Fire to reinsure selected
Personal Lines (covered business) written by CIGNA through a 100% Quota Share
Reinsurance Treaty. The agreement also calls for CIGNA and Vesta Fire to
cooperate to effect the transfer of the covered business from CIGNA to Vesta
Fire as the issuing carrier. While CIGNA does not own "renewal rights" under
agreements with agents and brokers, CIGNA will use good faith efforts, working
with Vesta Fire, to encourage agents and brokers to enter into similar
agreements with Vesta Fire.
Vesta County Mutual
Effective December 31, 1996, the Company acquired the right and authority to
control a county mutual insurance company organized under Chapter 17 of the
Texas Insurance Code, which became Vesta County Mutual. This acquisition
facilitated direct writings of automobile and associated lines of business in
Texas which Vesta Fire had historically reinsured for another mutual company.
The Company subsequently sold the right and authority to control Vesta County
Mutual for approximately $11.2 million. See, "Recent Developments."
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<PAGE>
Recent Adverse Business Developments
We faced four major adverse developments during 1998 and the first half of
1999:
. Accounting Irregularities. In June 1998, we discovered certain
accounting irregularities in our reported results for the fourth quarter
of 1997 and the first quarter of 1998. We promptly commenced an internal
investigation which resulted in a reduction of net income of
approximately $13.6 million in the fourth quarter of 1997 and first
quarter of 1998.
. Correction of prior accounting method. In 1998, we corrected the
methodology by which we recognized earned premiums in our Reinsurance
segment. This resulted in a restatement of its historical financial
statements and a decrease in reported net income of approximately $49
million for the years 1993 through 1997.
. Reduced statutory surplus of Vesta Fire. In 1997, Vesta Fire reported
statutory capital and surplus of approximately $355 million. During
1998, the Alabama Department of Insurance completed its examination of
its filing and adjusted the reported amount down to $100.8 million.
Although we were able to cure many of the technical deficiencies which
led to the adjustments, certain of the adjustments were based on
accounting methods which needed to be corrected and were not immediately
curable. Using the basis of accounting established in the examination,
we reported Vesta Fire's 1998 statutory capital and surplus as $217.3
million, after giving effect in 1998 to $125.8 million of "uncurable"
adjustments arising from the examination.
. A.M. Best ratings. A.M. Best Company, which rates insurance companies
based on factors of concern to policyholders, recently lowered its
rating on our insurance subsidiaries to "B" (Fair), after having already
lowered it to "B++" (Very Good) from "A-" (Excellent).
Strategy
During the last quarter of 1998 and the first quarter of 1999, we analyzed
the profitability of our Reinsurance, Commercial Lines and Personal Lines
segments in light of these developments. In the course of our analysis, we
determined that the corrective actions necessary to return our Commercial Lines
segment to profitability could not be justified in the current commercial
insurance marketplace. We also determined that we could no longer retain or
expand our Reinsurance portfolio. As a result of these conclusions, we decided
to our Commercial Lines and Reinsurance segments. Moving forward, we will
concentrate only on retaining and expanding the business in our Personal Lines
segment and reducing expenses to an appropriate level given our narrowed
operating strategy.
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<PAGE>
Business Written By Segment
The following table provides selected historical information on a Generally
Accepted Accounting Principles (GAAP) basis concerning the business written by
the Company and the associated underwriting results. This data should be read
in conjunction with the Company's Consolidated Financial Statements and related
notes thereto. For additional information on the Company's business segments,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note O to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------ Six Months
1994 1995 1996 1997 1998 Ended 6/30/99
-------- -------- -------- -------- -------- -------------
(In thousands, except ratio data)
<S> <C> <C> <C> <C> <C> <C>
Reinsurance(1)
Gross Premiums
Written............... $214,430 $353,988 $497,537 $535,427 $287,617 $ (1,089)
Net Premiums Written... 165,536 289,565 373,486 351,811 157,729 (4,366)
Net Premiums Earned.... 164,101 221,933 342,452 335,360 194,261 57,013
Loss Ratio............. 55.5% 68.1% 59.9% 53.5% 90.5% 60.5%
Personal
Gross Premiums
Written............... $ 63,658 $105,643 $109,661 $244,719 $346,992 $145,160
Net Premiums Written... 28,626 52,157 69,769 141,165 264,839 129,018
Net Premiums Earned.... 39,223 44,796 63,206 139,425 247,064 132,336
Loss Ratio............. 67.2% 43.6% 40.5% 68.3% 66.7% 63.9%
Commercial(1)
Gross Premiums
Written............... $ 49,018 $ 58,428 $ 44,573 $ 85,905 $124,412 $ 42,320
Net Premiums Written... 37,948 48,782 24,801 33,499 69,022 28,799
Net Premiums Earned.... 29,028 46,349 33,678 42,873 68,368 35,991
Loss Ratio............. 59.1% 61.3% 62.8% 55.9% 80.0% 76.1%
Combined
Gross Premiums
Written............... $327,106 $518,059 $651,771 $866,051 $759,021 $186,391
Net Premiums Written... 232,110 390,504 468,056 526,475 491,590 153,451
Net Premiums Earned.... 232,352 313,078 439,336 517,658 509,693 225,340
Loss Ratio............. 57.9% 63.6% 57.3% 57.7% 77.6% 64.4%
Expense Ratio.......... 35.4% 30.0% 33.2% 34.9% 50.2% 39.9%
Combined Ratio......... 93.3% 93.6% 90.5% 92.6% 127.8% 104.3%
</TABLE>
- --------
(1) As we did not implement our strategy to concentrate exclusively on Personal
Lines until 1999, our historical results of operations (including the
audited and unaudited consolidated financial statements contained in this
prospectus) continue to reflect significant premium volume in our
Reinsurance and Commercial Lines segments. We expect to lose substantially
all of this premium volume during 1999.
Personal Lines Business Segment
Business Mix. We offer four general types of Personal Lines insurance: (i)
Personal Auto, (ii) Homeowners, (iii) Financial Services and (iv) Other. For
each of these types of insurance, we strive to identify market opportunities
and develop insurance products to meet particular market needs. Prior to 1997,
Homeowners insurance dominated the Company's Personal Lines segment. In 1997,
the Company significantly increased its direct writings of Personal Auto
insurance through the purchase of Vesta County Mutual and Shelby (although the
Shelby acquisition was not effective until mid-year). In 1997, the Company also
acquired a substantial book of Homeowners business from CIGNA, representing
over $80 million in annual written premium. These acquisitions in 1997
essentially balanced the Company's Personal Lines writings evenly between
Personal Auto and Homeowners. In 1998, the Company's Personal Auto insurance
dominated the Personal Lines segment, due primarily to a full year of ownership
of the Shelby companies.
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<PAGE>
The mix of business between Homeowners and Personal Auto also affects our
exposure to risk of property damage versus personal liability. When Homeowners
insurance dominated the Company's Personal Lines segment, the Company's primary
exposure was to risk of damage to homes and their contents. With the addition
of the liability portions of the Shelby Personal Auto business, the Company's
writings are now fairly evenly balanced between property and seasonal liability
exposures. While emphasizing property coverage may have had certain advantages,
the most significant of which is that ultimate property claims losses generally
can be determined more quickly than ultimate liability claims losses, the
earnings of property insurers are extremely sensitive to unpredictable and
highly damaging catastrophic events. Management believes that the balancing of
the Company's total risk between property and seasonal liability exposures
provides better protection against the severe impact of natural catastrophe,
and thus more consistency to the Company's results.
The following table sets forth the Company's gross premiums written in its
Personal Lines segment by type of insurance offered for the three years
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------- Six Months
1996 1997 1998 ended 6/30/99
-------------- -------------- -------------- ---------------
(in thousands, except percentage)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal Auto........... $ 8,379 7.6% $112,394 45.9% $223,425 64.4% $ 98,289 67.7 %
Homeowners.............. 66,954 61.1 88,599 36.2 93,762 27.0% 49,185 33.9
Financial Services...... 25,945 23.7 37,344 15.3 20,682 6.0% (3,322) (2.3)
Other................... 8,383 7.6 6,382 2.6 9,123 2.6% 1,008 .7
-------- ----- -------- ----- -------- ----- -------- -----
$109,661 100.0% $244,719 100.0% $346,992 100.0% $145,160 100.0 %
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Personal Auto. The Company offers Personal Auto insurance for preferred,
standard and non-standard drivers. In its standard auto line, the Company
targets drivers over age 45 with above average driving records. The non-
standard auto line covers the full spectrum of non-standard drivers. Liability
limits up to $500,000 are written on standard auto policies, with an additional
$5 million personal umbrella limit also available. However, the vast majority
of the personal umbrellas are written at limits of $1 million or $2 million.
For non-standard auto, the Company typically writes minimum basic limits that
vary by state.
Homeowners. The Company's Homeowners insurance products cover the full range
of homes starting with lower-valued dwellings in the $10,000 to $50,000 range,
through the middle-valued homes from $50,000 to $150,000, as well as higher
valued homes up to $10,000,000. The majority of homes insured are valued
between $40,000 and $250,000.
Financial Services. The Company also provides specialty products protecting
collateral and repossessed property of financial institutions. Certain of these
products are designed to protect the interests of financial institutions
against physical damage to private passenger automobiles and other personal
property in those cases where the borrower fails to insure the collateral in
accordance with a loan agreement. The Company also has mortgage security
products that are designed to protect the interest of the mortgagee and the
mortgagor (borrower) caused by the mortgagor's failure to obtain property
insurance on the mortgaged property. Coverage is also provided for the
properties that are in the process of foreclosure.
Other. The Company's Industrial Fire program makes up the vast majority of
this category. This program is designed to offer fire and allied lines coverage
on low-value dwelling, mobile home, and household contents. All policies are
available on monthly, quarterly, semi-annual, or annual payment modes with
premium discounts given for quarterly, semi-annual, and annual payment modes.
All policies are written on a non-participating basis. This business was
developed through the agency force of Liberty National Life. On May 1, 1995,
Liberty National Life discontinued the marketing and new sales of fire and
allied lines of business, but as of late 1998, this product is available for
use by the Company's independent agencies in selected Southeastern states.
36
<PAGE>
Marketing. Prior to 1997, the Company marketed Personal Lines in 15 states
through approximately 870 agencies, with premium revenues concentrated in the
property lines in the Southeast. With the Shelby and CIGNA acquisitions, the
Company increased its marketing force to approximately 3800 agencies in 42
states. The following table sets forth the principal geographic distribution of
the Company's gross premiums written in its Personal Lines business for the
three years indicated. The states listed below comprise the ten states with the
largest gross premiums written for 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------- Six Months
1996 1997 1998 Ended 6/30/99
-------------- -------------- -------------- -------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas........... $ 4,588 4.2% $ 50,660 20.7% $ 77,567 22.3% $ 26,023 18.0%
Pennsylvania.... 20 0.0 24,455 10.0 50,185 14.4 25,819 17.8
West Virginia... 358 0.3 12,823 5.3 27,593 8.0 13,375 9.3
Tennessee....... 4,367 4.0 15,890 6.5 24,924 7.2 10,163 7.0
Ohio............ 541 0.5 10,865 4.5 17,942 5.2 10,111 7.0
Hawaii.......... 41,927 38.2 35,686 14.6 25,175 7.3 10,093 7.0
Illinois........ 1,482 1.4 12,118 4.6 20,029 5.8 6,016 4.2
Mississippi..... 3,950 3.6 7,773 3.2 11,398 3.3 5,673 3.9
Alabama......... 15,348 14.1 18,032 7.4 14,641 4.2 5,608 3.9
North Carolina.. 1,354 1.2 5,186 2.2 11,966 3.4 5,523 3.8
All Other....... 35,726 32.5 51,231 21.0 65,572 18.9 26,755 25.8
-------- ----- -------- ----- -------- ----- -------- ----
Total......... $109,661 100.0% $244,719 100.0% $346,992 100.0% $145,159 100%
======== ===== ======== ===== ======== ===== ======== ====
</TABLE>
The geographic balance reflected above allows for greater profit protection
and more cost effective management of the property catastrophe exposures. The
Company employs marketing representatives to maintain and expand its agency
relationships in its Personal Lines business. In addition, the Company pays
competitive commission rates to its agents and utilizes a profit sharing plan
for agencies which is based on volume of premiums and loss ratios for business
written.
The Company's independent agents have limited authority to bind insurance
coverages without prior approval from the Company, so long as such coverages
fit within our established guidelines. However, our underwriting staff reviews
all coverages bound by these agents and ultimately decides whether to continue
such coverages. Because of the broad base of the Company's independent agency
force, the contractual limitation on their authority to bind coverage and the
Company's underwriting review procedures, the Company does not believe that the
authority of its agents to bind the Company presents any material risk to the
Company and its operations.
Underwriting. Underwriting of Personal Lines business is conducted in two
locations (Honolulu and Birmingham) and performed by the Company's underwriting
staff in accordance with specific underwriting authority related to the
acceptability of each risk for the appropriate program profile. Management
information reports are utilized to measure risk selection and pricing in order
to control underwriting performance.
The principal underwriting criteria for Homeowners coverages is a
financially stable owner with a well-maintained property. Rates for lower
valued properties are surcharged to reflect risk characteristics. It has been
the Company's policy generally not to underwrite Homeowners business in the
Southeast within one hundred miles of a coastline (except for Florida which is
10 miles) in order to limit its exposure to typical coastal occurrences such as
hurricanes and other types of storms. In the Northeast and West, the Company
does not impose as restrictive a criteria for property location, but does
endeavor to utilize high wind deductibles whenever possible in order to limit
its exposure to catastrophic events. The Company continually monitors and
controls its production in order to prudently manage its risk in areas with
significant exposure to natural disasters.
37
<PAGE>
The principal underwriting criteria for Personal Auto are motor vehicle
reports, accident history, and loss frequency & severity. The vehicle make &
model are contemplated in the pricing and risk selection criteria. Considerable
weight is also given to age, marital status, and sex (where allowed by statute)
for the pricing of risks.
Growth Strategy. A significant potential for internal, organic growth exists
in Personal Lines through expansion of the Company's existing products to its
existing agency force. The largest potential exists with both standard and non-
standard Personal Auto, which are currently marketed in only 13 and 8 of the
Company's active states, respectively. There are many of the Company's
appointed agencies in additional states to whom it plans to market these
products in the next several years, thus enabling them to cross-sell the
Company's current Homeowners policyholders. This cross-selling activity not
only will increase premium production but also should improve renewal retention
and, therefore, the Company's loss ratio and expenses.
In addition to the expansion of the Company's Personal Auto insurance
products to other active states, the Company also plans to expand its low-
valued dwelling and high-valued homeowners products to other active states, as
appropriate, based on state demographics. The Company recognizes that to be a
successful Personal Lines carrier, it is essential that the Company makes it as
easy as possible for its agents to do business with the Company. Therefore, the
Company is currently pursuing three key technological developments in Personal
Lines to accomplish its goal.
. First, the Company is well along in its efforts to make its underwriting
and processing systems paperless through the implementation of an
imaging system. This system enables the Company to service its agents
and policyholders more quickly and effectively by having policy
information readily available on its computer. The Company anticipates
this will improve its policy processing time.
. Second, the Company continues to expand the number of agencies utilizing
its SEMCI agency download system, updating the agencies' management
systems with current policy data. Currently over 600 agencies utilize
this service, and the number of agencies continues to grow.
. Third, the Company is currently developing an Internet-based interactive
inquiry, application and endorsement service for its agents. The Company
anticipates introducing this service in the second or third quarter of
1999. This inquiry service will put policy, billing and claims
information at the agents' fingertips, thus enabling them to better
serve their customers. In addition, the application and endorsement
service will enable the agents to have direct access to the Company's
policy issuance system, thus further improving turnaround time for
policy and endorsement processing.
Reinsurance Assumed (discontinued)
General. Reinsurance is a contractual arrangement under which one insurer
(the ceding company) transfers to another insurer (the reinsurer) all or a
portion of a risk or risks that the ceding company has assumed under the
insurance policy or policies it has issued. A ceding company may purchase
Reinsurance for any number of reasons including to obtain, through the
reduction of its liabilities, greater underwriting capacity than its own
capital resources would support, to stabilize its underwriting results, to
protect against catastrophic loss, to withdraw from a line of business and to
manage risk when entering a new line of business.
Reinsurance can be written on either a pro rata or excess of loss basis.
Under pro rata Reinsurance, the reinsurer, in return for a predetermined
portion or share of the insurance premium charged by the ceding company,
indemnifies the ceding company against a predetermined portion or share of the
losses LAE of the ceding company under the covered primary policy or policies.
Under excess of loss Reinsurance, the reinsurer indemnifies the ceding company
against all or a specified portion of losses and LAE on underlying insurance
policies in excess of a specified dollar amount, known as the ceding company's
retention, subject to a negotiated policy limit. Catastrophe Reinsurance is a
form of excess of loss Reinsurance which indemnifies the ceding company for
losses resulting from a particular catastrophic event. Excess of loss
Reinsurance is often written in layers, with one or a group of reinsurers
taking the risk from the ceding company's retention layer up
38
<PAGE>
to a specified amount, at which point either another reinsurer or a group of
reinsurers takes the excess liability or it remains with the ceding company.
The reinsurer acquiring the risk immediately above the ceding company's
retention layer is said to write working or low layer Reinsurance. A loss that
reaches just beyond the primary insurer's retention layer will create a loss
for the working layer reinsurer but not necessarily for the reinsurers on the
higher layers.
Premiums that the ceding company pays to the reinsurer for excess of loss
coverage are not directly proportional to the premiums that the ceding company
receives because the reinsurer does not assume a proportionate risk. Excess of
loss coverage is priced separately and distinctly from the pricing employed by
the ceding company in connection with its risk since the probability of loss is
different for the reinsurer than the ceding company. In contrast, in pro rata
Reinsurance, premiums that the ceding company pays to the reinsurer are
proportional to the premiums that the ceding company receives, consistent with
the proportional sharing of risk, and the reinsurer generally pays the ceding
company a ceding commission. Generally, the ceding commission is based upon the
ceding company's cost of obtaining the business being reinsured
(i.e., commissions, premium taxes, assessments and miscellaneous administrative
expenses).
Substantially all of the Reinsurance that the Company currently has written
is on personal (including automobile) and commercial property risks. Management
believes there are certain advantages in emphasizing the writing of property
Reinsurance over casualty Reinsurance, the most significant of which is that
ultimate property claims losses generally can be determined more quickly than
ultimate casualty claims losses. Long-tail Reinsurance, such as certain
casualty coverages, frequently are slower to be reported and finally
determined. However, the earnings of property insurers are affected by
unpredictable catastrophic events. In addition, a continuing increase in the
severity of catastrophic losses as well as various other market forces could
affect the availability of adequate retrocessional coverage.
Business Mix. The Company's mix of Reinsurance assumed business on a gross
premiums written basis is set forth in the following table for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------- Six Months Ended
Type of Reinsurance 1996 1997 1998 6/30/99(1)
- ------------------- -------------- -------------- -------------- ----------------
(in thousands, except ratio data)
<S> <C> <C> <C> <C> <C> <C> <C>
Property Reinsurance
Pro Rata(1)............ $383,637 77.1% $443,164 82.8% $213,877 74.3% $(4,547)
Catastrophe............ 46,485 9.4 51,287 9.6 37,042 12.9 4,471
Excess Risk............ 3,135 0.6 3,289 0.6 5,393 1.9 --
-------- ----- -------- ----- -------- ----- -------
Total Property.......... 433,257 87.1 497,740 93.0 256,312 89.1 (76)
Casualty Reinsurance
Auto Liability(1)...... 60,912 12.2 32,696 6.1 29,534 10.3 (1,131)
Other Casualty(2)...... 3,368 0.7 4,991 0.9 1,771 0.6 117
-------- ----- -------- ----- -------- ----- -------
Total Casualty.......... 64,280 12.9 37,687 7.0 31,305 10.9 (1,104)
-------- ----- -------- ----- -------- ----- -------
Total Reinsurance...... $497,537 100.0% $535,427 100.0% $287,617 100.0% $(1,089)
======== ===== ======== ===== ======== ===== =======
</TABLE>
- --------
(1) The negative written premiums is primarily attributable to the commutation
and unearned portfolio transfers of several large reinsurance contracts.
(2) Estimated casualty portion of total Reinsurance excluding Auto Liability.
In 1998, the Company's pro rata Reinsurance writings of private passenger
automobile decreased significantly over 1997. The acquisition of Vesta County
Mutual resulted in a further shift of a large portion of private passenger
automobile writings which had been recorded on the Reinsurance line to personal
line. Additionally, the Reinsurance market experienced increased market
capacity accompanied by increased price competition in the private passenger
automobile line of business. The Company continued to terminate certain
accounts, which reduced its writings of pro rata Reinsurance of private
passenger automobile.
39
<PAGE>
The principal lines of business reinsured by the Company include homeowner
and commercial property coverages and non-standard automobile insurance. For
1998, homeowner and commercial business comprised approximately 68% of gross
Reinsurance premiums written, non-standard automobile insurance comprised
approximately 26% of gross Reinsurance premiums written, and other lines
comprised approximately 6% of gross Reinsurance premiums written. The Company
writes a small amount of casualty Reinsurance for a certain number of its
property Reinsurance clients. Casualty Reinsurance risks assumed by the Company
consist largely of non-standard automobile liability insurance as well as
liability coverages provided under homeowner and commercial multi-peril
policies.
Marketing. The Company historically provided Reinsurance to small and
medium-sized regional insurance companies and regional specific Reinsurance for
larger insurance companies located throughout the United States. Most of the
Company's Reinsurance business was produced through major Reinsurance
intermediaries in the United States. In 1996 the Company began writing
international Reinsurance business with an emphasis on catastrophe Reinsurance.
This was enhanced in September 1996 with the establishment of a branch office
in Copenhagen, Denmark, which improved access to the European Reinsurance
market. Until recently, the Company's Reinsurance segment did business through
approximately 40 intermediaries, five of which were responsible for
approximately 85% of Reinsurance premium volume during 1998.
Underwriting. Management's underwriting strategy is to practice strict
discipline in carrying out its major operating functions, risk selection and
retention. For selecting and managing its portfolio of Reinsurance contracts,
the authority to bind the Company was limited to five employees whose duties
concentrated primarily on identifying and accessing desirable business. The
Company utilized computers and analytical software to assist underwriters in
evaluating and selecting risks and determining appropriate retention levels. It
has been the Company's practice to have direct contact, either by underwriting
audits or periodic visits of a more general nature, with ceding companies with
whom the Company has working pro rata and layer relationships, both to enhance
the quality of its underwriting process and to develop and retain its business
relationships.
Strategy. The Company determined that the recent A.M. Best ratings downgrade
and the increased competition in the Reinsurance marketplace would cause a
significant loss of Reinsurance premiums in 1999. Therefore, on March 24, 1999,
the Company transferred the majority of its Reinsurance business to Hartford
Fire Insurance Company through a 100% Reinsurance arrangement, and agreed to
use its best efforts to cause such business to renew with Hartford upon
expiration, in exchange for $15 million. See Note T of the Notes to the
Consolidated Financial Statements for further discussion.
Commercial Lines (discontinued)
General. Until recently, the Company provided a full spectrum of property,
liability and auto coverage for a broad range of commercial target classes,
including hotels, manufacturers, restaurants, motorcycle dealers, broadcasters
and publishers. The Company also had designed a complementary group of
insurance products for the trucking industry offered to independent owner-
operators of trucks and small fleets to cover physical damage, non-trucking
liability (non-business use of the vehicle), and cargo risks. In its Commercial
Lines business, the Company had developed particular expertise with respect to
a select group of smaller account classes, including small office, service and
retail business owners; mini-storage facilities; artisan contractors; and small
service garages. The Company concluded, however, that in the continuing
competitive marketplace, the Company could not achieve adequate pricing for
these Commercial Lines as required for profitability. Therefore, all Commercial
Lines were discontinued in the second quarter of 1999.
40
<PAGE>
Marketing. The Company offered its standard Commercial Lines products in 29
states through approximately 2,000 independent agencies. The following table
sets forth the principal geographic distribution of the Company's direct
premiums written in its Commercial Lines of business for the years indicated.
The states listed below comprise the ten states with the largest gross premiums
written for 1998. Since the Company elected to discontinue commercial lines in
the second quarter of 1999, the schedule excludes information regarding premium
volume of the top ten states in 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1997 1998
------------- ------------- --------------
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
North Carolina.................... $ 1,337 3.0% $10,869 12.4% $ 19,226 15.5%
Ohio.............................. 846 1.9 4,673 5.3 12,325 9.9
Texas............................. 11,035 24.8 11,804 13.5 9,222 7.4
Missouri.......................... 6,554 14.7 5,429 6.2 8,748 7.0
Connecticut....................... -- 0.0 4,131 4.7 8,608 6.9
Tennessee......................... 1,447 3.2 5,336 6.2 8,255 6.6
Indiana........................... 81 0.2 4,415 5.1 7,675 6.2
Georgia........................... 1,410 3.2 4,933 5.6 6,471 5.2
Kentucky.......................... 1,787 4.0 3,828 4.4 5,767 4.7
Rhode Island...................... 0 0.0 3,490 4.0 5,650 4.5
All Other......................... 20,076 45.0 26,997 32.6 32,465 26.1
------- ----- ------- ----- -------- -----
Total........................... $44,573 100.0% $85,905 100.0% $124,412 100.0%
======= ===== ======= ===== ======== =====
</TABLE>
The Company conferred limited binding authority on its contracted agents but
only for risks which had been underwritten, priced and accepted by an
authorized underwriter of the Company or for risks which qualified under
specific and pre-set guidelines and rate parameters established for a specified
class of products.
Underwriting. Underwriting of the Company's commercial business and
transportation products had been centralized in two locations (the Company's
home office and the Shelby office). All underwriting was performed by the
Company's underwriting staff in accordance with specific underwriting authority
based upon the experience and knowledge level of each underwriter. Risks that
were perceived to be more difficult and complex risk exposures are underwritten
by the more experienced staff and reviewed by management. Many underwriting
factors were examined for the commercial business line, such as quality of
construction, occupancy, protection against fire and other hazards and
financial condition of the owners. Transportation products underwriting was
heavily concentrated on a review of the driver, including the driver's record
and experience. However, other factors are also considered, such as, in the
case of cargo insurance, damageability and theft exposure.
Reinsurance Ceded
The Company seeks to manage its risk exposure through the purchase of
Reinsurance, including retrocessional placements for its Reinsurance business.
The Company obtains Reinsurance principally to reduce its net liability on
individual risks and to provide protection for individual loss occurrences,
including catastrophic losses, in order to stabilize its underwriting results.
In exchange for Reinsurance, the Company pays to its reinsurers a portion of
the premiums received under the reinsured policies. While the assuming
reinsurer is liable for losses to the extent of the coverage ceded, Reinsurance
does not legally discharge the Company from primary liability for the full
amount of the policies ceded.
The Company generally purchases Reinsurance separately for its primary
insurance business lines and its Reinsurance business. Gross written premiums
ceded for 1997 were $339.6 million, which constituted 39.2% of the gross
premiums written, and for 1998 were $267.4 million, which constituted 35.1% of
the gross premiums written. The decrease in 1998 was primarily due to the
decrease in gross written premiums in 1998 and the
41
<PAGE>
cancellation of a certain Reinsurance treaty effective July 1, 1998. While the
Company seeks to reinsure a significant portion of its property catastrophe
risks, there can be no assurance that losses experienced by the Company will be
within the coverage limits of the Company's Reinsurance and retrocessional
programs.
The availability and cost of Reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Should a reinsurer fail to pay claims on Vesta's ceded business, Vesta (or
its insurance subsidiary) is primarily liable for such claims. The Company
seeks to evaluate the credit quality of the reinsurers and retrocessionares to
which it cedes business. No assurance can be given regarding the future ability
of any of the Company's reinsurers to meet their obligations.
Claims
Claims arising under the policies issued by the Company are managed by the
Company's Claims Department. When the Company receives notice of a loss, its
claims personnel open a claim file and establish a reserve with respect to the
loss. All claims are reviewed and all payments are made by the Company's
employees, with the exception of claims on certain products, which are adjusted
by a managing general agency and periodically audited by the Company's claims
personnel.
Most Personal Lines claims are adjusted and paid by staff claims adjusters.
Management believes that utilizing the Company's trained employee adjusters
permits faster, more efficient service at a lower cost.
Claims settlement authority levels are established for each adjuster or
manager based upon each employee's ability and level of experience. Upon loss
notification, each claim is reviewed and assigned to an adjuster or manager
based upon the type of claim. Claims-related litigation is monitored by home
office litigation supervisors. The Company emphasizes prompt, fair and
equitable settlement of meritorious claims, adequate reserving for claims and
controlling of claims adjustment and legal expenses.
Reserves
The Company's insurance subsidiaries maintain reserves to cover their
estimated ultimate liability for losses and LAE with respect to reported and
unreported claims incurred. To the extent that reserves prove to be inadequate
in the future, the Company would have to increase such reserves and incur a
charge to earnings in the period such reserves are increased, which could have
a material adverse effect on the Company's results of operations and financial
condition. The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that ultimate losses will not materially
exceed the Company's loss and LAE reserves. Reserves are estimates involving
actuarial and statistical projections at a given time of what the Company
expects to be the cost of the ultimate settlement and administration of claims
based on facts and circumstances then known, estimates of future trends in
claims severity and other variable factors such as inflation. The inherent
uncertainties of estimating reserves generally are greater with respect to
Reinsurance liabilities due to the diversity of development patterns among
different types of Reinsurance contracts, the necessary reliance on ceding
companies for information regarding reported claims and differing reserving
practices among ceding companies.
With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking into
account the circumstances surrounding each claim and policy provision relating
to the type of loss. Loss reserves are reviewed on a regular basis, and as new
data becomes available, appropriate adjustments are made to reserves.
For incurred but not reported ("IBNR") losses, a variety of methods have
been developed in the insurance industry for determining estimates of loss
reserves. One common method of actuarial evaluation, which is used by the
Company, is the loss development method. This method uses the pattern by which
losses have been
42
<PAGE>
reported over time and assumes that each accident year's experience will
develop in the same pattern as the historical loss development. The Company
also relies on industry data to provide the basis for reserve analysis on newer
lines of business (lines written less than three years).
Provisions for inflation are implicitly considered in the reserving process.
The Company's reserves are carried at the total estimate for ultimate expected
loss without any discount to reflect the time value of money.
Reserves are computed by the Company based upon actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management, and, as required by
state law, the Company periodically engages an independent actuary to render
opinions as to the adequacy of statutory reserves established by management.
The actuarial opinions are filed with the various jurisdictions in which the
Company is licensed. Based on the practice and procedures employed by the
Company, management believes that the Company's reserves were adequate as of
the valuation date.
The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Gross Losses and LAE reserves at beginning of
year........................................ $ 168,502 $ 173,275 $ 596,797
Reinsurance Receivable....................... (49,769) (60,343) (204,336)
--------- --------- ---------
Net Losses and LAE reserves at beginning of
year........................................ 118,733 112,932 392,461
Increases (decreases) in provisions for
losses and LAE for claims incurred:
Current year................................ 242,454 311,089 396,091
Prior year.................................. 9,329 (12,451) (769)
Acquisition of Shelby........................ -- 300,315 --
Losses and LAE payments for claims incurred:
Current year................................ (168,981) (166,447) (269,369)
Prior year.................................. (88,603) (152,977) (219,642)
--------- --------- ---------
Net Losses and LAE reserves at end of year... 112,932 392,461 298,772
Reinsurance Receivable....................... 60,343 204,336 206,139
--------- --------- ---------
Gross loss and LAE Reserves.................. $ 173,275 $ 596,797 $ 504,911
========= ========= =========
The reconciliation between statutory basis and GAAP basis reserves for each
of the three years in the period ended December 31, 1998, is shown below:
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Statutory reserves........................... $ 115,360 $ 391,069 $ 363,139
Adjustments for salvage and subrogation...... (2,428) (15,553) (11,250)
Retroactive Reinsurance amounts.............. -- 16,945 (53,117)
Gross-up of amounts netted against
Reinsurance recoverable..................... 60,343 204,336 206,139
--------- --------- ---------
Reserves on a GAAP basis..................... $ 173,275 $ 596,797 $ 504,911
========= ========= =========
</TABLE>
The following table shows the development of the reserves for unpaid losses
and LAE from 1988 through 1998 for the Company's insurance subsidiaries on a
GAAP basis net of Reinsurance recoveries. The top line of the table shows the
liabilities at the balance sheet date for each of the indicated years. This
reflects the estimated amounts of losses and LAE for claims arising in that
year and all prior years that are unpaid at the
43
<PAGE>
balance sheet date, including losses incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts
subsequently paid as of successive years with respect to the liability. The
lower portion of the table shows the reestimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimates change as more information becomes known about the frequency and
severity of claims for individual years. A redundancy (deficiency) exists when
the reestimated liability at each December 31 is less (greater) than the prior
liability estimate. The "cumulative redundancy (deficiency)" depicted in the
table, for any particular calendar year, represents the aggregate change in the
initial estimates over all subsequent calendar years.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and LAE..... $40,837 $32,861 $27,823 $21,919 $21,976 $29,688 $66,648 $118,733 $112,932 $392,461 $298,772
Paid (cumulative)
as of
One year later..... 19,730 19,611 11,864 13,166 20,517 20,761 51,527 88,377 86,978 197,477
Two years later.... 28,475 24,063 14,949 17,054 20,272 28,766 65,360 116,388 114,704
Three years later.. 32,443 27,199 17,096 16,810 20,281 34,776 66,490 125,299
Four years later... 34,628 29,235 18,093 16,622 23,272 33,139 72,273
Five years later... 36,703 29,960 19,206 18,140 20,994 38,222
Six years later.... 37,535 30,976 20,683 16,218 22,964
Seven years later.. 38,602 32,303 20,391 17,922
Eight years later.. 40,150 31,856 22,284
Nine years later... 39,524 33,171
Ten years later.... 40,268
Liability
reestimated as of
End of year....... 40,837 32,861 27,823 21,919 21,976 29,688 66,648 118,733 112,932 392,461 298,772
One year later..... 42,097 34,078 28,779 21,853 28,530 28,930 61,033 127,790 99,708 391,692
Two years later.... 42,702 33,304 29,431 19,009 27,914 34,219 66,582 110,437 144,986
Three years later.. 42,665 33,851 29,130 19,817 26,120 38,940 66,713 118,657
Four years later... 42,493 32,097 29,578 16,470 30,435 41,517 76,863
Five years later... 40,132 34,549 26,291 19,862 33,845 50,993
Six years later.... 42,973 31,205 29,493 23,760 40,317
Seven years later.. 39,464 34,280 36,400 29,574
Eight years later.. 42,525 38,955 40,568
Nine years later... 46,648 44,587
Ten years later.... 52,146
Cumulative
redundancy/
(deficiency)....... (11,309) (11,726) (12,745) (7,655) (18,341) (21,305) (10,215) 76 (32,054) 769
</TABLE>
The table above was significantly affected by the 1998 restatement of Vesta
Fire's statutory loss development (Schedule P) required by the Alabama
Department of Insurance, which corrected the assignment of certain losses to
accident years and is reflected above. In addition, the table reflects certain
GAAP adjustments (see Note D of the Notes to Consolidated Financial Statements
on page F-11) and for years prior to 1997 excludes the development related to
the 1997 acquisitions of Shelby and Vesta County Mutual.
The Company reinsured a number of casualty risks in the early 1980's which
could result in claims for coverage of asbestos related and other environmental
impairment liabilities to the extent that such liabilities were not excluded
from the underlying policies. The attachment points in Reinsurance treaties
relating to these risks are relatively high, and the Company's percentage
participation in the layers of Reinsurance in which it participates is
relatively low. In addition, the Company carries Reinsurance which would
mitigate the effect of any losses under these treaties. While there exists a
possibility that the Company could suffer material loss in the event of a high
number of large losses under these treaties, this is unlikely in our
management's judgment.
44
<PAGE>
Investments
The Company's investment portfolio consists primarily of investment grade
fixed income securities. Waddell & Reed Asset Management Company ("WRAMCO")
provides investment advisory services to the Company subject to investment
policies and guidelines established by management and the Board of Directors.
The Company's investments at December 31, 1998, totaled approximately $634.7
million and were classified as follows:
<TABLE>
<CAPTION>
Amount at
which Shown on % of
Type of Investment Balance Sheet Portfolio
------------------ -------------- ---------
(in thousands)
<S> <C> <C>
Cash and short-term investments..................... $156,350 24.6%
United States Government securities................. 75,416 11.90%
Asset-backed securities............................. 88,760 14.0%
Corporate bonds..................................... 161,582 25.5%
Foreign government.................................. 3,717 .6%
Municipal bonds..................................... 127,744 20.1%
Equity securities................................... 21,099 3.3%
-------- -----
Total.............................................. $634,668 100.0%
======== =====
</TABLE>
The value of the fixed maturities portfolio, classified by category, as of
December 31, 1998, was as follows:
<TABLE>
<CAPTION>
Fair
Amortized Cost Value
-------------- --------
(in thousands)
<S> <C> <C>
United States Government........................... $ 72,935 $ 75,416
Asset-backed securities............................ 87,773 88,760
Municipal.......................................... 124,358 127,744
Foreign government................................. 3,619 3,717
Corporate.......................................... 157,831 161,582
-------- --------
Total............................................. $446,516 $457,219
======== ========
</TABLE>
The composition of the fixed maturities portfolio, classified by Moody's
rating as of December 31, 1998, was as follows:
<TABLE>
<CAPTION>
% of
Amortized Cost Total
-------------- -----
(in thousands)
<S> <C> <C>
Aaa.................................................... $240,083 53.8%
Aa..................................................... 61,758 13.8%
A...................................................... 130,167 29.2%
Baa.................................................... 14,508 3.2%
-------- -----
Total................................................. $446,516 100.0%
======== =====
</TABLE>
The National Association of Insurance Commissioners ("NAIC") has a bond
rating system that assigns securities to classes called "NAIC designations"
that are used by insurers when preparing their annual statutory financial
statements. The NAIC assigns designations to publicly-traded as well as
privately-placed securities. The designations assigned by the NAIC range from
class 1 to class 6, with a rating in class 1 being of the highest quality. As
of December 31, 1998, 100% of the Company's fixed maturities portfolio,
measured on a statutory carrying value basis, was invested in securities rated
in class 1 or 2 by the NAIC, which are considered investment grade. The
weighted average maturity of the Company's fixed income portfolio at December
31, 1998, was 6.1 years. The weighted average duration of the Company's fixed
income portfolio was 3.1 years.
45
<PAGE>
As of December 31, 1998, none of the Company's fixed maturities portfolio
was invested in securities that were rated below investment grade. Less than 5%
of the Company's assets were invested in equity securities, and less than 20%
of the Company's assets were invested in collateralized mortgage obligations
secured by residential mortgages.
Regulation
The Company's insurance companies are subject to regulation by governmental
agencies in the states in which they do business. The nature and extent of such
regulation varies by jurisdiction, but typically involves prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates for
many lines of insurance, standards of solvency and minimum amounts of capital
and surplus which must be maintained, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
company, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, and reports with respect to financial condition and
other matters. In addition, state regulatory examiners perform periodic
examinations of insurance companies. Such regulation is generally intended for
the protection of policyholders rather than security holders.
For its assumed Reinsurance business, the Company has historically made
estimates for its Reinsurance reports received subsequent to a period end on a
combined underwriting and accident year basis for both statutory and GAAP
purposes. As a result of a routine examination by the Alabama Department of
Insurance, the Company agreed to revise the accounting for its Reinsurance
business for statutory purposes. Effective with its year end 1997 statutory
filings, Vesta Fire revised its statutory accounting for its assumed
Reinsurance business to reflect only accident/calendar year information. The
adjustments essentially reversed, in the form of a one-time charge, the
cumulative effect of the accounting practice consistently applied over prior
years. On a GAAP basis, the correction was accounted for by restating prior
financial statements.
In addition to the regulatory supervision of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Alabama,
Ohio, Indiana, Hawaii and Texas Insurance Holding Company System Regulatory
Acts (the "Holding Company Acts"). The Holding Company Acts contain certain
reporting requirements including those requiring the Company, as the ultimate
parent company, to file information relating to its capital structure,
ownership, and financial condition and general business operations of its
insurance subsidiaries. The Holding Company Acts contain special reporting and
prior approval requirements with respect to transactions among affiliates. The
Alabama Holding Company Act is generally the most significant to the Company
since it governs the Company's relationship with Vesta Fire, the Company's
principal insurance subsidiary.
In 1997, Vesta Fire reported statutory capital and surplus of approximately
$355 million. During 1998, the Alabama Department of Insurance completed its
examination of this filing and adjusted the reported amount down to $100.8
million. Although we were able to cure many of the technical deficiencies which
led to the adjustments, certain of the adjustments were based on accounting
methods which needed to be corrected and were not immediately curable. Using
the basis of accounting established in the examination, we reported Vesta
Fire's 1998 statutory capital and surplus as $217.3 million, after giving
effect in 1998 to $125.8 million of "uncurable" adjustments arising from the
examination.
On August 23, 1999, the Alabama Department of Insurance completed its target
examination of Vesta Fire's December 31, 1998 Annual Statement. This target
examination, which had been requested by the Company, resulted in adjustments
of approximately $9 million. Of those adjustments, which were as of December
31, 1998, the Company subsequently cured $5.2 million with no material impact
on surplus.
46
<PAGE>
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. Recently, a
number of state legislatures have considered or have enacted legislative
proposals that alter, and in many cases increase, the authority of state
agencies to regulate insurance companies and holding company systems. In
addition, legislation has been introduced from time to time in recent years
which, if enacted, could result in the federal government assuming a more
direct role in the regulation of the insurance industry.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles which will replace the current NAIC Annual Statement Instructions
and Accounting Practices and Procedures manual as the NAIC's primary guidance
on statutory accounting. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting
in some areas. The implementation date established by the NAIC is January 1,
2001; however, the effective date will be specified by each insurance company's
state of domicile. The Company is currently evaluating the potential effect of
the Codification guidance but does not expect it to have a material impact on
the Company's statutory surplus.
State insurance regulators and the NAIC periodically re-examine existing
laws and regulations and their application to insurance companies. In recent
years, the NAIC has approved and recommended to the states for adoption and
implementation, several regulatory initiatives designed to decrease the risk of
insolvency of insurance companies. These initiatives include risk-based capital
("RBC") requirements for determining the levels of capital and surplus an
insurer must maintain in relation to its insurance and investment risks. Other
NAIC regulatory initiatives impose restrictions on an insurance company's
ability to pay dividends to its stockholders. These initiatives may be adopted
by the various states in which the Company's subsidiaries are licensed; the
ultimate content and timing of any statutes and regulations adopted by the
states cannot be determined at this time. It is not possible to predict the
future impact of changing state and federal regulation on the Company's
operations, and there can be no assurance that existing insurance related laws
and regulations will not become more restrictive in the future or that laws and
regulations enacted in the future will not be more restrictive.
The NAIC's RBC requirements are intended to be used as an early warning tool
to help insurance regulators identify deteriorating or weakly capitalized
companies in order to initiate regulatory action. Such requirements are not
intended as a mechanism for ranking adequately capitalized companies. The
formula defines a new minimum capital standard which supplements the low, fixed
minimum capital and surplus requirements previously implemented on a state-by-
state basis.
The NAIC adopted risk-based capital requirements that require insurance
companies to calculate and report information under a risk-based formula which
attempts to measure statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The formula is designed to
allow state insurance regulators to identify potential weakly capitalized
companies. Under the formula, a company determines its "risk-based capital"
("RBC") by taking into account certain risks related to the insurer's assets
(including risks related to its investment portfolio and ceded Reinsurance) and
the insurer's liabilities (including underwriting risks related to the nature
and experience of its insurance business). Risk-based capital rules provide for
different levels of regulatory attention depending on the ratio of a company's
total adjusted capital to its "authorized control level" ("ACL") of RBC.
47
<PAGE>
At December 31, 1998, the total RBC as a percentage of authorized control
level were as follows for the Company's insurance subsidiaries:
<TABLE>
<S> <C>
Vesta Fire Insurance Corporation................................... 275%
The Hawaiian Insurance & Guaranty Company, Limited................. 9900%
Shelby Casualty Insurance Company.................................. 2663%
The Shelby Insurance Company....................................... 6221%
Insura Property and Casualty Company............................... 2591%
Affirmative Insurance Company...................................... 17029%
Sheffield Insurance Corporation.................................... 2225%
Vesta Insurance Corporation........................................ 4988%
Vesta County Mutual Insurance Company.............................. 844%
Vesta Lloyds Insurance Company..................................... 9643%
</TABLE>
Restrictions on Dividends to Stockholders. The Company's insurance
subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The restrictions are generally based on
certain levels of surplus, investment income and operating income, as
determined under statutory accounting practices. Alabama, Ohio, Indiana and
Texas law permits dividends in any year which, together with other dividends or
distributions made within the preceding 12 months, do not exceed the greater of
(i) 10% of statutory surplus as of the end of the preceding year or (ii) the
net income for the preceding year, with larger dividends payable only after
receipt of prior regulatory approval. Hawaii law limits dividends to the lesser
of (i) and (ii) without prior approval. Certain other extraordinary
transactions between an insurance company and its affiliates also are subject
to prior approval by the Department of Insurance. Future dividends from the
Company's subsidiaries may be limited by business and regulatory
considerations.
Insurance Regulation Concerning Change or Acquisition of Control. Certain
subsidiaries of the Company are domestic property and casualty insurance
companies organized under the insurance codes of Alabama, Ohio, Indiana, Hawaii
and Texas (the "Insurance Codes"). The Insurance Codes contain a provision to
the effect that the acquisition or change of "control" of a domestic insurer or
of any person that controls a domestic insurer cannot be consummated without
the prior approval of the relevant insurance regulatory authority. A person
seeking to acquire control, directly or indirectly, of a domestic insurance
company or of any person controlling a domestic insurance company must
generally file with the relevant insurance regulatory authority an application
for change of control (commonly known as a "Form A") containing certain
information required by statute and published regulations and provide a copy of
such Form A to the domestic insurer. In Alabama, control is presumed to exist
if any person, directly or indirectly, owns, controls, holds with the power to
vote or holds proxies representing 5% or more of the voting securities of any
other person. In Texas and Hawaii, control is presumed to exist if any person,
directly or indirectly, or with members of the person's immediate family, owns,
controls, or holds with the power to vote, or if any person other than a
corporate officer or director of a person holds proxies representing, 10% or
more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a non-
domestic admitted insurance company in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the change of control,
such statutes do authorize issuance of a cease and desist order with respect to
the non-domestic admitted insurer if certain conditions exist, such as undue
market concentration.
Any future transactions that would constitute a change in control of the
Company also generally would require prior approval by the Insurance
Departments of Alabama, Ohio, Indiana, Hawaii and Texas and would require
preacquisition notification in those states which have adopted preacquisition
notification provisions and wherein the insurers are admitted to transact
business. Such requirements may deter, delay or prevent certain
48
<PAGE>
transactions affecting the control of the Company or the ownership of the
Company's common stock, including transactions that could be advantageous to
the stockholders of the Company.
Membership in Insolvency Funds and Associations; Mandatory Pools. Most
states require property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of an insurer writing insurance in the state. Members of the fund or
association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premiums written by a member in that state.
The Company is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. Among the pools in which the Company
participates are those established in coastal states to provide windstorm and
other similar types of property coverage. These pools typically require all
companies writing property insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are not covered by the Company's Reinsurance
treaties, they may have an adverse effect on the Company.
Total assessments from insolvency funds, associations and mandatory pools
were $.5 million, $.3 million and $2.9 million for 1996, 1997 and 1998,
respectively. Some of these payments are recoverable through future policy
surcharges and premium tax reductions.
Various states in which the Company is doing business have established
certain shared market facilities with respect to the coverage of windstorm and
hurricane losses in the state. The Company is subject to assessments under
these facilities up to certain prescribed limits (which are generally based on
its share of the property insurance market in the state) if funds in the state
facility are inadequate to pay such losses on insured risks. The Company
believes that such assessments generally would be treated as a catastrophic
loss under the Company's catastrophe Reinsurance programs.
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity
and pricing. These regulations include (i) the creation of "markets assistance
plans" under which insurers are induced to provide certain coverages, (ii)
restrictions on the ability of insurers to cancel certain policies in mid-term,
(iii) advance notice requirements or limitations imposed for certain policy
non-renewals and (iv) limitations upon or decreases in rates permitted to be
charged.
Effect of Federal Legislation. Although the federal government does not
directly regulate the business of insurance, federal initiatives often affect
the insurance business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include federal
government participation in asbestos and other product liability claims,
pension regulation (ERISA), examination of the taxation of insurers and
reinsurers, minimum levels of liability insurance and automobile safety
regulations.
NAIC-IRIS Ratios. The NAIC has developed its Insurance Regulatory
Information System ("IRIS") to assist state insurance departments in
identifying significant changes in the operations of an insurance company, such
as changes in its product mix, large Reinsurance transactions, increases or
decreases in premiums received and certain other changes in operations. Such
changes may not result from any problems with an insurance company but merely
indicate changes in certain ratios outside ranges defined as normal by the
NAIC. When an insurance company has four or more ratios falling outside "normal
ranges," state regulators may investigate to determine the reasons for the
variance and whether corrective action is warranted. In 1996, Vesta Fire had no
ratios which varied unfavorably from the "usual value" range. With respect to
1997, Vesta Fire's IRIS ratios may be negatively impacted by the one-time
statutory charge. In 1998, Vesta Fire had 6 ratios which varied
49
<PAGE>
unfavorably from the "usual value" range. The unfavorable ratios were primarily
due to 1998 operating results and the Company's overall reserve strengthening
during the year.
A.M. Best Rating
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, recently lowered its rating on the Company's insurance
subsidiaries to "B" (Fair, its sixth highest rating category) from "B++" (Very
Good, its fifth highest rating category). Some of the factors noted by A.M.
Best as contributing to the downgrade include the Company's highly leveraged
financial condition, weak holding company liquidity and declines in its capital
base, following significant earnings charges during 1998. The Company has
determined that the impact of the A.M. Best downgrade on the commercial line of
business will necessitate corrective actions in excess of what the marketplace
will accept. Therefore, the Company commenced withdrawing from its Commercial
Lines of business in the second quarter of 1999. The Company has also
determined that the impact of the downgrade on the Reinsurance segment has
significantly impaired the Company's ability to compete effectively in the
current Reinsurance marketplace. Therefore, effective March 24, 1999, the
Company transferred a significant portion of its Reinsurance operations to
another reinsurer in exchange for $15 million. The downgrade may negatively
impact our ability to renew existing business or attract new business in our
Personal Lines segment until we can improve the rating.
Competition
The property and casualty insurance industry is highly competitive on the
basis of both price and service. The Company competes for direct business with
other stock companies, specialty insurance organizations, mutual insurance
companies and other underwriting organizations, some of which are substantially
larger and have greater financial resources than the Company. In recent years,
there has been a trend in the property and casualty industry toward
consolidation which could result in even more competitive pricing. The Company
also faces competition from foreign insurance companies and from "captive"
insurance companies and "risk retention" groups (i.e., those established by
insureds to provide insurance for themselves.) In the future, the industry,
including the Company, may face increasing insurance underwriting competition
from banks and other financial institutions.
Relationship with Torchmark
Prior to the initial public offering of its common stock in November 1993,
the Company was a wholly owned subsidiary of Torchmark. As of June 30, 1999,
Torchmark owned approximately 27% of the issued and outstanding common stock of
the Company. Prior to its initial public offering, the Company entered into
several agreements with Torchmark and certain of its subsidiaries regarding the
future relationship of the Company and Torchmark. Among these are a lease
agreement, pursuant to which the Company leased its headquarters building, and
an investment services agreement, pursuant to which the Company receives
investment advice and services in connection with the management of the
Company's investment portfolio. On September 25, 1999, Torchmark and its
subsidiaries transferred the ownership of the Company's headquarters building
to an unaffiliated third party. Prior to May of 1995, the Company marketed
lower value personal dwelling insurance in six states through agents of Liberty
National Life Insurance Company (LNF), pursuant to a written marketing
agreement between the Company and LNL. However, LNL terminated this agreement
in 1995 and no longer markets these products through its agents. See "Executive
Compensation and Other Transaction With Management--Certain Relationships and
Related Transactions."
Employees
As of June 30, 1999, the Company employed 657 persons. The Company's
employees are neither represented by labor unions nor are they subject to any
collective bargaining agreements. Management knows of no current efforts to
establish labor unions or collective bargaining agreements.
50
<PAGE>
Properties
The Company leases approximately 111,099 square feet for its home office at
3760 River Run Drive, Birmingham, Alabama under a long-term operating lease
from Torchmark Development Corporation, which, until September 25, 1999 was a
wholly owned subsidiary of Torchmark Corporation. The Company considers the
office facilities to be suitable and adequate for its current level of
operations.
HIG leases approximately 8,140 square feet for its operations at 1001 Bishop
Street Pacific Tower, Honolulu, Hawaii under a long-term operating lease. The
Company considers the office facilities to be suitable and adequate for HIG's
current and anticipated level of operations.
The Company owns an office building with approximately 175,000 square feet
located at 175 Mansfield Avenue, Shelby, Ohio for its Shelby operations. This
property is currently listed and is being marketed for sale.
Legal Proceedings
Restated 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 accounting irregularities consisting of inappropriate
reductions of reserves and overstatements 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
overstatements. This investigation concluded that inappropriate amounts had, in
fact, been recorded, and the Company determined it should restate its
previously issued 1997 financial statements and first quarter 1998 Form 10-Q.
Additionally, during its internal investigation the Company 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. The Company determined that Reinsurance premiums should be
recognized as earned over the contract period and corrected the error in its
accounting methodology by restating previously issued financial statements. The
Company issued press releases, which were filed with the Securities and
Exchange Commission, on June 1, 1998 and June 29, 1998 announcing its intention
to restate its historical financial statements.
In addition, the Company determined, subsequent to the issuance of the 1997
financial statements, that a specific reinsurance ceded contract entered into
in 1997 contains retroactive elements as defined in SFAS 113. A contract is
deemed retroactive when an assuming enterprise agrees to reimburse a ceding
enterprise for liabilities incurred as a result of past insurable events. For
such contracts, SFAS 133 requires that any initial gain and any benefit due
from a reinsurer as a result of subsequent covered losses be deferred in the
financial statements of the ceding enterprise and recognized into income over
the settlement period of the underlying claims. The Company erroneously
recorded a gain on this contract in the fourth quarter of 1997 and has adjusted
its previously issued financial statements to appropriately defer and recognize
such gain.
The Company restated its previously issued financial statements for 1995,
1996 and 1997 and its first quarter 1998 Form 10-Q for the above item by
issuance of a current report on Form 8-K dated August 19, 1998 and Form 10-K
for the fiscal year ended December 31, 1998. These restatements resulted in a
cumulative decrease to stockholders' equity of $86.0 million through September
30, 1998.
Commencing in June, 1998, the Company and several of its current and former
officers and directors were named in several purported class action lawsuits in
the United States District Court for the Northern District of Alabama and in
one purported class action lawsuit in the Circuit Court of Jefferson County,
Alabama. Several of Vesta's officers and directors also have been named in a
derivative action lawsuit in the Circuit Court of Jefferson County, Alabama, in
which Vesta is a nominal defendant.
The class action lawsuit filed in the Circuit Court of Jefferson County,
Alabama has been dismissed and the derivative case has been placed on the
administrative docket. The class actions filed in the United States District
Court for the Northern District of Alabama have been consolidated into a single
action in that district.
51
<PAGE>
The purported class representatives in that action have filed (a) a
consolidated amended complaint alleging that the defendants violated the
federal securities laws and (b) a motion for class certification. The
consolidated amended complaint also added as defendants Torchmark Corporation
and the Company's predecessor auditors, KPMG Peat Marwick LLP. The consolidated
amended complaint alleges various violations of the federal securities law and
seeks unspecified but potentially significant damages.
The Company has notified its directors and officers liability insurance
companies of these lawsuits and the consolidated amended complaint. The
litigation is still in the preliminary stages and there has been no discovery
or class certification. The Company intends to vigorously to defend this
litigation and intends to explore all available rights and remedies it may have
under the circumstances. In related litigation, in September, 1998, Cincinnati
Insurance Company ("Cincinnati"), one of the Company's directors and officers
liability insurance carriers, filed a lawsuit in the United States District
Court for the Northern District of Alabama seeking to avoid coverage under its
directors and officers liability and other policies. The Company filed a motion
to dismiss Cincinnati's complaint on jurisdictional grounds in federal court
(which was granted), and filed a lawsuit against Cincinnati in the Circuit
Court of Jefferson County, Alabama seeking damages arising out of Cincinnati's
actions. Cincinnati has filed an answer and counterclaim in that case again
seeking to avoid coverage. The Company intends to vigorously resist
Cincinnati's efforts to avoid coverage. Because these matters are in their
early stages, their ultimate outcome cannot be determined. Accordingly, no
provision for any liability that may result therefrom has been made in the
accompanying consolidated financial statements.
As discussed above, the Company corrected its accounting for assumed
Reinsurance business through restatement of its previously issued financial
statements. Similar corrections were made on a statutory accounting basis
through recording cumulative adjustments in Vesta Fire's 1997 statutory
financial statements. The impact of this correction has been reflected in
amounts ceded under the Company's 20 percent whole account quota share treaty
which was terminated on June 30, 1998 on a run-off basis. The Company believes
such treatment is appropriate under the terms of this treaty and has calculated
the quarterly Reinsurance billings presented to the treaty participants
accordingly. The aggregate amount included herein as recoverable from such
reinsurers totaled $75.4 million at December 31, 1998. The Company collected
$34.5 from NRMA Insurance Ltd ("NRMA"), the largest participant on the treaty
through the draw down of a letter of credit which NRMA was required to post
since it is a foreign reinsurer. NRMA filed a lawsuit in the United States
District Court for the Northern District of Alabama contesting the Company's
claim and the validity of the treaty, and is seeking return of the $34.5. The
Company filed a demand for arbitration as provided for in the treaty and has
filed a motion to compel arbitration which is currently pending in the United
State District Court action. The Company also recently filed for arbitration
against the other two participants on the treaty. While management believes its
interpretation of the treaty's terms and computations based thereon are
correct, the effects, if any, of participant audits or other actions cannot be
determined at this time.
General
On June 23, 1999, a subsidiary of Torchmark filed suit in the Circuit Court
of Jefferson County, Alabama against two subsidiaries of the Company.
On September 23, 1999, Torchmark Corporation, the Company's largest common
stockholder whose shares are being offered hereby, filed a lawsuit in the
Circuit Court of Jefferson County, Alabama against the Company asserting breach
of contract, conversion and breach of duty in connection with the Company's
preparation and filing of a registration statement covering its shares in
accordance with certain registration rights claimed by Torchmark. This claim
seeks an injunction requiring a registration statement to be filed, as well as
compensatory and punitive damages. This litigation is in its early stages, and
management is unable to assess the damages that may be awarded, if any.
However, management does not believe that such damages, if any, would
materially and adversely affect the Company's financial position or results of
operation.
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims, and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation or arbitration to be material.
52
<PAGE>
MANAGEMENT
Board of Directors
The Company's Restated Certificate of Incorporation, as amended and
supplemented by a certificate of designation relating to the Company's Series A
Convertible Preferred Stock (the "Class A Preferred Stock") provides for two
classes of directors--those elected by the holders of the Company's common
stock (the "Common Directors") and those elected by the holders of the Class A
Preferred Stock, voting as a separate class (the "Class A Directors"). The
number of Class A Directors may vary depending on the number of Common
Directors serving from time to time. See "Description of Capital Stock--
Preferred Stock"
The Company's Bylaws provide that, subject to the rights of the holders of
any series of Preferred Stock, the number of directors shall be not less than
two nor more than twelve, with the exact number to be fixed by the Board of
Directors. The board presently consists of six (6) Common Directors and three
(3) Class A Directors.
The Common Directors of the Company are divided into three classes and are
elected to hold office for a three-year term and until their successors are
elected and qualified at the annual meeting of stockholders held in the year in
which their term expires. The election of each class of Common Directors is
staggered over each three-year period. The Class A Directors were initially
elected by the sole holder of the Class A Preferred Stock to serve an initial
term, expiring at the annual meeting of the Company's stockholders to be held
in 2002. Thereafter, the Class A Directors will be elected to serve staggered,
three year terms similar to the Common Directors.
Profiles of Common Directors
Walter M. Beale, Jr. (age 53) has been a director of the Company since 1993.
His term expires in 2000 (Class I). Principal occupation: Partner in the law
firm of Balch & Bingham LLP since prior to 1993.
Ehney A. Camp, III (age 56) has been a director of the Company since 1993.
His term expires in 2001 (Class II). Principal occupation: Principal, Addison
Investments, L.L.C. (private investments) since 1996. From 1975 until 1996, Mr.
Camp was the President and Chief Executive Officer of Camp & Company, a
mortgage banking company located in Birmingham, Alabama.
Norman W. Gayle, III, (age 45) has been a director of the Company since
1998. His term expires in 2002 (Class III). Principal occupation: President and
Chief Executive Officer of the Company since 1998. Executive Vice President and
Chief Operating Officer of the Company from 1995 to 1998; Executive Vice
President of the Company from 1994 to 1995; Senior Vice President of Carvill
America, Inc., Atlanta, Georgia, from 1989 to 1994.
Clifford F. Palmer (age 50) has been a director of the Company since 1993.
His term expires in 2001 (Class II). Principal occupation: Insurance Consultant
with Pilgrim Managers Limited since 1997. From 1979 until 1997, Mr. Palmer was
the named underwriter for Lloyd's Syndicate 314 and was a principal in the
managing agency, Ashley Palmer Syndicates, Ltd.
Jarvis W. Palmer (age 66) has been a director of the Company since 1993. His
term expires in 2000 (upon effectiveness of his election as a Class II
director, which election shall become effective at the expiration of his term
as a Class III director in 1999). Principal occupation: Insurance Consultant
since 1994.
James E. Tait (age 50), Chairman, has been a director of the Company since
1998. His term expires in 2002. Principal occupation: Executive Vice President
and Chief Financial Officer of the Company since 1998; President, Tait Advisory
Services, LLC, 1996 - present; President of Inex Insurance Exchange, 1996 -
1999; Partner, Coopers & Lybrand, 1980-1996.
53
<PAGE>
Profiles of Class A Directors
Robert B.D. Batlivala, PhD. (age 59) was elected as a Class A Director
effective October 19, 1999. Principal occupation: Presently, Director,
Regulatory Economics and Corporate Strategic Planning for BP Amoco, where he
has served in various capacities since 1964.
Larry D. Striplin, Jr. (age 69) was elected as a Class A Director effective
September 30, 1999. Principal occupation: Chairman and Chief Executive Officer
of Nelson-Brantley Glass Contractors, Inc. and Chairman and Chief Executive
Officer of Clearview Properties, Inc. since 1995; director of HEALTHSOUTH
Corporation, a publicly-traded provider of rehabilitative health care services;
director of Kulicke & Soffa Industries, Inc., a publicly-traded manufacturer of
electronic equipment; Vice Chairman of The Banc Corporation, a publicly-traded
bank holding company headquartered in Birmingham, Alabama, and director of The
Bank, a banking corporation headquartered in Birmingham, Alabama and the
principal subsidiary of The Banc Corporation, since 1998; director of Warrior
Capital Corporation, a bank holding company headquartered in Warrior, Alabama,
from 1997 until it was merged into The Banc Corporation in 1998; Chairman and
Chief Executive Officer of Circle "S" Industries, Inc., a privately-owned
bonding wire manufacturer until 1995.
James A Taylor (age 57) was elected as a Class A Director effective
September 30, 1999. Principal occupation: Chairman and Chief Executive Officer
of The Banc Corporation, a publicly-traded bank holding company headquartered
in Birmingham, Alabama, since its incorporation in 1998; President of The Banc
Corporation from its incorporation until November 1998, and from February 1999
to present; director of The Bank, a banking corporation headquartered in
Birmingham, Alabama and the principal subsidiary of The Banc Corporation, since
1997; Chairman of The Bank since 1998; director of the American Sports Medicine
Institute; Chairman, President and Chief Executive Officer of Warrior Capital
Corporation, a bank holding company headquartered in Warrior, Alabama, from
1997 until it was merged into The Banc Corporation in 1998; Founder, Chairman
and Chief Executive Officer of Alabama National BancCorporation, a bank holding
company headquartered in Birmingham, Alabama, from its incorporation in 1986
until 1996.
Committees of the Board of Directors
The Company's Board of Directors (the "Board") has established on Executive
Committee, an Audit Committee and a Compensation Committee. In accordance with
New York Stock Exchange policy, no member of the Audit Committee is or will be
an officer or employee of the Company or any of its subsidiaries.
The Executive Committee possesses all of the powers and authority of the
Company's Board between meetings of the Board, except as limited by applicable
law. The members of the Executive Committee are Messrs. Camp, chairman, Gayle,
Tait and Taylor. The Executive Committee, established in October of 1999, did
not meet in 1998.
The duties of the Audit Committee are to recommend to the Board the
selection of independent certified public accountants to audit annually the
books and records of the Company, to review the activities and the reports of
the independent certified public accountants and to report the results of such
review to the Board. The Audit Committee also monitors the activities of the
Company's audit staff and the adequacy of the Company's internal controls. The
members of the Audit Committee are Messrs. Robert B.D. Batlivala and Jarvis W.
Palmer.
The duties of the Compensation Committee are to make recommendations and
reports to the Board with respect to the salaries, bonuses and other
compensation to be paid to the Company's officers and to administer all plans
relating to the compensation of such officers. The members of the Compensation
Committee are Messrs. Ehney A. Camp, III, Jarvis W. Palmer and Clifford F.
Palmer. The Compensation Committee met 4 times in 1998.
Meetings of the Board of Directors and Committees
During 1998, the Board of Directors met 13 times. In 1998, all of the
directors attended more than 75% of the meetings of the Board and the
committees on which they served.
54
<PAGE>
Profiles of Executive Officers Who Are Not Directors
The following table shows certain information concerning each person deemed
to be an executive officer of the Company on December 31, 1998, except Norman
W. Gayle, III and James E. Tait, who also serve as a directors. Each executive
officer and key employee is elected by the Board of Directors of the Company
annually and serves at the pleasure of the Board. There are no arrangements or
understandings between any executive officer and any other person pursuant to
which the officer was selected.
<TABLE>
<CAPTION>
Principal Occupation and Business Experience
Name Age for the Past Five Years
---- --- --------------------------------------------
<C> <C> <S>
Donald W. Thornton 52 Senior Vice President--General Counsel and Secretary of
the Company since 1995; Vice President--General Counsel
and Secretary of the Company from 1993 to 1994.
Charles M. Angell 52 Senior Vice President--Insurance Operations of Vesta
Fire Insurance Corporation since 1995; Vice President
of Commercial Insurance Operations of Amerisure
Companies from 1989 to 1995.
Robert K. Cooney (resigned) 35 Senior Vice President--Reinsurance Assumed of Vesta
Fire Insurance Corporation since 1997; Vice President
of Reinsurance Assumed of Vesta Fire Insurance
Corporation from 1993 to 1997.
Brian R. Meredith (resigned) 33 Senior Vice President--Finance and Treasurer of the
Company since 1997; Vice President--Finance of the
Company from 1994 to 1997; Equity Research Analyst with
Morgan Stanley & Company, Inc. from 1990 to 1994.
William P. Cronin 39 Senior Vice President and Controller since 1998; Vice
President, Audit and Regulatory Affairs of Tait
Advisory Services, LLC, 1997 - present; Senior Manager,
Ernst & Young, LLP, 1993-1997.
</TABLE>
55
<PAGE>
Stock Ownership of Management
The following table shows certain information about stock ownership of the
directors and each of the executive officers named in the Summary Compensation
Table herein, and all directors and executive officers as a group, as of
December 31, 1998.
<TABLE>
<CAPTION>
Company Common Stock
or Options Beneficially
Owned as of December 31, 1998
-----------------------------
Name Directly Indirectly Percent of Class(1)
- ---- --------------- --------------- -------------------
<S> <C> <C> <C>
Charles M. Angell....... 4,334(2) -0- *
Walter M. Beale, Jr..... 30,529(3) -0- *
Ehney A. Camp, III...... 29,429(4) -0- *
Norman W. Gayle, III.... 102,190(5) -0- *
Robert A. Hershbarger... 16,427(6) -0- *
Robert Y. Huffman 50,399(7) 16,000(7)(8) *
(resigned 5/31/98)......
Brian R. Meredith 37,438(9) -0- *
(resigned)..............
Clifford F. Palmer...... 39,779(10) -0- *
Jarvis W. Palmer........ 35,029(11) 3,000(12) *
James E. Tait........... 30,000(13) -0- *
Donald W. Thornton...... 124,637(14) -0- *
All Directors, Nominees
and Executive Officers
as a group (11
persons):............... 452,232 -0- 2.4%
</TABLE>
- --------
* Less than one percent
(1) A person is deemed to beneficially own securities which he or she has a
right to acquire within sixty (60) days (i.e., through the exercise of
options, warrants, rights or conversion privileges). Any securities which
are not outstanding but deemed to be beneficially owned by a person are
considered outstanding for the purpose of computing such person's
percentage ownership but are not considered outstanding when computing any
other person's percentage ownership.
(2) Consists of 4,334 shares of restricted stock granted under the Company's
Long Term Incentive Plan.
(3) Includes 15,000 shares subject to the exercise of options received in lieu
of the payment of 1994 annual director fee, 3,000 shares subject to the
exercise of options granted pursuant to the Company's Long Term Incentive
Plan and 9,000 shares subject to the exercise of options granted pursuant
to the Company's Non-Employee Director Stock Plan.
(4) Consists of 7,500 shares subject to the exercise of options received in
lieu of the payment of fifty (50) percent of 1994 annual director fee,
3,000 shares subject to the exercise of options granted pursuant to the
Company's Long Term Incentive Plan, 9,000 shares subject to the exercise
of options granted pursuant to the Company's Non-Employee Director Stock
Plan, and 5,150 shares are held in the name of Sterne, Agee & Leach, Inc.,
custodian for Ehney A. Camp, III Individual Retirement Account.
(5) Includes 27,298 shares subject to the exercise of options and 71,152
shares of restricted stock granted pursuant to the Company's Long Term
Incentive Plan.
(6) Includes 1,500 shares subject to the exercise of options received in lieu
of the payment of twenty (20) percent of 1994 annual director fee, 3,000
shares subject to the exercise of options granted pursuant to the
Company's Long Term Incentive Plan and 9,000 shares subject to the
exercise of options granted pursuant to the Company's Non-Employee
Director Stock Plan.
(7) To the best of the Company's knowledge, based on an amended Form 4 filed
by Mr. Huffman on July 17, 1998.
56
<PAGE>
(8) These shares are held by Mr. Huffman's spouse either directly or as
custodian for her grandchild.
(9) Includes of 33,237 shares subject to the exercise of options and 4,001
shares of restricted stock granted under the Company's Long Term Incentive
Plan.
(10) Includes 15,000 shares subject to the exercise of options received in lieu
of the payment of 1994 annual director fee, 3,000 shares subject to the
exercise of options granted pursuant to the Company's Long Term Incentive
Plan, 9,000 shares subject to the exercise of options granted pursuant to
the Company's Non-Employee Director Stock Plan, and 9,000 shares held by
Corporation of Lloyd's, for the account of Clifford F. Palmer.
(11) Includes 15,000 shares subject to the exercise of options received in lieu
of the payment of 1994 annual director fee, 3,000 shares subject to the
exercise of options granted pursuant to the Company's Long Term Incentive
Plan, and 9,000 shares subject to the exercise of options granted pursuant
to the Company's Non-Employee Director Stock Plan.
(12) Consists of shares held by Birmingham Insurance Co., Inc., of which Mr.
Palmer is a 98% owner.
(13) Consists of 30,000 shares of restricted stock granted under the Company's
Long Term Incentive Plan.
(14) Consists of 105,128 shares subject to the exercise of options and 19,489
shares of restricted stock granted pursuant to the Company's Long Term
Incentive Plan.
EXECUTIVE COMPENSATION AND OTHER TRANSACTIONS WITH MANAGEMENT
Summary Compensation Information
The following table sets forth certain information regarding compensation
paid by the Company and its subsidiaries during the fiscal years 1996, 1997 and
1998 for services rendered to the Company and its subsidiaries during such
years by each person who served as Chief Executive Officer during 1998 and the
four other most highly compensated executive officers serving at the end of
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual
Compensation Long Term Compensation
---------------- ----------------------------------------------
Awards Payouts
---------------------- ----------
Other Restricted Securities
Annual Stock Underlying LTIP All Other
Name and Salary Bonus(1) Compensation Award(s)(2) Options Payouts(3) Compensation
Principal Position Year ($) ($) ($) ($) (#) ($) ($)
------------------ ---- ------- -------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert Y. Huffman 1998 311,538 -0- -0- -0- -0- 65,725 9,825(4)
Chief Executive Officer 1997 575,000 575,000 -0- 316,659 47,916 130,550 5,900(4)
until June 1, 1998 1996 475,000 475,000 -0- 250,927 45,418 130,550 4,750(4)
Norman W. Gayle, III 1998 438,269 -0- -0- -0- -0- 181,022 6,998(5)
Chief Executive Officer 1997 365,000 365,000 -0- 126,629 30,803 181,022 5,480(5)
since June 1, 1998 1996 300,000 300,000 -0- 133,344 28,685 181,022 5,596(5)
James E. Tait 1998 212,019 -0- -0- 286,800 45,000 -0- 6,797(6)
Executive Vice President
and Chief Financial
Officer
Donald W. Thornton 1998 234,423 -0- -0- -0- -0- 40,610 7,440(7)
Senior Vice President-- 1997 210,000 210,000 -0- 73,344 17,113 40,610 5,170(7)
General Counsel and 1996 200,000 200,000 -0- 66,672 19,124 40,610 4,750(7)
Secretary
Charles M. Angell 1998 208,942 -0- -0- -0- 10,000 -0- 6,581(8)
Senior Vice President-- 1997 195,000 195,000 -0- 64,640 -0- -0- 5,140(8)
Insurance Operations of 1996 195,000 120,000 -0- 49,667 -0- -0- 3,908(8)
Vesta Fire Insurance
Corporation
Brian R. Meredith 1998 203,845 -0- -0- -0- -0- -0- 6,429(9)
Senior Vice President-- 1997 195,000 195,000 -0- 55,659 -0- -0- 3,692(9)
Finance and Treasurer 1996 190,000 90,000 -0- 46,655 -0- -0- 4,750(9)
</TABLE>
- --------
(1) Consists of payments under the Company's Cash Bonus Plan. The bonus amounts
shown in this column were paid based on performance rendered during the
years indicated, but the bonuses were paid during the fiscal years
immediately following the years indicated.
57
<PAGE>
(2) No part of the restricted stock awards reflected above will vest in under
three years from the date of the grant. Dividends will be paid on the
restricted stock prior to vesting. The value of the restricted stock awards
shown above reflects the number of shares awarded during the year indicated
multiplied by the closing market price of the Company's unrestricted common
stock on the date of the award. The following table shows the aggregate
number and value of all shares of restricted stock held by the persons
identified in the table above as of December 31, 1998:
<TABLE>
<CAPTION>
Number of Shares Market Value on 12/31/98
---------------- ------------------------
<S> <C> <C>
Robert Y. Huffman -0- $ -0-
Norman W. Gayle, III 71,152 426,912
James E. Tait 30,000 180,000
Donald W. Thornton 19,489 116,934
Charles M. Angell 4,334 26,004
Brian R. Meredith 4,001 24,006
</TABLE>
(3) Consists of payments with respect to the repayment of loans made to enable
certain executive officers to purchase restricted stock of the Company.
(4) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $479 in 1998 and $1,150 in 1997, and
contributions by the Company under the Company's 401(k) plan of $9,346 in
1998, $4,750 in 1997 and $4,750 in 1996.
(5) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $860 in 1998, $730 in 1997 and $846 in
1996, and contributions by the Company under the Company's 401(k) plan of
$6,138 in 1998, $4,750 in 1997 and $4,750 in 1996.
(6) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $437 in 1998, and contributions by the
Company under the Company's 401(k) plan of $6,360 in 1998.
(7) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $460 in 1998 and $420 in 1997, and
contributions by the Company under the Company's 401(k) plan of $6,980 in
19998, $4,750 in 1997 and $4,750 in 1996.
(8) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $410 in 1998, $390 in 1997 and $983 in
1996, and contributions by the Company under the Company's 401(k) plan of
$6,171 in 1998, $4,750 in 1997 and $2,925 in 1996.
(9) Consists of the payment by the Company of premiums under the Company's
group term life insurance plan of $400 in 1998 and $398 in 1997, and
contributions by the Company under the Company's 401(k) plan of $6,029 in
1998, $3,294 in 1997 and $4,750 in 1996.
Stock Options
Prior to the completion of the Company's initial public offering, the
Company's stockholders approved the Long Term Incentive Plan (the "Incentive
Plan"), which provides for grants to the Company's executive officers of
restricted stock, stock options, stock appreciation rights and deferred stock
awards. The Incentive Plan is administered by the Compensation Committee of the
Board of Directors. The Company's stockholders approved certain amendments to
the Incentive Plan, effective May 16, 1995, including an amendment to increase
the shares of the Company's common stock available for awards under the
Incentive Plan from 1,091,400 shares to 2,221,998 shares.
58
<PAGE>
The following table reflects certain information concerning grants of
options to purchase the Company's common stock that were made by the Company
during 1998 to the executive officers of the Company named in the Summary
Compensation Table above.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential
Realizable
Pre-Tax Value
at Assumed Annual
Rates of Stock Price
Appreciation
Individual Grants for Option Term
------------------------------------------------ --------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees Price Expiration
Name Granted(#)(1) In Fiscal Year ($/Sh) Date 5% ($)(2) 10% ($)(2)
---- ------------- -------------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert Y. Huffman....... -0- N/A N/A N/A N/A N/A
Norman W. Gayle, III.... -0- N/A N/A N/A N/A N/A
James E. Tait........... 45,000 58% 9.56 8-26-08 270,165 685,628
Donald W. Thornton...... -0- N/A N/A N/A N/A N/A
Charles M. Angell....... 10,000 13% 9.56 8-26-08 60,037 152,362
Brian R. Meredith....... -0- N/A N/A N/A N/A N/A
</TABLE>
- --------
(1) All options granted during 1998 are non-qualified stock options which have
a ten year term, and all such options have an exercise price equal to the
closing price of the Company's common stock on the grant date. These
options were granted pursuant to the Incentive Plan and become exercisable
with respect to 50% of the shares two years after the grant date and with
respect to the remaining 50% of the shares three years after the grant
date.
(2) The dollar amounts shown are based on certain assumed rates of appreciation
and the assumption that the options will not be exercised until the end of
the expiration periods applicable to the options. Actual realizable values,
if any, on stock option exercises and common stock holdings are dependent
on the future performance of the Company's common stock and overall stock
market conditions. There can be no assurance that the amounts reflected
will be achieved.
The following table presents certain information with respect to the
value of options held by the executive officers of the Company named in the
Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of unexercised
Number of unexercised in-the-money options
Value options at year-end(#) at fiscal year-end ($)
Shares acquired Realized ------------------------- -------------------------
Name on exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert Y. Huffman....... 202,230 776,989 -0- -0- -0- -0-
Norman W. Gayle, III.... -0- -0- 27,288 68,776 -0- -0-
James E. Tait........... -0- -0- -0- 45,000 -0- -0-
Donald W. Thornton...... -0- -0- 105,148 41,809 -0- -0-
Charles M. Angell....... -0- -0- -0- 10,000 -0- -0-
Brian R. Meredith....... -0- -0- 33,237 -0- -0- -0-
</TABLE>
Employment Agreements.
The Company has entered into employment agreements with Norman W. Gayle III,
James E. Tait and Donald W. Thornton (the "Executives"), each dated as of
September 30, 1999. Under these employment agreements, the Executives will
continue to serve in their current capacities, for which they will receive a
base
59
<PAGE>
salary subject to annual adjustment, and may receive additional amounts as
bonus compensation in accordance with the Company's regular compensation
practices. The agreements also provide that each of the Executives shall
participate in the "Executive Officer Incentive Compensation Plan" (described
below) and are entitled to receive other perquisites, including a car allowance
and country club or dining club dues.
If the Company terminates an Executive's employment without "cause" (as
defined in the agreement), or if the Executive terminates his employment for
"good reason" following a "change of control" (as those terms are defined in
the agreements), the Executive shall be entitled to receive the equivalent of
three years' salary and bonus (in lump sum or in thirty six monthly
installments), continued health benefits until the age of 65 and immediate
vesting or lapse of restrictions of any stock options or shares of restricted
stock awarded to him.
The term of each of the agreements is three years, and the agreements will
be automatically extended for one year on each anniversary of their effective
date, unless written notice of non-extension is provided by the Company or the
Executive at least ninety (90) days prior to such an anniversary date.
Executive Officer Incentive Compensation Plan
The Company established the Executive Officer Incentive Compensation Plan to
motivate the Executives by providing them with the opportunity to earn a one-
time cash bonus based on the increase in the Company's market capitalization
measured over a three year period. The Executives may elect additional
executive officers to participate in the plan by unanimous written consent.
Under the plan, the Company shall pay to the participants in the plan, in the
aggregate, a one-time cash bonus equal to five percent (5%) of the amount by
which the Company's total market capitalization (as defined in the plan) on the
earlier of (i) September 29, 2002 or (ii) the date the Company ceases to be
publicly traded exceeds the Company's total market capitalization on September
29, 1999. As of September 29, 1999, the participants in the plan were Messrs.
Gayle (allocable share--40%), Tait (allocable share--40%) and Thornton
(allocable share--20%).
Post Retirement Benefits Plan
The Company's employees are technically employed by J. Gordon Gaines, Inc.,
an administrative subsidiary. The J. Gordon Gaines, Inc. Post Retirement
Benefits Plan (the "Retirement Plan") is an unfunded deferred compensation plan
for officers and other key employees of J. Gordon Gaines, Inc. The Retirement
Plan is administered by the Executive Committee of J. Gordon Gaines, Inc., and
the Executive Committee is authorized to determine eligibility for
participation in the Retirement Plan. Under the Retirement Plan, upon normal
retirement, which is defined for purposes of the Retirement Plan as retirement
for participants who either are age 65 or older or who have completed not less
than 20 years of continuous service, a participant will be entitled to receive
an amount equal to twice the participant's current annual base salary. Upon
early retirement, which is defined for purposes of the Retirement Plan as
retirement by those between the ages of 60 and 65 who have completed not less
than ten years of service with the Company and its affiliates, a participant
will be entitled to receive the amount which has been accrued as a liability on
the Company's balance sheet as of the most recent fiscal year with respect to
such participant.
To qualify for benefits under the Retirement Plan, a participant must
continue as an employee until age 60 or have completed not less than 20 years
of continuous service. No benefits will be paid if employment is terminated
earlier, regardless of the reason, except if a participant's employment is
terminated by the Company for reasons other than "cause" or by the participant
for a "stated good reason" within two years after a
60
<PAGE>
"change of control" of the Company (as those terms are defined in the
Retirement Plan). In that case, the participant will be entitled to receive the
amount which has been accrued as a liability on the Company's balance sheet as
of the most recent fiscal year with respect to such participant. In addition,
if there is a change of control during the period in which a participant would
be eligible for early retirement under the Retirement Plan, any benefits
payable to such participant under the Retirement Plan upon early retirement
will become fully vested.
Each year the Company records as a liability on its balance sheet an amount
(based on an established formula) which will be sufficient, together with
amounts recorded as a liability for previous years, to cover the payment of the
projected benefit amounts for each participant upon such participant's normal
retirement. As of December 31, 1998, the Company had recorded a total of
$1,392,741 as a liability on its balance sheet to cover projected benefits
under the Retirement Plan. Assuming Messrs. Gayle, Tait, Thornton, Angell and
Meredith retire from the Company after reaching normal retirement age and
assuming their salary levels remain the same for the remainder of the period
until their normal retirement date, or their 1998 salaries, they will be
entitled under the Retirement Plan to receive $860,000, $1,050,000, $460,000,
$410,000 and $400,000, respectively, upon their retirement. Mr. Huffman's
resignation on May 31, 1998, did not entitle him to any benefits under the
Retirement Plan.
Payments to Directors
For 1998, directors who are not executive officers or employees of the
Company received an annual retainer fee of $28,000, payable in equal quarterly
installments. They did not receive fees for the execution of written consents
in lieu of board meetings and attending board or committee meetings. Directors
also receive an allowance for their travel and lodging expenses if they do not
live in the area where the meeting is held.
At the annual meeting of stockholders of the Company held on May 16, 1995,
the stockholders approved the Company's Non-Employee Director Stock Plan (the
"Director Plan"). Under the Director Plan, on the first trading day of each
calendar year, each non-employee director is granted a nonqualified stock
option to purchase 3,000 shares of the Company's common stock at a purchase
price equal to the fair market value per share of the common stock on such
grant date. Each option granted under the Director Plan is exercisable for a
period of ten years beginning on the date of its grant. An option may not be
exercised during the first six months after grant, except in the event of the
death or disability of the director. An aggregate of 180,000 shares of Company
common stock is reserved for issuance under the Director Plan, subject to
adjustment for changes in the Company's capital structure.
In addition, the Director Plan provides that each eligible director may
elect, pursuant to an advance written election, to receive shares of the
Company's common stock ("Restricted Stock") in lieu of part or all of such
director's annual director fee. The number of shares of Restricted Stock which
an eligible director will be entitled to receive will be equal to the dollar
amount of director fees which such director has elected not to receive, divided
by seventy-five percent (75%) of the fair market value of the Company's common
stock on the date on which such fees would otherwise become payable. Shares of
Restricted Stock may not be sold, transferred, pledged or assigned for a period
of two years following the effective date of the issuance thereof. Directors
electing to receive Restricted Stock will be entitled, with respect to such
shares, to all rights of a stockholder, including the right to vote and to
receive dividends on the shares. However, certificates for the shares of
Restricted Stock shall be delivered only after the period of forfeiture has
expired. For 1998, all eligible directors elected to receive Restricted Stock
in lieu of all of their annual director fee.
Indebtedness of Directors, Nominees and Executive Officers
On September 13, 1993, the Company entered into separate restricted stock
agreements with each of the executive officers of the Company pursuant to which
it sold to such executive officers at total of 153,500 shares of Common Stock.
Pursuant to these restricted stock agreements, Messrs. Huffman and Thornton
purchased 45,993 shares and 14,307 shares, respectively, for a purchase price
of $10.26 per share. On July 18, 1994, the
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<PAGE>
Company entered into a restricted stock agreement with Mr. Gayle pursuant to
which it sold to Mr. Gayle 60,000 shares of Common Stock (together with shares
sold to the other executive officers, the "Restricted Shares") for a purchase
price of $18.92 per share. Each of these executive officers has executed a
promissory note in favor of the Company representing the obligation to repay a
loan from the Company for the purchase price of each of their Restricted
Shares, and the Restricted Shares are being held by the Company as security for
the repayment of such promissory notes. The largest aggregate amount of
indebtedness under the loans to each of Messrs. Gayle and Thornton during 1998
was $784,683 and $85,935, respectively, and the outstanding balance under these
loans as of December 31, 1998, was $664,464 and $69,560, respectively. The
promissory notes have a term of nine years and bear interest at a rate of 5.22%
per annum. All dividends payable on the Restricted Shares have been assigned to
the Company to be applied toward the repayment of the promissory notes.
The Company intends to pay cash bonuses each year in amounts sufficient,
after the payment of taxes due with respect to such bonus, to reduce the
promissory notes by the amount of the purchase price for the Restricted Shares
which vests in that year, so long as the executive officer remains in the
employ of the Company. The Restricted Shares may not be sold or otherwise
disposed of by the executive officers prior to the repayment in full of their
promissory note or the termination of their employment. In 1998, the Company
paid bonuses to reduce the amount of indebtedness of the executive officers to
the Company in the following amounts: to Mr. Huffman in the amount of $65,725;
to Mr. Gayle in the amount of $181,022; and to Mr. Thornton in the amount of
$40,610.
Report of the Compensation Committee
The Compensation Committee is comprised of three non-employee directors. The
primary function of the Compensation Committee is to make recommendations and
reports to the Board of Directors with respect to salaries, bonuses and other
compensation to be paid to the Company's officers with a base salary of more
than $150,000 annually and to administer all plans relating to the compensation
of such officers.
The Company's total compensation structure is comprised of annual base
salary, annual cash bonus payments under the Company's Cash Bonus Plan and long
term equity based compensation granted pursuant to the Incentive Plan. The
Company's overall compensation program has been designed to attract and retain
key executives and to provide appropriate incentives to these executives to
maximize the Company's long term financial results for the benefit of the
stockholders. A significant portion of the executive compensation package is
comprised of equity based compensation in order to align the interests of
management with those of the stockholders. Individual compensation levels are
based not only upon the relative success of the Company but also upon the
duties and responsibilities assumed by each officer, the performance of their
individual business units, their attainment of individual and business unit
goals and their participation and contribution to specific Company projects.
The salary levels for the Company's executive officers for 1998, including
the salaries of Mr. Huffman and Mr. Gayle as Chief Executive Officer of the
Company, were based upon the salary levels paid by other similarly situated
property and casualty insurance and Reinsurance companies, as well as upon
individual performance and responsibility. According to a compensation survey
performed by a third party consultant engaged on behalf of the Compensation
Committee, the base salary levels approved by the Compensation Committee are
comparable with the average salary levels of similarly situated property and
casualty insurers and reinsurers.
The Company's Cash Bonus Plan is designed to provide short-term incentive
compensation to the Company's executive officers based upon pre-established
performance goals for both the Company and each executive officer. Bonuses
under the Cash Bonus Plan are paid out of a bonus fund, the amount of which is
based on a percentage of the Company's net income from operations. The actual
amount to be contributed to the bonus fund each year is based upon the
Company's profitability, which is measured by comparing the Company's GAAP
combined ratio (the generally accepted industry measure) for the year with a
benchmark ratio. The Compensation Committee determines the amounts of annual
bonus awards for each executive officer
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<PAGE>
granted under the Cash Bonus Plan up to 100% of the executive officer's annual
salary. In 1998, the Compensation Committee did not approve the payment of any
cash bonuses to executive officers of the Company under the Cash Bonus Plan.
The Incentive Plan provides for grants to the Company's executive officers
of restricted stock, stock options, stock appreciation rights and deferred
stock awards. The payment of equity based compensation to the Company's
executive officers under the Incentive Plan is designed to focus their
attention on the enhancement of stockholder value.
In 1998, the Company granted options to purchase a total of 77,500 shares of
the Company's Common Stock under the Incentive Plan to 4 employees of the
Company, including grants to Messrs. Tait and Angell of options to purchase
45,000 and 10,000 shares, respectively. In 1998, the Company also granted a
restricted stock award under the Incentive Plan to Mr. Tait, covering 30,000
shares.
The awards granted to the Company's executive officers in 1998 represent the
Compensation Committee's continued emphasis on incentive based compensation and
are intended to provide further incentives to these individuals to sustain the
Company's growth and success and to further align their interests with those of
the Company's stockholders. The size of the awards to individual executive
officers was determined by the Compensation Committee and approved by the Board
of Directors based upon a subjective assessment of each executive officer's
performance and individual contribution to the Company, his position and level
of responsibility and other factors.
The Compensation Committee is aware of the provisions of Section 162(m) of
the Internal Revenue Code and the related regulations of the Internal Revenue
Service ("Section 162(m)") which restrict deductibility of executive
compensation paid to the CEO and the four highest paid executive officers other
than the CEO at the end of any fiscal year to the extent such compensation
exceeds $1,000,000 in any year and does not qualify as performance based
compensation as defined by Section 162(m). The Compensation Committee does not
anticipate that any cash compensation paid to its executive officers in the
foreseeable future will exceed the dollar limitations of such provisions.
Should annual compensation of any executive officer exceed $1,000,000, the
Compensation Committee will evaluate the advisability of structuring such
compensation as qualified performance based compensation within the meaning of
Section 162(m). In this respect, the Compensation Committee believes that any
compensation attributable to the grant of stock options pursuant to the
Incentive Plan, which must be granted with an exercise price at least equal to
the fair market value of the underlying stock on the date of the grant, will be
excepted from the limitations on deductibility imposed by Section 162(m).
By the Compensation Committee
Ehney A. Camp, III
Clifford F. Palmer
Jarvis W. Palmer
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee of the Company's Board of
Directors (the "Compensation Committee") during 1998 were Ehney A. Camp, III,
Clifford F. Palmer, Jarvis W. Palmer and R.K. Richey. No present or former
officer of the Company or its subsidiaries serves as a member of the
Compensation Committee. During 1998, there were no interlocking relationships
between any executive officers of the Company and any entity whose directors or
executive officers serve on the Company's Board of Directors and/or
Compensation Committee.
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<PAGE>
Performance Graph
The following graph compares the cumulative total stockholder return
(including the reinvestment of dividends) on the Common Stock of the Company
with that of the Standard & Poor's 500 Stock Index and the Standard & Poor's
Property/Casualty Index. The comparison for the period assumes that $100 was
invested in each index on December 31, 1993.
[Performance Graph Appears Here]
Certain Relationships and Related Transactions
Jarvis W. Palmer, a director of the Company and a member of the Compensation
Committee whose term expires at the annual meeting, owns ninety-eight percent
(98%) of Birmingham Insurance Co., Inc. ("Birmingham Insurance"). In 1996,
Birmingham Insurance ceded $(66,246) in gross premiums to the Company, for
which the Company paid ceding commissions to Birmingham Insurance of $(20,099).
In 1997 and 1998, Birmingham Insurance did not cede any premiums to or receive
any commissions from the Company.
Mr. Palmer is also a fifty-one percent (51%) owner of the Caribou Insurance
Agency, Inc. ("Caribou"), an independent insurance agency which represents,
among others, one or more of the Company's insurance subsidiaries. Of the gross
premiums written by the Company's insurance subsidiaries in 1996, 1997 and
1998, $399,837, $500,811 and $623,621, respectively, were attributable to
insurance contracts sold by Caribou, for which the Company paid commissions to
Caribou of $74,323, $96,104 and $118,796, respectively.
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<PAGE>
Clifford F. Palmer, a director of the Company and a member of the
Compensation Committee, was the named underwriter for Lloyd's Syndicate 314
during a portion of 1996. In 1996, the Company ceded $1,838,864 of gross
premiums written to Lloyd's Syndicate 314, for which it paid ceding commissions
to the Company of $463,993.
The Company currently leases its offices at 3760 River Run Drive in
Birmingham, Alabama from Torchmark Development Corporation, which, until
September 25, 1999, was a wholly owned subsidiary of Torchmark, pursuant to an
office lease. Under this office lease, the Company currently leases
approximately 115,774 square feet of space. During 1998, the Company paid
$1,155,000 in rent under this office lease, $717,875 in 1997 and $595,916
during 1996.
On September 13, 1993, the Company and Waddell & Reed Asset Management
Company, a subsidiary of Torchmark ("WRAMCO"), entered into an Investment
Services Agreement pursuant to which WRAMCO provides investment advice and
services to the Company and its subsidiaries in connection with the management
of their respective portfolios. WRAMCO receives an annual fee based on the
amount of the Company's average assets under management, as determined by the
following formula: 1/4 of 1% on the first $25 million of the Company's average
assets under management, 1/5 of 1% of the next $25 million, 3/20 of 1% of the
next $150 million, 1/10 of 1% of the next $200 million and 1/20 of 1% in excess
of $400 million. During 1998, the Company paid $578,171 in total fees to WRAMCO
pursuant to the Investment Services Agreement, $393,686 in 1997 and $409,252 in
1996. In March 1998, WRAMCO entered into a sub-advisory agreement with an
unaffiliated investment advisor for the provision of these services for the
Company and its subsidiaries.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned
subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance
Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered
into a Marketing and Administrative Services Agreement, pursuant to which Vesta
Fire markets certain of its industrial fire insurance products through agents
of Liberty National. Under this agreement, Liberty National pays to Vesta Fire
an amount equal to all premiums collected by Liberty National after deducting
all expenses incurred by Liberty National which are directly attributable to
the industrial fire insurance products and after deducting a fee for
administrative services. Such fees were for $619,000 for 1998, $1,353,246 for
1997 and $1,702,000 for 1996. This agreement was terminated effective April 30,
1995, and these products are no longer marketed through Liberty National
agents. However, Liberty National continued to service the existing business
until September of 1998, at which time Vesta Fire assumed the servicing of this
business.
During 1998, the Company engaged Tait Advisory Services, L.L.C., an
affiliate of James E. Tait, to perform advisory services to the Company on
financial and accounting matters, for which the Company paid approximately
$60,500. This engagement terminated upon the appointment of Mr. Tait as
Executive Vice President and Chief Financial Officer of the Company in July of
1998.
James A. Taylor, Sr., a Class A Director, is the Chairman and Chief
Executive Officer of the Banc Corporation and the Chairman of The Bank. Larry
Striplin, also a Class A Director, is a member of the board of directors of the
Banc Corporation. Effective September 30, 1999, the Company established secured
revolving credit facilities (the "Credit Facilities") in the aggregate amount
of $20,000,000 with The Banc Corporation and its banking subsidiary The Bank.
The interest rate on principal amount outstanding under the $15,000,000 loan
from The Bank will not exceed 2% over rate earned on the certificate of deposit
referenced above; provided a higher default rate may apply. The interest rate
on principal amounts outstanding on the $5,000,000 loan from the Banc
Corporation will not exceed The Bank's prime rate. See, "Management's
Discussion and Analysis--Liquidity."
During 1996, 1997 and 1998, the law firm of Balch & Bingham LLP, of which
Walter M. Beale, Jr., a director of the Company, is a partner, rendered various
legal services to the Company and certain of its subsidiaries.
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<PAGE>
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
During 1998, the Board of Directors of the Company adopted a resolution
authorizing the Chairman of the Audit Committee, in his discretion, (i) to
dismiss KPMG Peat Marwick LLP ("KPMG") as the Company's independent
accountants, effective upon management's notification of KPMG of such dismissal
and (ii) concurrently with such dismissal, to engage PricewaterhouseCoopers LLP
("PwC") as the Company's independent accountants for the fiscal year ending
December 31, 1998.
On December 18, 1998, the Company notified KPMG of the dismissal. Also on
December 18, 1998, the Company engaged PwC as the Company's independent
accountants, subject to PwC's normal client acceptance procedures. This process
was completed and PwC's engagement commenced on January 26, 1999. During the
two most recent fiscal years, and during the subsequent interim period
preceding the decision to change independent accountants, neither the Company
nor anyone on its behalf consulted PwC regarding either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements, and neither a written report nor oral advice was provided to the
Company by PwC with respect to any such consultation.
KPMG audited the Company's annual consolidated financial statements as of
and for each of the fiscal years ended December 31, 1993, 1994, 1995, 1996 and
1997 (the "Historical Financial Statements"). KPMG's auditors reports on these
Historical Financial Statements did not contain any adverse opinion or
disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. However, in connection with the Company's
decision to restate the Historical Financial Statements in June, 1998, KPMG
advised the Company that it could no longer be associated with these Historical
Financial Statements. The Company subsequently issued restated financial
statements as of and for the fiscal years ended December 31, 1996 and 1997 (the
"Restated Financial Statements"), which were filed with the Securities and
Exchange Commission as a current report on Form 8-K on August 20, 1998. KPMG
issued an auditors report on the Restated Financial Statements which did not
contain any adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
By a current report on Form 8-K filed on December 28, 1998, in connection
with KPMG's dismissal, the Company reported that during the Company's two most
recent fiscal years, and in the subsequent interim period, there had been no
disagreements between the Company's management and KPMG on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of KPMG, would
have caused KPMG to make reference to the matter in an auditor's report.
However, KPMG subsequently clarified its view that certain issues regarding the
financial presentation set forth in the Company's Form 10-Q filed with the
Securities and Exchange Commission on November 16, 1998, constituted reportable
disagreements. Accordingly, the Company amended its Form 8-K on January 12,
1999, to reflect these unresolved issues as reportable disagreements and filed
copies of letters from KPMG summarizing these unresolved issues as Exhibits
16.1 and 16.2 to that amendment. The Audit Committee discussed these matters
with KPMG and authorized KPMG to respond fully to the inquiries of PwC
concerning these matters. The Company did not consult PwC, prior to its
engagement as the Company's successor auditors, regarding such matters.
As noted above, KPMG audited the Company's consolidated financial statements
for the period ended December 31, 1997, which audit was completed March 27,
1998, except as to Note B, which is as of August 19, 1998. By letter dated
December 3, 1998, KPMG informed the Audit Committee of the Company's Board of
Directors that, in connection with said audit and their reviews of the 1998
quarterly financial statements, it had noted certain matters involving internal
controls that it considered to be reportable conditions under applicable
auditors' reporting standards.
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<PAGE>
LARGEST SINGLE AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by the selling stockholder. Torchmark
is the only person known to be the beneficial owner of more than five percent
of the Company's outstanding Common Stock as of December 31, 1998.
<TABLE>
<CAPTION>
Beneficial Number of
Ownership Prior to Shares Beneficial Ownership
Offering Offered After the Offering
------------------ --------- ---------------------
Number of Percent Number Percent
Name and Address Shares of Class of Shares of Class
- ---------------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Torchmark Corporation......... 5,130,000 27.46% 5,130,000 -0- -0-
2001 Third Avenue South
Birmingham, Alabama 35233
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
Vesta's authorized capital stock consists of 100,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock") and 5,000,000 shares of
preferred stock (the "Preferred Stock"). At the close of business on August 5,
1999, there were 18,676,335 shares of Common Stock outstanding.
Common Stock
The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by
the Vesta Board with respect to any series of Preferred Stock, the holders of
such shares will possess exclusive voting power. The Certificate of
Incorporation of Vesta (the "Vesta Certificate") does not provide for
cumulative voting in the election of directors. Subject to any preferential
rights of any outstanding series of Preferred Stock created by the Vesta Board
from time to time, the holders of Common Stock will be entitled to such
dividends as may be declared from time to time by the Vesta Board from funds
available therefor, and upon liquidation will be entitled to receive pro rata
all assets of Vesta available for distribution to such holders.
Preferred Stock
The Vesta Certificate authorizes the Vesta Board to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which
number the Vesta Board may thereafter (except where otherwise provided in the
applicable certificate of designation) increase or decrease (but not below the
number of shares thereof then outstanding), (iii) whether dividends, if any,
will be cumulative or noncumulative, the preference or relation which such
dividend, if any, will bear to the dividends payable on any other class or
classes of any other series of capital stock, and the dividend rate of the
series, (iv) the conditions and dates upon which dividends, if any, will be
payable, (v) the redemption rights and price or prices, if any, for shares of
the series, (vi) the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series, (vii) the amounts payable on
and the preference, if any, of shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of Vesta, (viii) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security,
of Vesta 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 as of 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 the shares of the
series, and (xi) any other relative rights, preferences and limitations of such
series.
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Vesta believes that the ability of Vesta's Board to issue one or more series
of Preferred Stock will provide Vesta with flexibility in structuring possible
future financings and acquisitions, and in meeting other corporate needs which
might arise. The authorized shares of Preferred Stock, as well as shares of
Common Stock, will be available for issuance without further action by Vesta's
shareholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which Vesta's securities
may be listed or traded. The NYSE currently requires shareholder approval as a
prerequisite to listing shares in several instances, including where the
present or potential issuance of shares could result in an increase in the
number of shares of Common Stock, or in the amount of voting securities,
outstanding of at least 20%. If the approval of Vesta's stockholders is not
required for the issuance of shares of Preferred Stock or Common Stock, the
Board may determine not to seek stockholder approval.
On September 30, 1999, the Company issued 2,950,000 shares of its Series A
Convertible Preferred Stock (the "Class A Preferred Stock") to the Birmingham
Investment Group, LLC. See, "Recent Developments" and "Management's Discussion
and Analysis--Liquidity." The following summarizes certain terms of the Class A
Preferred Stock.
Dividends. Dividends shall accrue on the Class A Preferred Stock at the rate
of 9% per annum and will be payable semi-annually in arrears on each January 1
and July 1, beginning January 1, 2000. If any dividend on the Class A Preferred
Stock shall for any reason not be paid at the time such dividend becomes due,
then dividends shall continue to accrue on the Class A Preferred Stock on a
cumulative basis. In the event that any dividends remain accrued but unpaid at
the time of any conversion of any of the Class A Preferred Stock (as described
herein and set forth in the Certificate of Designations), such accrued but
unpaid dividends shall remain payable, notwithstanding such conversion.
The holders of the Class A Preferred Stock will not be paid any dividends
until such time as the Company resumes the payment of interest on its
deferrable debentures issued to Vesta Capital Trust I, a finance subsidiary
formed in 1997 for the purpose of issuing and selling $100,000,000 of its
Capital (sometimes called "trust preferred") Securities. The Company has
deferred the payment of interest on such debentures until January 15, 2000 and,
under the relevant trust documents, has the right to further defer such
payments for a period of up to ten years. Until the Company resumes the payment
of such interest, dividends on the Class A Preferred Stock will continue to
accrue on a cumulative basis.
General Voting Rights. The holder of each share of Class A Preferred Stock
shall have the right to cast one vote for each share of common stock issuable
on conversion, or two votes per share of Class A Preferred Stock (subject to
adjustment as described herein). Based on the number of shares of Common Stock
outstanding as of August 5, 1999 (18,676,335, each of which is entitled to cast
one vote), the total number of votes which could be cast generally would be
24,576,335, of which 5,900,000, or approximately 24%, could be cast by the
holders of the Class A Preferred Stock. In connection with these general voting
rights, the Class A Preferred Stock will vote with the common stock as a single
class, and the holders of the Class A Preferred Stock shall have full voting
rights and powers equal to the voting rights and powers of the holders of
common stock.
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Special Voting Rights--Class A Directors. The Class A Preferred Stock,
voting as a separate class, shall have the right to elect a certain number of
directors of the Company (the "Class A Directors"), depending upon the size of
the full board of directors and the number of shares of Class A Preferred Stock
outstanding. The following table indicates the number of Class A Directors
which the holders of the Class A Preferred Stock will be entitled to elect:
<TABLE>
<CAPTION>
# of Shares of Number of
Preferred Outstanding Size of Full Board Class A Directors
--------------------- -------------------- --------------------
<S> <C> <C>
More than 1,976,500 7 or less 2
8-10 3
11-12 4
Between 973,000 and 1,976,500 7 or less 1
8-10 2
11-12 3
Less than 973,000 No Class A Directors No Class A Directors
</TABLE>
Upon issuance of the Class A Preferred Stock, the holders of such Class A
Preferred Stock will elect the Class A Directors to serve for an initial term
expiring at the annual meeting of the Company's stockholders to be held in
2002. After the 2002 annual meeting, the Class A Directors shall be divided
into three classes and shall be elected to serve staggered terms of three
years, with each class term expiring every three years. The holders of the
common stock will not have the right to vote for or to remove the Class A
Directors.
The Class A Directors elected by the holders of the Class A Preferred Stock
shall be represented proportionately (but shall not be less than one) on all
committees of the Company's board of directors, other than any committee
created for the special purpose of negotiating with the holders of the Class A
Preferred Stock or affiliates thereof.
Redemption. On or after July 1, 2009, the Company shall have the right, at
its option and by resolution of its Board of Directors, at any time it may
lawfully do so, to redeem all or any portion of the outstanding shares of the
Class A Preferred Stock. Each share of Class A Preferred Stock to be so
redeemed shall be redeemed against payment of an amount in cash equal to the
following redemption prices per share (expressed as a percentage of the initial
purchase price of $8.50 per share), plus, in each case, all declared and unpaid
dividends thereon to the date fixed for redemption (the "Redemption Price"):
If redeemed during the twelve-month period beginning July 1:
<TABLE>
<S> <C>
2009.................................... 110%
2010.................................... 108%
2011.................................... 106%
2012.................................... 104%
2013.................................... 102%
</TABLE>
In the event the Company elects to redeem all or any portion of the Class A
Preferred Stock for cash, the holders of the Class A Preferred Stock may, at
their option, convert each share of their Class A Preferred Stock into two
shares of the Company's common stock (subject to adjustment as described herein
and as set forth in the Certificate of Designations) in lieu of such
redemption.
Optional Conversion. The holders of the Class A Preferred Stock will have
the right, at any time, to convert each share of Class A Preferred Stock held
into two shares of the Company's common stock, subject to adjustment as
described below under the heading "Conversion Price".
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Mandatory Conversion. Each share of the Class A Preferred Stock shall
automatically be converted into two shares of the Company's common stock,
subject to adjustment as described below under the heading "Conversion Price"
and as more fully set forth in the Certificate of Designations, on the earlier
of (a) the date on which the average closing price of Company's common stock
for twenty consecutive trading days is $8.00 or greater or (b) fifteen years
from the date of issuance of the Class A Preferred Stock. If, in the future,
the Company declares a stock split (including a reverse split), a dividend
payable in common stock or any other distribution of securities to the holders
of the Company's common stock with respect to their common stock, then the
closing price of $8.00 per share referred to in clause (a) of the preceding
sentence shall be appropriately adjusted to reflect such stock split, dividend
or other distribution of securities.
Conversion Price. Each share of the Class A Preferred Stock will be
convertible into the number of shares of the Company's common stock which
results from dividing the "Conversion Price" in effect at the time of
conversion into $8.50. The initial "Conversion Price" is $4.25, which divided
into $8.50 results in 2 shares of common stock. However, this Conversion Price
will be adjusted automatically in any of the following events:
. the Company issues any common stock (or options, rights, warrants or
other securities convertible into or exchangeable for shares of common
stock) at a price per share less than the Conversion Price in effect on
the date of issuance;
. the Company (i) declares a stock dividend or other distribution on its
common stock in shares of its common stock, (ii) subdivides or
reclassifies the outstanding shares of its common stock into a greater
number of shares, or (iii) combines or reclassifies the outstanding
shares of its common stock into a smaller number of shares; or
. the Company distributes to all holders of shares of its common stock (i)
any equity security other than common stock, (ii) any debt instruments
(including debt of its subsidiaries), (iii) any other assets (excluding
cash dividends or distributions in shares of its common stock) or (iv)
other rights or warrants (excluding options, rights, warrants or other
securities convertible into or exchangeable for shares of common stock).
Consolidation, Merger, Sale, Lease or Conveyance. If the Company
consolidates with or merges with or into another corporation, or sells, leases
or conveys its assets or property as an entirety or substantially as an
entirety to another corporation, then each share of Class A Preferred Stock
shall thereafter be convertible into the number of shares of stock or other
securities or property (including cash) which the common stock issuable (at the
time of such consolidation, merger, sale, lease or conveyance) upon conversion
of such Class A Preferred Stock would have been entitled upon such
consolidation, merger, sale, lease or conveyance. If necessary, the provisions
set forth in the Certificate of Designations shall be appropriately adjusted so
as to be applicable, as nearly as may reasonably be, to any shares of stock or
other securities or property thereafter deliverable on the conversion of the
shares of Class A Preferred Stock.
Preference on Liquidation. In the event of any liquidation, dissolution,
involuntary or voluntary corporate reorganization under the federal bankruptcy
laws or similar state laws, or winding up of the Company, the holders of the
Class A Preferred Stock then outstanding shall be senior to any other class or
series of capital stock of the Company. Accordingly, the holders of the Class A
Preferred Stock shall be entitled to be paid out of the assets and surplus
funds of the Company available for distribution to its shareholders, and before
any payment shall be made to the holders of any shares of the Company's common
stock, an amount equal to $8.50 per share plus declared and unpaid dividends
thereon to the date fixed for distribution.
Call For Special Meeting. As long as more than 973,500 shares of Class A
Preferred Stock remain outstanding, the Class A Preferred Stock, voting as a
separate class, shall have the right to call special stockholders' meetings
upon the minimum notice required by applicable law or regulation.
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<PAGE>
Right To Approve Certain Transactions. Without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of the Class A Preferred Stock, voting
together as a separate class, the Company may not:
. sell, convey or otherwise dispose of all or substantially all of its
property or business, if such transaction would adversely affect the
rights of the holders of the Class A Preferred Stock;
. merge into or consolidate with any other corporation (other than a
wholly owned subsidiary of the Company) or effect any transaction or
series of related transactions in which more than fifty percent (50%) of
the voting power of the Company is disposed of, if such transaction
would adversely affect the rights of the holders of the Class A
Preferred Stock;
. alter or change the rights, preferences or privileges of the Class A
Preferred Stock as to adversely affect such series;
. increase the authorized number of shares of Class A Preferred Stock; or
. create any new class or series of stock having rights, preferences or
privileges superior to the Class A Preferred Stock.
Right To Nominate Directors, Generally. In addition to the right to elect
Class A Directors, the holders of the Class A Preferred Stock, acting through
the Class A Directors, will have the right to nominate additional directors for
general election, if the Class A Directors' proportionate representation on the
full board of directors is less than the proportionate number of votes which
the holders of the Class A Preferred Stock may cast in a general election of
directors (including the votes which may be cast by holders of the Class A
Preferred Stock, the Company's Common Stock and any other voting securities of
the Company). In such a circumstance, the holders of the Class A Preferred
Stock will be entitled to nominate a number of nominees which, when added to
the number of Class A Directors and assuming their election, would make their
proportionate representation on the full board of directors equal to or greater
than the proportionate number of votes which the holders of the Class A
Preferred Stock may cast in a general election of directors. The number of
nominees which the holders of the Class A Preferred Stock are entitled to
nominate under this clause shall increase proportionately upon any increase in
the percentage of the total number of votes which the holders of the Class A
Preferred Stock may cast in a general election of directors. The Board of
Directors shall exercise all authority under applicable law to cause the Class
A Director Nominees to be elected as directors of the Company.
The Vesta Board could issue additional series of Preferred Stock that,
depending on the terms of such series, could impede the completion of a merger,
tender offer or other takeover attempt. The Vesta Board will make any
determination to issue such shares based on its judgment as to the best
interests of Vesta and its stockholders. The Vesta Board, in so acting, could
issue Preferred Stock having terms that could discourage an acquisition attempt
through which an acquiror may be able to change the composition of the Vesta
Board, including a tender offer or other transaction that some, or a majority,
of Vesta's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
Antitakeover Effects of Provisions of the Certificate and Bylaws
Board of Directors. The Vesta Certificate and Bylaws provide that Vesta's
Board will be divided into three classes of directors, each class to be as
nearly equal in number as possible. The term of office of one class of
directors expires each year in rotation so that one class is elected at each
annual meeting of shareholders for a full three-year term. The Bylaws provide
for not less than two nor more than twelve directors with the exact number of
directors fixed by a majority of the total number of directors which Vesta
would have if there were no vacancies. The Bylaws provide that a vacancy on
Vesta's board and any newly created directorships resulting from any increase
in the authorized number of directors may be filled for the full term or any
remainder of a full term by an affirmative vote of a majority of directors
remaining in office, even though less
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<PAGE>
than a quorum. The Vesta Certificate provides that a director may be removed
only for cause and only by affirmative vote of the holders of at least 80
percent of the voting power of the then outstanding stock of Vesta.
These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of Vesta's board by filling the
vacancies created by removal with its own nominees unless such third party
controls at least 80 percent of the combined voting power of the voting stock
of Vesta. Under the classified board provisions described above, it would take
at least two elections of directors for any individual or group to gain control
of Vesta's board. Accordingly, these provisions would tend to deter unfriendly
takeovers.
Stockholder Action. Vesta's Bylaws provide that stockholder action may be
taken only at an annual meeting or at a special meeting of stockholders called
by the Chairman of the Board or by Vesta's Board pursuant to a resolution
adopted by a majority of the total number of directors which Vesta would have
if there were no vacancies. Stockholders are not permitted to call a special
meeting of stockholders or to require that Vesta's Board call such a special
meeting. This may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by
Vesta's Board or by the Chairman of the Board.
Rights Issuances. The Vesta Certificate authorizes the Vesta Board 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 Vesta shares of stock or other securities of Vesta or any
other corporation. The times at which and the terms upon which such rights can
be issued may be determined by the Vesta Board and set forth in the contracts
or instruments that evidence such rights. The authority of the Vesta Board with
respect to such rights includes, but is not limited to, determination of (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 Vesta, (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 Vesta, a change in ownership of Vesta's stock or other Securities or a
reorganization, merger, consolidation, sale of assets or other occurrence
relating to Vesta or any stock of Vesta, and provisions restricting the ability
of Vesta to enter into any such transaction absent an assumption by the other
party or parties thereto of the obligations of Vesta under such rights, (d)
provisions which deny the holder of a specified percentage of the outstanding
stock or other securities of Vesta the right to exercise such rights and/or
cause the rights held by such holder to become void, and (e) provisions which
permit Vests to redeem or exchange such rights, which redemption or exchange
may be within the sole discretion of the Vesta Board.
Such rights could, under certain circumstances, 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 Vesta, to engage
in any transaction which might result in a change of control of Vesta 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 Vesta. The Vesta Board will make any
determination to issue such rights based on its judgment as to the best
interests of Vesta and its shareholders. The Vesta Board, in so acting, could
issue rights having terms that could discourage an acquisition attempt through
which an acquiror may be able to change the composition of the Vesta Board,
including a tender offer or other transaction that some, or a majority, of
Vesta's shareholders might believe to be in their best interests or in which
shareholders might receive a premium for their stock over the then current
market price of such stock.
Advance Notice Procedures. The Bylaws establish an advance notice procedure
for stockholders to make nominations of candidates for election as directors or
to bring other business before an annual meeting of stockholders of the Company
(the "Stockholder Notice Procedure"). The Stockholder Notice Procedure provides
that only persons who are nominated by, or at the direction of, the Chairman or
the Company's Board,
72
<PAGE>
or by a stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. The Stockholder Notice
Procedure also provides that at an annual meeting only such business may be
conducted as has been brought before the meeting by, or at the direction of,
the Chairman or the Company's Board or by a stockholder who has given timely
written notice to the Secretary of the Company of such stockholder's intention
to bring such business before such meeting. Under the Stockholder Notice
Procedure, for notice of stockholder nomination to be made at an annual meeting
to be timely, such notice must be received by Vesta not less than 70 days nor
more than 90 days prior to the first anniversary of the previous year's annual
meeting (or if the date of the annual meeting is advanced by more than 20 days
or delayed by more than 70 days from such anniversary date, not earlier than
the 90th day prior to such meeting and not later than the later of (x) the 70th
day prior to such meeting and (y) the 10th day after public announcement of the
date of such meeting is first made). Notwithstanding the foregoing, in the
event that the number of directors to be elected is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Company at least 80 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice will be timely, but only with respect to nominees for any
new positions created by such increase, if it is received by the Company not
later than the 10th day after such public announcement is first made by the
Company. Under the Stockholder Notice Procedure, for notice of a stockholder
nomination to be made at a special meeting at which directors are to be elected
to be timely, such notice must be received by the Company not earlier than the
90th day before such meeting and not later than the later of (x) the 70th day
prior to such meeting and (y) the 10th day after the public announcement of the
date of such meeting is first made. In addition, under the Stockholder Notice
Procedure, a stockholder's notice to the Company proposing to nominate a person
for election as a director or relating to the conduct of business other than
the nomination of directors must contain certain specified information. If the
chairman of a meeting determines that a person was not nominated, or other
business was not brought before the meeting, in accordance with the Stockholder
Notice Procedure, such person will not be eligible for election as a director,
or such business will not be conducted at such meeting, as the case may be.
Amendment. The Vesta Certificate provided that the affirmative vote of the
holders of at least 80% of the voting power of the outstanding shares of voting
stock, voting together as a single class, is required to amend provisions of
the Vesta Certificate relating to the prohibition of stockholder action without
a meeting; the number, election, term and removal of Vesta's directors; and the
creation and issuance of rights entitling the holders thereof to purchase from
Vesta shares of stock or other securities. The Vesta Certificate further
provides that the bylaws may be amended by Vesta's board or by the affirmative
vote of the holders of at least 80% of the voting power of the outstanding
shares of voting stock, voting together as a single class.
Antitakeover Legislation
Section 203 of the Delaware General Corporation Law, as amended ("Section
203") provides that, subject to certain exceptions specified therein, an
"interested stockholder" of a Delaware corporation shall not engage in any
business combination, including mergers or consolidations or acquisitions of
additional shares of the corporation, with the corporation for a three-year
period following the date that such stockholder becomes an "interested
stockholder" unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an "interested stockholder," (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iii) on or subsequent to such date,
the business combination is approved by the board of directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66 2/3% of the outstanding voting stock which
is not owned by the "interested stockholder." Except as otherwise specified in
Section 203, an "interested stockholder" is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately
73
<PAGE>
prior to the relevant date and (y) the affiliates and associates of any such
person. Torchmark will not be subject to the limitations of Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Vesta Certificate does not exclude Vesta from the restrictions
imposed under Section 203. The provisions of Section 203 may encourage
companies interested in acquiring Vesta to negotiate in advance with the Vesta
Board since the stockholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction which results in the shareholder becoming an interested
shareholder. Such provisions also may have the effect of preventing changes in
the management of Vesta. It is possible that such provisions could make it more
difficult to accomplish transactions which Stockholders may otherwise deem to
be in their best interests.
Insurance Regulation Concerning Change of Control
Many state insurance regulatory laws intended primarily for the protection
of policyholders contain provisions that require advance approval by state
agencies of any change in control of an insurance company or insurance holding
company that is domiciled (or, in some cases, having such substantial business
that it is deemed commercially domiciled) in that state. In addition, many
state insurance regulatory laws contain provisions that require pre-
notification to state agencies of a change in control of a non-domestic
admitted insurance company in that state. While such pre-notification statutes
do not authorize the state agency to disapprove the change of control, such
statutes do authorize issuance of a cease and desist order with respect to the
nondomestic admitted insurer if certain conditions exist such as undue market
concentration. Any future transactions that would constitute a change in
control of Vesta would generally require prior approval by the State insurance
departments of Alabama, Texas, Ohio, Indiana and Hawaii and would require the
preacquisition notification in those states which have adopted preacquisition
notification provisions and wherein the Company's subsidiaries are admitted to
transact business. Such requirements may deter, delay or prevent certain
transactions affecting the control of or the ownership of Common Stock,
including transactions that could be advantageous to the stockholders of Vesta.
For a more comprehensive discussion of applicable state regulations, see
"Business--Regulation."
Limitation of Liability of Officers and Directors
The Vesta Certificate provides that no officer or a director of Vesta will
be personally liable to Vesta or its stockholders for monetary damages for
breach of fiduciary duty as an officer or a director, except for liability (i)
for any breach of the officer's or director's duty of loyalty to Vesta 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 Delaware Law, which concerns unlawful payments of dividends, stock
purchases or redemptions or (iv) for any transaction from which the officer or
director derived an improper personal benefit. In addition, Vesta's Bylaws
provide that the Company will indemnify and hold harmless its officers,
directors and others acting on its behalf.
While the Vesta Certificate provides officers and directors with protection
from awards for monetary damages for breaches of their duty of care, it does
not eliminate such duty. Accordingly, the Vesta Certificate will have no effect
on the availability of equitable remedies such as an injunction or rescission
based on an officer's or a director's breach of his or her duty of care.
Transfer Agent and Registrar
First Chicago Trust Company of New York is the transfer agent and registrar
for the Common Stock.
74
<PAGE>
PLAN OF DISTRIBUTION
The Shares may be sold from time to time by Torchmark or its pledgees,
distributees or donees. Such sales may be made on one or more exchanges or in
negotiated transactions not on an exchange at prices and on terms then
prevailing or at prices related to the then current market price or at
negotiated prices. The Shares
may be sold by one or more of the following methods: (a) a block trade in which
the broker or dealer so engaged will attempt to sell the Shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction and (b) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers or dealers may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts in amounts to be negotiated immediately prior
to the sale which amounts will not be greater than that normally paid in
connection with ordinary trading transactions.
The Shares may also be publicly offered through agents, underwriters or
dealers. In such event, Torchmark may enter into agreements with respect to any
such offering. Such underwriters, dealers or agents may receive compensation in
the form of underwriting discounts, concessions or commissions from Torchmark
and any such underwriters, dealers or agents that participate in the
distribution of the Shares may be deemed to be underwriters, and any profit on
the sale of the Shares by them and any discounts, commissions or concessions
received by them may be deemed to be underwriting discounts and commissions,
under the Securities Act.
In order to comply with the securities laws of certain states, sales of the
Shares to the public in such states may be made only through broker-dealers who
are registered or licensed in such states. Sales of the Shares must also be
made by Torchmark in compliance with other applicable state securities laws and
regulations.
In addition, any of the Shares covered by this Prospectus which qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this Prospectus.
Vesta is registering the sales of the Shares by Torchmark under the
Securities Act by means of a registration statement of which this Prospectus
forms a part in accordance with a Separation and Public Offering Agreement
dated September 13, 1993 between Torchmark and Vesta (the "Separation
Agreement"). The Separation Agreement governs certain aspects of the
relationship between Torchmark and Vesta as a result of the "spin-off" of Vesta
by Torchmark. In the Separation Agreement, Vesta agreed to register the Shares
for sale by Torchmark and pay the expenses of effecting such registration,
other than the expenses of Vesta's counsel and the filing fees with the
Commission, filing and qualification fees and expenses under applicable state
securities laws, stock exchange listing fees and printing costs and expenses,
all of which shall be paid by Torchmark.
VALIDITY OF SECURITIES
The validity of the Common Stock offered hereby will be passed on by Balch &
Bingham LLP of Birmingham, Alabama. Walter M. Beale, Jr., a director of the
Company, is a partner with Balch & Bingham LLP. As of December 31, 1998, Mr.
Beale was the beneficial owner of 30,529 shares of the Company's Common Stock.
EXPERTS
The financial statements of Vesta Insurance Group, Inc. as of December 31,
1998 and for the year then ended, included in this Registration Statement have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements and schedules of Vesta Insurance Group, Inc. as of
December 31, 1997 and for each of the years in the two year period ended
December 31, 1997, included herein and elsewhere in the
75
<PAGE>
Registration Statement, have been included in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon authority of said firm as experts in accounting and auditing.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-1
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets at December 31, 1997 and 1998................ F-3
Consolidated Statements of Operations and Comprehensive Income (loss) for
each of the years in the three-year period ended December 31, 1998...... F-4
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 1998........................... F-5
Consolidated Statements of Cash Flows for each of the years in the three-
year period ended December 31, 1998..................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998....... F-29
Consolidated Statements of Income and Comprehensive Income for the Six
Months Ended June 30, 1999 and 1998..................................... F-30
Consolidated Statements of Cash Flow for the Six Months Ended June 30,
1999 and 1998........................................................... F-31
Notes to Consolidated Financial Statements............................... F-32
</TABLE>
76
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders
Vesta Insurance Group, Inc.
In our opinion, the consolidated financial statements listed in the index on
page F-76 of this Form S-1 present fairly, in all material respects, the
financial position of Vesta Insurance Group, Inc. and its subsidiaries at
December 31, 1998, and the results of their operations and their cash flows for
the year ended in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules listed in the index
appearing on page F-76 of this Form S-1 present fairly, in all material
respects, the information set forth therein at December 31, 1998 and the year
then ended when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedules. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles and estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
Birmingham, Alabama
April 15, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Vesta Insurance Group, Inc.
Birmingham, Alabama:
We have audited the consolidated balance sheet of Vesta Insurance Group,
Inc. and subsidiaries as of December 31, 1997 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flow for each of the years in the two-year period ended December 31, 1997.
These financial statements are the responsibility of Vesta's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vesta
Insurance Group, Inc. and subsidiaries at December 31, 1997, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note B, the Company has restated its financial statements as
of and for the year ended December 31, 1997.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
March 27, 1998, except
as to the statements of
comprehensive income
and Note B and Note O
which are as of
April 19, 1999
F-2
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
At December 31,
----------------------
1997 1998
---------- ----------
(Restated)
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1997--$488,923; 1998--$446,516).............. $ 495,566 $ 457,219
Equity securities--at fair value: (cost: 1997--
$10,921; 1998--$18,127)............................. 20,424 21,099
Short-term investments............................... 119,025 131,029
---------- ----------
Total investments.................................... 635,015 609,347
Cash.................................................. 21,801 25,321
Accrued investment income............................. 8,419 7,194
Premiums in course of collection (net of allowances
for losses of
$654 in 1997 and $1,712 in 1998)..................... 252,193 121,948
Reinsurance balances receivable....................... 315,534 265,903
Reinsurance recoverable on paid losses................ 136,640 111,577
Deferred policy acquisition costs..................... 102,124 100,957
Property and equipment................................ 18,093 18,442
Income tax receivable................................. 4,231 17,950
Deferred income taxes................................. 7,310 19,090
Other assets.......................................... 39,358 35,681
Goodwill.............................................. 96,141 14,292
---------- ----------
Total assets......................................... $1,636,859 $1,347,702
========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses.................. 596,797 504,911
Unearned premiums.................................... 365,052 309,515
---------- ----------
961,849 814,426
Deferred gain on retroactive reinsurance.............. 16,945 9,848
Reinsurance balances payable.......................... 56,897 49,028
Other liabilities..................................... 60,230 48,071
Short term debt....................................... 45,000 70,000
Long term debt........................................ 98,602 98,302
---------- ----------
Total liabilities.................................... 1,239,523 1,089,675
Commitments and contingencies: See Note J
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: 1997--18,970,695 shares; 1998--18,964,322.... 190 190
Additional paid-in capital............................ 162,550 156,465
Accumulated other comprehensive income, net of
applicable taxes..................................... 9,829 8,889
Retained earnings..................................... 154,074 10,120
Receivable from issuance of restricted stock.......... (3,891) (2,045)
Treasury stock........................................ (25,416) (15,592)
---------- ----------
Total stockholders' equity........................... 297,336 158,027
---------- ----------
Total liabilities, Deferrable Capital Securities and
stockholders' equity................................ $1,636,859 $1,347,702
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands except per share data)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------
1996 1997 1998
-------- ---------- ---------
(Restated)
<S> <C> <C> <C>
Revenues:
Net premiums written.......................... $468,056 $526,475 $ 491,590
Decrease (increase) in unearned premium....... (28,720) (8,817) 18,103
-------- -------- ---------
Net premiums earned........................... 439,336 517,658 509,693
Net investment income......................... 23,148 35,960 35,058
Realized investment gains (losses)............ 32 3,283 3,272
Other......................................... 188 2,094 5,473
-------- -------- ---------
Total Revenue................................ 462,704 558,995 553,496
Expenses:
Losses incurred............................... 229,953 273,774 337,564
Loss adjustment expense incurred.............. 21,830 24,864 57,758
Policy acquisition expenses................... 118,608 132,984 155,952
Operating expenses............................ 21,167 38,913 91,394
Premium taxes and fees........................ 5,928 8,567 8,648
Interest on debt.............................. 10,059 10,859 14,054
Loss on asset impairment...................... -- -- 74,496
Goodwill amortization......................... 484 4,007 6,609
-------- -------- ---------
Total expenses............................... 408,029 493,968 746,475
Net income (loss) before taxes................ 54,675 65,027 (192,979)
Income taxes (benefit)........................ 17,862 23,116 (57,244)
Deferred capital security interest, net of
tax.......................................... -- 5,051 5,449
-------- -------- ---------
Net Income (loss)............................ $ 36,813 $ 36,860 $(141,184)
======== ======== =========
Basic net income (loss) per common share...... $ 1.95 $ 1.98 $ (7.61)
======== ======== =========
Diluted net income (loss) per common share.... $ 1.92 $ 1.93 $ (7.61)
======== ======== =========
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss).............................. $ 36,813 $ 36,860 $(141,184)
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
available-for-sale securities net of
applicable taxes of $(422), $2,778 and $2,676
in 1996, 1997 and 1998, respectively......... (742) 7,521 1,187
Less realized gains on available-for-sale
securities net of applicable taxes of $11,
$1,149 and 1,145 in 1996, 1997 and 1998,
respectively................................. 21 2,134 2,127
-------- -------- ---------
(763) 5,387 (940)
Comprehensive income (loss).................... $ 36,050 $ 42,247 $(142,124)
======== ======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
<TABLE>
<CAPTION>
Accumulated Receivable
Additional Other From
Common Paid-in Comprehensive Retained Treasury Restricted
Stock Capital Income (Loss) Earnings Stock Stock
------ ---------- ------------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 ................. $189 $159,449 $5,205 $ 86,098 $ (520) $(3,162)
Net income.............. -- -- -- 36,813 --
Issuance of stock....... 1 1,188 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- (45)
Treasury stock
acquisitions........... -- -- -- -- (10,597) --
Treasury stock issued
for options exercised.. -- 63 -- (64) 563 --
Common dividends
declared
(0.20 per share)....... -- -- -- (2,836) -- --
Net change in unrealized
gains net of tax of
$(411)................. -- -- (763) -- -- --
Tax Benefit from
exercise of stock
options................ -- 337 -- -- -- --
---- -------- ------ --------- -------- -------
Balance, December
31,1996............... 190 161,037 4,442 120,011 (10,554) (3,207)
Net income as restated.. -- -- -- 36,860 -- --
Change in restricted
stock receivable....... -- -- -- -- -- (684)
Treasury stock
acquisitions........... -- -- -- -- (21,164) --
Treasury stock issued
for options exercised.. -- (1,061) -- -- 6,302 --
Common dividends
declared (0.15 per
share)................. -- -- -- (2,797) -- --
Net change in unrealized
gains net of tax of
$3,927................. -- -- 5,387 -- -- --
Tax benefit from
exercise of stock
options................ -- 2,574 -- -- -- --
---- -------- ------ --------- -------- -------
Balance, December
31,1997 as restated... 190 162,550 9,829 154,074 (25,416) (3,891)
Net loss................ -- -- -- (141,184) -- --
Change in restricted
stock receivable....... -- -- -- -- -- 1,846
Treasury stock issued
for options exercised.. -- (6,833) -- -- 9,824 --
Common dividends
declared (0.15 per
share)................. -- -- -- (2,770) -- --
Net change in unrealized
gains net of tax of
$(1,531)............... -- -- (940) -- -- --
Tax benefit from
exercise of stock
options................ -- 748 -- -- -- --
---- -------- ------ --------- -------- -------
Balance, December
31,1998............... $190 $156,465 $8,889 $ 10,120 $(15,592) $(2,045)
==== ======== ====== ========= ======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------------------
1996 1997 1998
-------- ---------- ---------
(Restated)
<S> <C> <C> <C>
Operating Activities:
Net income (loss)............................. $ 36,813 $ 36,860 $(141,184)
Adjustments to reconcile net income (loss) to
cash provided from
operations:
Changes in:
Loss and LAE reserves........................ 4,773 140,152 (91,886)
Unearned premium reserves.................... 59,813 38,350 (55,537)
Deferred income taxes........................ -- 3,959 9,434
Accrued income taxes......................... (3,326) (18,354) (34,933)
Reinsurance balances payable................. (18,201) 5,735 (7,869)
Other liabilities............................ 14,126 18,617 (26,633)
Premiums in course of collection............. (10,877) (285,188) 179,874
Reinsurance recoverable on paid losses....... (25,363) (8,515) 25,063
Other assets................................. (39,632) 15,519 12,505
Policy acquisition costs deferred............ (60,797) (112,981) (163,433)
Policy acquisition costs amortized........... 53,096 105,209 164,600
Investment gains............................. (32) (3,283) (3,272)
Amortization and depreciation................ 3,562 4,803 11,647
Goodwill impairment.......................... -- -- 74,496
Gain on disposition of property, plant,
equipment................................... (115) (38) --
-------- --------- ---------
Net cash provided from (used in) operations.. 13,840 (59,155) (47,128)
Investing Activities:
Investments sold, matured, and called:
Fixed maturities available for sale--matured,
called and sold............................. 43,811 283,723 156,377
Equity securities............................ -- 2,291 3,822
Investments acquired:
Fixed maturities available for sale.......... (37,239) (52,871) (116,007)
Equity securities............................ (7,326) -- (4,323)
Net cash paid for acquisition................ -- (245,811) --
Net increase in short-term investments........ (9,490) (13,610) (12,005)
Additions to property and equipment........... (1,754) (4,182) (5,659)
Dispositions of property and equipment........ 236 289 1,677
-------- --------- ---------
Net cash provided from (used in) investing
activities.................................. (11,762) (30,171) 23,882
Financing Activities:
Issuance of long and short term debt and
deferrable capital securities................ 7,116 123,321 24,700
Issuance of treasury stock.................... 563 6,302 --
Acquisition of treasury stock................. (10,597) (21,164) --
Dividends paid................................ (2,836) (2,797) (2,770)
Capital contributions from exercising stock
options...................................... 1,481 828 4,836
-------- --------- ---------
Net cash provided from (used in) financing
activities.................................. (4,273) 106,490 26,766
-------- --------- ---------
Increase (decrease) in cash.................... (2,195) 17,164 3,520
Cash at beginning year......................... 6,832 4,637 21,801
-------- --------- ---------
Cash at end of year............................ $ 4,637 $ 21,801 $ 25,321
======== ========= =========
</TABLE>
- --------
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note A--Significant Accounting Policies
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta) and
subsidiaries (the Company) was incorporated by Torchmark Corporation
("Torchmark") on July 9, 1993 and capitalized on July 16, 1993 with a $50
million contribution from Torchmark and the contribution from Torchmark of all
of the outstanding common stock of J. Gordon Gaines, Inc., Liberty National
Reinsurance Company, Ltd, and Vesta Fire Insurance Corporation (Vesta Fire) and
its wholly-owned subsidiaries. On November 18, 1993, the Company completed an
initial public offering of common stock which resulted in proceeds to the
Company of approximately $51 million. At year-end 1998, Torchmark held
approximately 23.9% of the outstanding common stock of the Company with the
balance publicly traded.
Nature of Operations: The Company is a holding company for a group of
property and casualty insurance companies (the "Vesta Group") that offer treaty
reinsurance and primary insurance on personal and commercial risks. The lead
insurer in the Vesta Group is Vesta Fire. In both its reinsurance and primary
insurance operations, the Company focuses primarily on private passenger auto
and property coverages. Gross premiums written by the Company in 1998 totaled
$759.0 million. Gross premiums written in the reinsurance line were $287.6
million in 1998, substantially all of which were on personal (including
automobile) risks and commercial property risks. Also, property (including auto
physical damage) risks accounted for approximately 62% of the Company's gross
premiums written in all lines in 1998.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing on both assumed and ceded reinsurance weakened slightly in 1997 and
1998 due to increased availability of reinsurance market capacity.
Use of Estimates in the Preparation of the Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from those estimates. These estimates
and assumptions are particularly important in determining the premiums in
course of collection, reserves for losses and loss adjustment expenses and
deferred policy acquisition costs.
Investments: Investment securities are classified in three categories at
date of purchase and accounted for as follows: (i) Debt securities which are
purchased with the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost; (ii) Debt and
equity securities which are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and reported
at fair value, with unrealized gains and losses included in earnings; and (iii)
Debt and equity securities which are not classified as either held-to-maturity
or trading securities are classified as available for sale and reported at fair
value, with unrealized gains and losses excluded from earnings and reported in
a separate component of stockholders' equity.
Short-term investments are carried at cost and include investments in
certificates of deposit and other interest-bearing time deposits with original
maturities of one year or less. If an investment becomes permanently impaired,
such impairment is treated as a realized loss and the investment is adjusted to
net realizable value.
Gains and losses realized on the disposition of investments are recognized
as revenues and are determined on a specific identification basis. Unrealized
gains and losses on equity securities and fixed maturities available for sale,
net of deferred income taxes, are reflected directly in stockholders' equity.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note A--Significant Accounting Policies (continued)
Determination of Fair Values of Financial Instruments: Fair values for cash,
short-term investments, short-term debt, receivables and payables approximate
their carrying value. Fair values for investment securities and long-term debt
are based on quoted market prices where available. Otherwise, fair values are
based on quoted market prices of comparable instruments.
Cash: Cash consists of balances on hand and on deposit in banks and
financial institutions.
Recognition of Premium Revenue: Earned premiums on primary business are
generally recognized as revenue on a pro rata basis over the policy term.
Earned premiums on assumed reinsurance are recognized as revenue when reported
by the cedant. Also, due to the delay in reporting from its reinsurance
cedants, the Company accrues unreported premium revenue on its assumed
reinsurance business based on historical experience. The company estimates for
its reinsurance reports received subsequent to a period end on a combined
calendar/accident year basis. These accrued premiums are necessarily based on
estimates and, while management believes that the accruals are reasonable, the
ultimate reported premium may be less than or in excess of the amounts accrued.
Losses and Loss Adjustment Expenses: The liability for losses and loss
adjustment expenses ("LAE") includes an amount determined from loss reports and
individual cases. It also includes an amount for losses incurred but not
reported which is based on past experience. Such liabilities are necessarily
based on estimates and, while management believes that the amount is adequate,
the ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting
liabilities are continually reviewed, and any adjustments are reflected in
earnings currently. These reserves are established on an undiscounted basis and
are reduced for estimates of salvage and subrogation.
Deferred Acquisition Costs: Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they relate. Anticipated investment income is
considered in determining recoverability of deferred acquisition costs on
certain lines.
Reinsurance: Reinsurance enables an insurance company, by assuming or ceding
reinsurance, to diversify its risk and limit its financial exposure to risk and
catastrophic events. However, reinsurance does not ordinarily relieve the
primary insurer from its obligations to the insured. In the ordinary course of
business, Vesta assumes business from other insurance organizations and also
reinsures certain risks with other insurance organizations.
Income Taxes: Vesta accounts for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the straight
line method over the estimated useful lives of these assets which range from 2
to 5 years for equipment. Ordinary maintenance and repairs are charged to
income as incurred.
Goodwill: The company amortizes goodwill on a straight-line basis over a
period of 15 years.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
stockholders' equity or net income during the period involved.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note A--Significant Accounting Policies (continued)
Income Per Share: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per share," effective for the year ended
1997. This standard requires the dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement and a
reconciliation of basic EPS to diluted EPS. As required by SFAS 128, prior-
period EPS data has been restated for comparability. Basic EPS is computed by
dividing income available to common stockholders by the weighted average common
shares outstanding for the period. Weighted average common shares outstanding
for each period are as follows: 1998-18,548,612, 1997-18,600,000, 1996-
18,860,000. 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. Weighted average diluted
shares outstanding for each period are as follows: 1998--18,548,612, 1997--
19,053,000, 1996--19,157,000.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- ---------
(restated)
(in thousands except per
share data)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Weighted average common shares outstanding......... 18,860 18,600 18,548
Net income (loss).................................. $36,813 $36,860 $(141,184)
Basic net income per share......................... $ 1.95 $ 1.98 $ (7.61)
DILUTED NET INCOME PER SHARE:
Weighted average common shares outstanding......... 18,860 18,600 18,548
Net effect of the assumed exercise of stock options
and nonvested restricted stock--based on the
treasury stock method using average market price
for the year...................................... 297 453 --
------- ------- ---------
Total weighted average common shares and common
stock equivalents outstanding..................... 19,157 19,053 18,548
Net income......................................... $36,813 $36,860 $(141,184)
Diluted net income per share....................... $ 1.92 $ 1.93 $ (7.61)
</TABLE>
Long lived assets: The Company evaluates long-lived assets and certain
identifiable intangibles held and used by an entity for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. This evaluation is based on undiscounted future
projected cash flows of the asset or asset group. If an impairment exists, the
amount of such impairment is calculated based on the estimated fair value of
the assets. Fair value is generally determined by discounting future projected
cash flows of the asset or asset group under review.
In accordance with Accounting Principles Board Opinion (APB) No. 17,
"Intangible Assets," the recoverability of goodwill not identified with assets
subject to an impairment loss is reviewed for impairment, on an acquisition by
acquisition basis, whenever events or changes in circumstances indicate that it
may not be recoverable. If such an event occurred, the Company would prepare
projections of future discounted cash flows for the applicable acquisition. The
projections are for the remaining term of the goodwill using a discount rate
and terminal value that would be customary for evaluating insurance company
transactions. The Company believes this discounted cash flow approach
approximates fair market value.
New Accounting Standards: In 1998, the Company implemented SFAS No. 130,
"Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," and SFAS No. 132, "Employers
Disclosures about Pensions and Other Postretirement Benefits." These financial
statements have been prepared with the expanded disclosures required by these
standards.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note A--Significant Accounting Policies (continued)
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This pronouncement is effective for periods beginning January 1,
1999 with early application encouraged. The Company implemented SOP 98-1 in
1998. The adoption of this standard did not have a material impact on the
Company's financial position, results of operations or cash flows.
Note B--Restatement
The Company determined, subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in SFAS 113. A contract is deemed
retroactive when an assuming enterprise agrees to reimburse a ceding enterprise
for liabilities incurred as a result of past insurable events. For such
contracts, SFAS 113 requires that any initial gain and any benefit due from a
reinsurer as a result of subsequent covered losses be deferred in the financial
statements of the ceding enterprise and recognized into income over the
settlement period of the underlying claims. The Company erroneously recorded a
gain on this contract in the fourth quarter of 1997 and has adjusted its
previously issued financial statements to appropriately defer and recognize
such gain. Analysis of this contract under the recovery method resulted in the
following adjustments to the 1997 financial statements included herein:
<TABLE>
<CAPTION>
As Previously
Reported Restatement As Restated
------------- ----------- -----------
<S> <C> <C> <C>
Losses incurred......................... $256,829 $ 16,945 $273,774
Income taxes............................ 29,048 (5,932) 23,116
Net income............................ 47,873 (11,013) 36,860
Basic net income per common share....... $ 2.57 (.59) 1.98
Diluted net income per common share..... $ 2.51 (.58) 1.93
Deferred income taxes................... 1,378 5,932 7,310
Deferred gain on retroactive
reinsurance............................ 0 16,945 16,945
Retained earnings....................... 165,087 (11,013) 154,074
</TABLE>
The deferred gain, which is included in the accompanying balance sheet,
associated with this contract at December 31, 1997 and 1998 is $16.9 million
and $9.8 million, respectively.
Note C--Asset Impairment
During the fourth quarter of 1998, management evaluated goodwill
recoverability pursuant to the Company's existing policies. The evaluation
indicated an impairment of goodwill acquired as part of the Shelby Acquisition
(See Note Q). The events that led to this conclusion include the Company's
inability to integrate the Shelby acquisition as planned and the resulting high
level of expenses, and the recording of significant operating losses in 1998.
The Company's measurement of this impairment was based on cash flow analysis
using projections for the remaining term of the goodwill and a weighted average
cost of capital and terminal value deemed appropriate for evaluating companies
similar to Vesta. The weighted average cost of capital and future premium
growth rates used were 12% and 5% respectively. The assumptions used in this
analysis represent management's best estimate of future results. However,
actual results could differ from these estimates.
As a result of this measurement, the unamortized goodwill attributable to
the Shelby Acquisition was reduced by $74.5 million.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note D--Statutory Accounting and Regulation
Insurance subsidiaries of Vesta are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP. The most
significant differences between statutory accounting principles and GAAP are as
follows: (a) acquisition costs of obtaining new business are deferred and
amortized over the policy period rather than charged to operations as incurred;
(b) loss and loss adjustment expense are reduced for the benefits of salvage
and subrogation; (c) deferred income taxes are provided for temporary
differences between financial and taxable earnings; (d) certain items are
reported as assets (property and equipment, agents' balances, prepaid expenses)
rather than being charged directly to surplus as non admitted items; (e)
statutory accounting disallows reserve credits for reinsurance in certain
circumstances; (f) bonds are recorded at their market values instead of
amortized costs. The tables set forth below reflect the Company's revision of
its accounting for its assumed reinsurance business to reflect only
accident/calendar year information. Effective with its year end 1997 statutory
filings, the adjustments reversed, in the form of a one-time charge, the
cumulative effect of the Company's prior practice of making estimates for
reinsurance assumed on a combined underwriting and accident year basis, the
accounting practice consistently applied over prior years. On a GAAP basis, the
revision was accounted for by retroactively restating prior financial
statements.
A reconciliation of Vesta's insurance subsidiaries' reported statutory net
income (loss) to Vesta's consolidated GAAP net income (loss) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1997 1998
-------- --------- ---------
<S> <C> <C> <C>
Statutory net income (loss)............. $ 46,745 $ (44,941) $(107,074)
Accounting Irregularities (2)........... -- -- 7,715
Deferral of acquisition costs........... 60,797 112,981 163,433
Amortization of acquisition costs....... (53,096) (105,210) (164,600)
Effects of retroactive reinsurance...... -- (16,945) 7,097
Differences in insurance policy
liabilities............................. 1,104 13,177 14,910
Reinsurance premium and loss accrual.... (13,424) 46,785 (1) --
Deferred income taxes................... 1,621 2,732 39,294
Income (loss) of non-insurance entities
and other .............................. (6,450) 32,012 (20,854)
Investment gains........................ -- 276 --
Goodwill amortization................... (484) (4,007) (6,609)
Loss on asset impairment................ -- -- (74,496)
-------- --------- ---------
GAAP net income (loss).................. $ 36,813 $ 36,860 $(141,184)
======== ========= =========
</TABLE>
Note D--Statutory Accounting and Regulation (continued)
A reconciliation of Vesta's insurance subsidiaries' reported statutory
stockholders' equity to Vesta's consolidated GAAP stockholders' equity is as
follows:
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Statutory stockholder's equity........... $352,695 $ 317,875 $220,210
Deferred gain on retroactive
reinsurance.............................. -- (16,945) (9,848)
Differences in insurance policy
liabilities.............................. 2,376 15,554 55,343
Deferred policy acquisition costs........ 75,532 102,124 100,957
Deferred income taxes.................... (21,463) 7,310 19,090
Nonadmitted assets....................... 1,267 297 22,131
Goodwill................................. 7,339 96,141 14,292
Net liabilities of non-insurance
entities................................. (101,914) (231,204) (274,850)
Reinsurance premium and loss accrual(1).. (46,785) --
Unrealized gain on investments........... 2,872 6,184 10,702
-------- --------- --------
GAAP stockholders' equity................ $271,919 $ 297,336 $158,027
======== ========= ========
</TABLE>
- --------
(1) Vesta Fire has revised its statutory and GAAP accounting for its assumed
reinsurance business to reflect only accident/calendar year information in
1997. On a GAAP basis, the correction was accounted for by restating prior
financial statements. On a statutory basis, the correction was made on a
cumulative basis to the 1997 statutory filings.
(2) In June 1998, the Company completed an internal investigation which
resulted in a reduction of net income of approximately $13.6 million
relating to the fourth quarter of 1997 and the first quarter of 1998. For
GAAP purposes, the amounts relating to 1997 were corrected in 1997, while
for statutory purposes, the amounts related to the fourth quarter of 1997
were recorded in the 1998 statutory reports as the 1997 statutory reports
had been filed prior to such discovery.
The excess, if any, of stockholders' equity of the insurance subsidiaries on
a GAAP basis over that as reported on a statutory basis is not available for
distribution to its stockholders without regulatory approval.
The Company's insurance subsidiaries are subject to regulation by the
insurance departments of states in which they are licensed and undergo
examinations by those departments. The Alabama Department of Insurance ("ADOI")
completed its examination of Vesta Fire's 1997 statutory report and issued its
report on December 18, 1998. The examination resulted in adjustments to
decrease reported statutory surplus by $255 million. Management believes that
it has appropriately recorded such adjustments in Vesta Fire's 1998 statutory
report or that other remedies have been executed to render certain adjustments
inappropriate for 1998 (for example, corrections of technical violations of
reinsurance security letters of credit). The ADOI is currently conducting a
target examination on Vesta Fire's 1998 filing. 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
or cash flows.
Note D--Statutory Accounting and Regulation (continued)
Restrictions on Dividends to Stockholders. The Company's insurance
subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The payment of dividends by Vesta Fire
is subject to certain limitations imposed by the insurance laws of the State of
Alabama. The restrictions are generally based on certain levels of surplus,
investment income and operating income, as determined under statutory
accounting practices. Alabama and most other states that regulate Vesta Fire's
operations permit dividends in any year which together with other dividends or
distributions made within the preceding 12 months, do not exceed the greater of
(i) 10% of statutory surplus as of the end of the preceding year or (ii) the
statutory net income for the preceding year, with larger dividends
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
payable only upon prior regulatory approval. Certain other extraordinary
transactions between an insurance company and its affiliates, including sales,
loans or investments which in any twelve-month period aggregate at least 3% of
its admitted assets or 25% of its statutory capital and surplus, also are
subject to prior approval by the Department of Insurance. In 1998, the Company
voluntarily agreed that it will not pay any dividends, except those required to
service "indebtedness" as defined under the $200 million Revolving Credit
Facility Agreement (Note P), until December 31, 1999, without the prior written
approval of the ADOI.
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the RBC levels for each of the Company's
insurance subsidiaries did not trigger regulatory attention.
Note E--Investment Operations
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Fixed maturities.................................. $16,668 $23,876 $27,930
Equity securities................................. 199 248 422
Short-term investments............................ 6,982 12,763 9,323
------- ------- -------
23,849 36,887 37,675
Less investment expense........................... (701) (927) (2,617)
------- ------- -------
Net investment income............................. $23,148 $35,960 $35,058
======= ======= =======
</TABLE>
Note E--Investment Operations (continued)
An analysis of gains (losses) from investments is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Realized investment gains (losses) from:
Fixed maturities........................... $ (139) $ 3,000 $ 159
Equity securities.......................... 171 283 3,113
-------- ------- --------
32 3,283 3,272
======== ======= ========
Net change in unrealized investment gains
(losses) on:
Fixed maturities available for sale........ $ (2,523) $ 3,772 $ 4,060
Equity securities available for sale....... 1,349 5,542 (6,531)
Applicable tax (benefit)................... (411) 3,927 (1,531)
-------- ------- --------
Net change in unrealized gains (losses)..... $ (763) $ 5,387 $ (940)
======== ======= ========
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
A summary of fixed maturities and equity securities by amortized cost and
estimated fair value at December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997: Cost Gains Losses Value
- ----- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 84,896 $ 1,348 $ 96 $ 86,148
States, municipalities and political
subdivisions........................ 145,567 2,891 0 148,458
Foreign governments.................. 3,643 102 0 3,745
Corporate............................ 194,672 1,844 107 196,409
Mortgage-backed securities, GNMA
collateral.......................... 60,145 743 82 60,806
-------- ------- ------ --------
Total Fixed Maturities.............. 488,923 6,928 285 495,566
Equity securities..................... 10,921 9,503 0 20,424
-------- ------- ------ --------
Total portfolio..................... $499,844 $16,431 $ 285 $515,990
======== ======= ====== ========
<CAPTION>
1998:
- -----
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 72,935 $ 2,509 $ 28 $ 75,416
States, municipalities and political
subdivisions........................ 124,358 3,386 -- 127,744
Foreign governments.................. 3,619 128 30 3,717
Corporate............................ 157,831 3,931 180 161,582
Mortgage-backed securities, GNMA
collateral.......................... 87,773 1,058 71 88,760
-------- ------- ------ --------
Total Fixed Maturities.............. 446,516 11,012 309 457,219
Equity securities..................... 18,127 4,079 1,107 21,099
-------- ------- ------ --------
Total portfolio..................... $464,643 $15,091 $1,416 $478,318
======== ======= ====== ========
</TABLE>
Note E--Investment Operations (continued)
A schedule of fixed maturities held for investment by contractual maturity
at December 31, 1998 is shown below on an amortized cost basis and on a fair
value basis. Actual maturities could differ from contractual maturities due to
call or prepayment provisions.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due in one year or less.................................. $ 49,029 $ 50,929
Due from one to five years............................... 209,811 216,029
Due from five to ten years............................... 79,983 81,482
Due in ten years or more................................. 19,920 20,019
-------- --------
358,743 368,459
Mortgage backed securities, including
GNMA's and GNMA collateral.............................. 87,773 88,760
-------- --------
Total.................................................... $446,516 $457,219
======== ========
</TABLE>
Proceeds from sales, maturities and calls of fixed maturities were $44
million in 1996, $284 million in 1997 and $156 million in 1998. Gross gains
realized on those sales were $23 thousand in 1996, $3,386 thousand in 1997 and
$178 thousand in 1998. Gross losses on those sales were $162 thousand in 1996,
$329 thousand in 1997 and $19 thousand in 1998.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note F--Property and Equipment
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
-------------------- --------------------
Accumulated Accumulated
Cost Depreciation Cost Depreciation
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Building and real estate.......... $16,518 $ 8,415 $15,664 $ 8,993
Data processing equipment......... 7,383 2,557 10,603 5,079
Furniture and office equipment.... 3,952 1,776 4,271 2,443
Other............................. 3,744 756 5,910 1,491
------- ------- ------- -------
$31,597 $13,504 $36,448 $18,006
======= ======= ======= =======
</TABLE>
Depreciation expense on property and equipment used in the business was $1.4
million, $2.9 million and $4.2 million each of the years 1996, 1997, 1998.
Note G--Deferred Policy Acquisition Costs
Deferred policy acquisition costs for the years ended December 31, 1996,
1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
Balance at beginning of year................ $ 67,831 $ 75,532 $102,124
Deferred policy acquisition costs acquired
from Anthem Casualty Group................. -- 18,820 --
Deferred during period...................... 60,797 112,981 163,433
Amortized during period..................... (53,096) (105,209) (164,600)
-------- --------- --------
Balance at end of year...................... $ 75,532 $ 102,124 $100,957
======== ========= ========
</TABLE>
Commissions comprise the majority of the additions to deferred policy
acquisition costs in each year.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
Note H--Reserves for Losses and Loss Adjustment Expenses
The table below presents a reconciliation of beginning and ending loss and
LAE reserves for the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Gross Losses and LAE reserves at beginning
of year.................................. $ 168,502 $ 173,275 $ 596,797
Reinsurance Recoverable................... (49,769) (60,343) (204,336)
--------- --------- ---------
Net Losses and LAE reserves at beginning
of year.................................. 118,733 112,932 392,461
Increases (decreases) in provisions for
losses and LAE for claims incurred:
Current year............................. 242,454 311,089 396,091
Prior year............................... 9,329 (12,451) (769)
Acquisition of Shelby..................... -- 300,315 --
Losses and LAE payments for claims in-
curred:
Current year............................. (168,981) (166,447) (269,369)
Prior year............................... (88,603) (152,977) (219,642)
--------- --------- ---------
Net Losses and LAE reserves at end of 112,932 392,461 298,772
year......................................
Reinsurance Recoverable................... 60,343 204,336 206,139
--------- --------- ---------
Gross loss and LAE Reserves............... $ 173,275 $ 596,797 $ 504,911
========= ========= =========
</TABLE>
Note I--Related Party Transactions
Vesta leases office space from Torchmark Development Corporation, a wholly
owned subsidiary of Torchmark. Rent expense of $.6 million, $.7 million and
$1.2 million was charged to operations for the years ended December 31, 1996,
1997 and 1998, respectively, related to this lease agreement.
Waddell & Reed Asset Management Company, ("WRAMCO"), provides investment
advice and services to the Company and its subsidiaries in connection with the
management of their respective portfolios pursuant to an Investment Services
Agreement. The Company paid $.4 million, $.4 million and $.6 million in fees to
WRAMCO pursuant to the Investment Services Agreement in 1996, 1997 and 1998,
respectively.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned
subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance
Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered
into a Marketing and Administrative Services Agreement, pursuant to which Vesta
Fire marketed certain of its industrial fire insurance products through agents
of Liberty National. Under this agreement, Liberty National pays to Vesta Fire
an amount equal to all premiums collected by Liberty National after deducting
all expenses incurred by Liberty National which are directly attributable to
the industrial fire insurance products and after deducting a fee for
administrative services. Such fee for 1996, 1997 and 1998 was $1.7 million,
$1.4 million and $.9 million, respectively. This agreement was terminated
effective April 30, 1995, and these products are no longer marketed through
Liberty National agents. However, Liberty National continues to service the
existing business.
Note J--Commitments and Contingencies
Litigation: 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 accounting irregularities
consisting of inappropriate reductions of reserves and overstatements 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 overstatements. This investigation concluded that
inappropriate amounts had, in fact, been
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note J--Commitment and Contingencies (continued)
recorded and the Company determined it should restate its previously issued
1997 financial statements and first quarter 1998 Form 10-Q. Additionally,
during its internal investigation the Company 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. The Company determined that reinsurance premiums should be
recognized as earned over the contract period and corrected the error in its
accounting methodology by restating previously issued financial statements. The
Company issued press releases, which were filed with the Securities and
Exchange Commission, on June 1, 1998 and June 29, 1998 announcing its intention
to restate its historical financial statements.
The Company restated its previously issued financial statements for 1995,
1996 and 1997 and its first quarter 1998 Form 10-Q for the above item by
issuance of a current report on Form 8-K dated August 19, 1998. These
restatements resulted in a cumulative decrease to stockholder' equity of $75.2
million through March 31, 1998.
Commencing in June, 1998, the Company and several of its current and former
officers and directors were named in several purported class action lawsuits in
the United States District Court for the Northern District of Alabama and in
one purported class action lawsuit in the Circuit Court of Jefferson County,
Alabama. Several of Vesta's officers and directors also have been named in a
derivative action lawsuit in the Circuit Court of Jefferson County, Alabama, in
which Vesta is a nominal defendant.
The class action lawsuit filed in the Circuit Court of Jefferson County,
Alabama has been dismissed and the derivative case has been placed on the
administrative docket. The class actions filed in the United States District
Court for the Northern District of Alabama have been consolidated into a single
action in that district. The purported class representatives in that action
have filed (a) a consolidated amended complaint alleging that the defendants
violated the federal securities laws and (b) a motion for class certification.
The consolidated amended complaint also added as defendants Torchmark
Corporation and the Company's predecessor auditors, KPMG Peat Marwick, LLP. The
consolidated amended complaint alleges various violations of the federal
securities law and seeks unspecified but potentially significant damages.
The Company has notified its directors and officers liability insurance
companies of these lawsuits and the consolidated amended complaint. The
litigation is still in the preliminary stages and there has been no discovery
or class certification. The Company intends to vigorously defend this
litigation and intends to explore all available rights and remedies it may have
under the circumstances. In related litigation, in September, 1998, Cincinnati
Insurance Company ("Cincinnati"), one of the Company's directors and officers
liability insurance carriers, filed a lawsuit in the United States District
Court for the Northern District of Alabama seeking to avoid coverage under its
directors and officers liability and other policies. The Company filed a motion
to dismiss Cincinnati's complaint on jurisdictional grounds in federal court
(which was granted), and filed a lawsuit against Cincinnati in the Circuit
Court of Jefferson County, Alabama seeking damages arising out of Cincinnati's
actions. Cincinnati
has filed an answer and counterclaim in that case again seeking to avoid
coverage. The Company intends to vigorously resist Cincinnati's efforts to
avoid coverage. Because these matters are in their early stages, their
ultimate outcome cannot be determined. Accordingly, no provision for any
liability that may result therefrom has been made in the accompanying
consolidated financial statements.
As discussed above, the Company corrected its accounting for assumed
reinsurance business through restatement of its previously issued financial
statements. Similar corrections were made on a statutory accounting basis
through recording cumulative adjustments in Vesta Fire's 1997 statutory
financial statements. The impact of this correction has been reflected in
amounts ceded under the Company's 20 percent whole
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
account quota share treaty which was terminated on June 30, 1998 on a run-off
basis. The Company believes such treatment is appropriate under the terms of
this treaty and has calculated the quarterly reinsurance billings presented to
the treaty participants accordingly. The aggregate amount included herein as
recoverable from such reinsurers totalled $60.4 million at December 31, 1998.
Two of the three participants have notified the Company that they wish to audit
the treaty computations as allowed by the terms of the treaty. The other
participant, through various correspondence, has also expressed an interest in
obtaining additional data. While management believes its interpretation of the
treaty's terms and computations based thereon, are correct, the effects, if
any, of participant audits or other actions cannot be determined at this time.
The Company, through its subsidiaries, is routinely a party to other pending
or threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation or arbitration to be material.
Leases: The Company leases office space for its home office and HIG under
operating lease arrangements. These leases contain various renewal options and
escalation clauses. Rental expense for operating leases was $1.1 million, $1.2
million, and $1.8 million, for the years ending December 31, 1996, 1997, and
1998, respectively. Future minimum rental commitments required under these
leases are approximately $1.5 million per year.
Concentrations of Credit Risk: Vesta maintains a highly-diversified
investment portfolio with limited concentrations in any given region, industry,
or economic characteristic. At December 31, 1998, the investment portfolio
consisted of securities of the U.S. government or U.S. government backed
securities (11.9%); mortgage backed securities, GNMA collateral (14.0%);
investment grade corporate bonds (25.5%); cash and short-term investments
(24.6%); securities of state and municipal governments (20.1%); securities of
foreign governments (.6%); and corporate common stocks (3.3%). Corporate equity
and debt investments are made in a wide range of industries. All of Vesta's
investments at year-end 1998 were rated investment-grade.
At December 31, 1998, the Company has unsecured reinsurance recoverables
from reinsurers that are in excess of 3% of statutory surplus, the largest of
which is $31 million.
Note K--Supplemental Disclosures for Cash Flow Statement
The following table summarizes Vesta's non-cash investing and financing
activities and amounts recorded for interest and income taxes paid.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- --------- -------
<S> <C> <C> <C>
Paid in capital from tax benefit of stock $ 337 $ 2,574 $ 748
option exercises..............................
</TABLE>
Note K--Supplemental Disclosures for Cash Flow Statement (continued)
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Interest paid........................................ $ 9,494 $15,113 $11,193
Income taxes paid.................................... $21,500 $22,571 $ --
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note L--Reinsurance
Vesta engages in reinsurance ceded transactions as part of its overall
underwriting and risk management strategy. Vesta's reinsurance ceded programs
include coverages which limit the amount of individual claims to a fixed amount
or percentage and which limit the amount of claims related to catastrophes.
The effect on premiums earned and losses and loss adjustment expenses
incurred of reinsurance ceded transactions are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Reinsurance ceded:
Premiums ceded.................................. $149,964 $300,799 $310,652
Losses and LAE recovered and recoverable........ 134,756 345,780 199,026
</TABLE>
The amounts of reserves for unpaid losses and loss adjustment expenses and
unearned premiums that Vesta would remain liable for should reinsuring
companies be unable to meet their obligations are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Losses and loss adjustment expense................ $ 204,336 $ 206,139
Retroactive Reinsurance Receivable................ 16,945 9,848
Unearned premiums................................. 94,253 49,916
----------- -----------
$315,534 $265,903
=========== ===========
</TABLE>
Vesta engages in assumed reinsurance transactions as part of its overall
business strategy. The effect on premiums earned and losses and loss adjustment
expenses of all assumed reinsurance transactions, including involuntary pools,
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Premiums assumed................................. $427,476 $495,063 $341,956
Losses and loss adjustment expenses assumed...... 288,835 333,488 230,497
</TABLE>
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- -------------------- --------------------
Written Earned Written Earned Written Earned
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $ 154,235 $ 161,824 $ 330,624 $ 323,394 $ 471,404 $ 478,389
Assumed................. 497,537 427,476 535,427 495,063 287,617 341,956
Ceded................... (183,716) (149,964) (339,576) (300,799) (267,431) (310,652)
--------- --------- --------- --------- --------- ---------
Net premiums.......... $ 468,056 $ 439,336 $ 526,475 $ 517,658 $ 491,590 $ 509,693
========= ========= ========= ========= ========= =========
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note M--Income Taxes
Income tax expense (benefit) for the years ended December 31, 1996, 1997 and
1998 was allocated as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Operating income................................ $17,862 $23,116 $(57,244)
Deferrable Capital Securities................... -- (2,719) (3,076)
Stockholder's equity, for unrealized gains (413) 3,927 (1,531)
(losses)........................................
Stockholder's equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial reporting purposes.... 337 (2,574) (748)
------- ------- --------
$17,786 $21,750 $(62,599)
======= ======= ========
</TABLE>
Income tax expense benefit attributable to income from operations consists
of:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Current tax expense (benefit)................... $19,483 $25,848 $(17,951)
Deferred tax expense (benefit).................. (1,621) (2,732) (39,293)
------- ------- --------
Total.......................................... $17,862 $23,116 $(57,244)
======= ======= ========
</TABLE>
Vesta's effective income tax rate differed from the statutory income tax
rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
------------ ------------ -------------
Amount % Amount % Amount %
------- --- ------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax $19,136 35% $22,759 35% $(67,543) (35)%
rate...........................
Increases (reductions) in tax
resulting from:
Tax exempt investment income.. (2,240) (3) (2,019) (2) (2,246) (2)
State income tax.............. -- -- 337 -- -- --
Goodwill...................... 13,109 8
Other......................... 966 1 2,039 2 (564) --
------- --- ------- --- -------- ---
$17,862 33% $23,116 35% $(57,244) (29)%
======= === ======= === ======== ===
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities included in
other liabilities at December 31, 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
1997 1998
------- -------
Deferred tax assets:
<S> <C> <C>
Unearned and advance premiums.............................. $19,439 $20,312
Reinsurance recoverables................................... 26,321 --
Discounted unpaid losses................................... 9,795 13,615
Net operating loss carryforward............................ -- 38,049
Goodwill................................................... -- 7,983
Retroactive Reinsurance.................................... 5,931 3,447
Deferred Compensation...................................... 750 775
------- -------
Total deferred tax assets................................... $62,236 $84,181
======= =======
Deferred tax liabilities:
Deferred acquisition costs................................. $35,455 $35,335
Contingent commissions..................................... 6,008 4,005
Unrealized gains........................................... 6,317 6,446
Fixed assets............................................... 1,470 2,606
Contingent receivables..................................... 2,467 4,764
Goodwill................................................... 2,252 --
Salvage and subrogation.................................... 875 248
Reinsurance Recoverables................................... 10,982
Other...................................................... 82 705
------- -------
Total deferred tax liabilities.............................. $54,926 $65,091
------- -------
Net deferred tax asset...................................... $ 7,310 $19,090
======= =======
</TABLE>
Deferred tax assets are to be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The Company is able to demonstrate that the benefits of its deferred
tax assets are realizable and accordingly, no valuation allowance has been
recorded at December 31, 1998 and 1997.
Note N--Retirement Plans
Vesta has a defined contribution retirement and savings plan and a
supplemental executive retirement plan. These plans are fully funded at year-
end 1998. Vesta's total cost for benefits under these plans was $.3 million for
1996, $.7 million for 1997 and $.1 million for 1998.
Note O--Segment Information
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which requires companies to report
financial and descriptive information about their reportable operating
segments. The Company writes personal and commercial insurance products
throughout the United States and reinsurance for companies located throughout
the United States. All revenues are generated from external customers and the
Company does not have a reliance on any major customer.
The Company evaluates segment profitability based on pre-tax operating
profit. Net investment income, interest expense and operating expenses are
allocated based on certain assumptions and estimates; stated segment operating
results would change if different methods were applied. The accounting policies
of the operating segments are the same as those described in Note A.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
-------- ---------- ----------
<S> <C> <C> <C>
Revenues
Reinsurance Operations
Net premiums earned........................ $342,452 $ 335,360 $ 194,261
Net investment income and realized
gain/(loss)............................... 18,864 18,578 14,045
-------- ---------- ----------
Total reinsurance......................... 361,316 353,938 208,306
Personal insurance operations
Net premiums earned........................ 63,206 139,425 247,064
Net investment income and realized
gain/(loss)............................... 3,263 13,501 15,727
Other ..................................... 123 1,602 4,287
-------- ---------- ----------
Total personal............................ 66,592 154,528 267,078
Commercial insurance operations
Net premiums earned........................ 33,678 42,873 68,368
Net investment income and realized
gain/(loss)............................... 1,053 7,164 8,558
Other ..................................... 65 492 1,186
-------- ---------- ----------
Total commercial.......................... 34,796 50,530 78,112
-------- ---------- ----------
Total revenues............................ $462,704 $ 558,995 $ 553,496
======== ========== ==========
Total pretax income from operations
Reinsurance Operations
Underwriting gain (loss)................... $ 37,318 $ 38,774 $ (84,662)
Net investment income and realized
gain/(loss)............................... 18,864 18,578 14,045
Interest expense........................... 7,841 7,036 5,377
-------- ---------- ----------
Total reinsurance......................... 48,342 50,316 (75,994)
Personal Operations
Underwriting gain (loss)................... 7,773 (2,470) (35,688)
Net investment income and realized
gain/(loss)............................... 3,263 13,501 15,727
Other income .............................. 123 1,602 4,287
Loss on asset impairment................... -- -- 65,496
Goodwill................................... 316 3,065 5,177
-------- ---------- ----------
Total personal............................ 10,843 9,568 (86,347)
Commercial Operations
Underwriting gain (loss)................... (3,242) 2,252 (21,279)
Net investment income and realized
gain/(loss)............................... 1,053 7,164 8,558
Other income .............................. 65 492 1,186
Loss on asset impairment................... -- -- 9,000
Goodwill................................... 168 942 1,432
-------- ---------- ----------
Total commercial.......................... (2,292) 8,966 (21,967)
-------- ---------- ----------
Other Operations
Interest expense........................... 2,218 3,823 8,671
-------- ---------- ----------
Total pretax income (loss) from
operations............................... $ 54,675 $ 65,027 $ (192,979)
======== ========== ==========
Total identifiable assets
Reinsurance operations
Investments and other assets............... $644,954 $ 681,273 $ 451,667
Deferred acquisition costs................. 55,870 52,742 57,764
Personal operations
Investments and other assets............... 111,564 580,809 520,200
Deferred acquisition costs................. 16,437 38,772 35,465
Commercial operations
Investments and other assets............... 39,335 272,653 274,878
Deferred acquisition costs................. 3,225 10,610 7,728
-------- ---------- ----------
Total assets.............................. $871,385 $1,636,859 $1,347,702
======== ========== ==========
</TABLE>
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note P--Debt
On July 19, 1995, the Company issued $100 million of its 8.75% Senior
Debentures due July 15, 2025. The Debentures are not subject to redemption or
any sinking fund prior to maturity. The Debentures are unsecured and rank on
parity with all of its other unsecured and unsubordinated indebtedness. The
Debentures contain covenants that limit the ability of the Company or its
subsidiaries to issue, sell or otherwise dispose of shares of voting common
stock of any Restricted Subsidiary and limit the ability of the Company or its
subsidiaries to pledge the shares of capital stock of any subsidiary. The
Debentures also place certain limitations on the Company's ability to
consolidate or merge with or sell its assets substantially as an entirety. The
Company used the proceeds from the sale to repay a $28 million loan from a
Torchmark affiliate, and to increase the capital and surplus of Vesta Fire.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Deferrable Capital
Securities. These securities have a 30 year maturity and are not redeemable
except in certain limited circumstances. These securities were sold in a
private placement transaction to qualified institutional buyers and were not
registered under Securities Act of 1933 pursuant to an exemption from
registration provided by Rule 144A promulgated thereunder. A portion of the
proceeds from the sale of these securities were used to repay indebtedness
under the Company's existing lines of credit and for general corporate
purposes. As required by the Company's amended bank facility, the Company will
defer interest under the Indenture dated January 31, 1997 which will result in
the deferral of distributions under the amended and restated Declaration of
Trust dated January 31, 1997.
At December 31, 1998, the Company had borrowed $70 million under its $200
million 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 related to this line of
credit contains certain covenants that require, among other things, the Company
to maintain a certain consolidated net worth ("Consolidated Net Worth
Covenant"), maintain a certain amount of earnings before interest and taxes
available for the payment of interest and dividend expense, ("Fixed Charge
Coverage Ratio"), cause each insurance subsidiary to maintain a certain total
adjusted statutory capital, ("Adjusted Statutory Capital Covenant"), and that
limits the amount of indebtedness of the companies. As of December 31, 1998,
the Company was not in compliance with all of its financial covenants.
Subsequent to December 31, 1998, the Company's banks agreed to amend the
covenants and waive any event of default arising from non-compliance with the
covenants as of December 31, 1998. The amended credit facility was restructured
into a $70 million senior revolving credit facility, maturing July 31, 2000
(the "Amended Facility"). The interest rate on the Amended Facility will be the
prime rate plus 1%, provided that from and after September 30, 1999 the rate
shall be increased to the prime rate plus 3% if the Company has not made
permanent principal prepayments on the Amended Facility aggregating at least
$25 million. The Company will also pay the banks a 1% Commitment Fee on all of
the used and unused commitments under the Amended Facility.
The Amended Facility requires the Company to make a closing principal
prepayment of $15 million less transaction expenses the net amount of which
reduces the obligation to make permanent principal payments aggregating $25
million. The amended Facility also provides for warrants equal to approximately
6.6% of the Company's outstanding shares being issued to the banks
participating on the Amended Facility, which become exerciseable in the event
the Company does not make $25 million of permanent principal prepayments on the
facility by March 15, 2000.
The Amended Facility requires the Company to suspend dividends on its common
stock and defer payments of interest on its junior subordinated debentures due
January 31, 2027 unless the Company has made $25 million of permanent principal
prepayments on the Amended Facility by March 15, 2000. The Amended
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note P--Debt (continued)
Facility contains certain covenants that require the Company to maintain
minimum statutory surplus levels, minimum cumulative statutory net income
levels and minimum cumulative GAAP net income levels.
Note Q--Stock Options
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the intrinsic
valued based accounting method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. The Company has
continued to use this method to account for its stock options. However,
SFAS 123 requires entities electing to remain with the intrinsic method of
accounting to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as well
as other disclosures about the Company's stock-based employee compensation
plans. Information about the Company's stock option plans and the related
required disclosures follow.
Prior to completion of the Company's initial public offering, the Company's
stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan
("Plan"), which provided for grants to the Company's executive officers of
restricted stock, stock options, stock appreciation rights, and deferred stock
awards, and in certain instances grants of options to directors. The Company's
stockholders approved certain amendments to the Plan effective May 16, 1995,
including an amendment to increase the shares of the Company's common stock
available for awards under the Plan from 1,091,400 shares to 2,221,998 shares
and an amendment to delete the provision for the grant of options to non-
employee directors. The Company's stockholders also approved the Vesta
Insurance Group, Inc. Non-Employee Director Stock Plan ("Director Plan")
effective May 16, 1995, which provides for grants to the Company's non-employee
directors of stock options and restricted stock.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1998, respectively; risk-free interest rates of 5.75
percent and 5.16 percent; dividend yields of 0.27 and 0.44 percent; volatility
factor of the expected market price of the Company's common stock of 38.75 and
44.70; and a weighted-average expected life of the options of ten years for
both years.
The Company's actual and pro forma information follows (in thousands except
for earnings per share information):
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998
---------- ---------
(restated)
<S> <C> <C>
Net income:
As reported....................................... $36,860 $(141,184)
Pro forma......................................... 33,576 (144,684)
Basic net income per common share:
As reported....................................... $ 1.98 $ (7.61)
Pro forma......................................... 1.81 (7.80)
Diluted net income per common share:
As reported....................................... $ 1.93 $ (7.61)
Pro forma......................................... 1.76 (7.80)
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note Q--Stock Options (continued)
The following summary sets forth activity under the Plan for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of the year............ 1,055,699 $18.37 1,022,872 $20.38 937,451 $25.65
Granted................. 129,394 31.93 135,085 51.64 101,500 21.30
Exercised............... 55,667 15.51 220,506 17.15 237,000 17.16
Forfeited............... 106,554 16.99 -- -- 237,903 35.14
--------- ------ --------- ------ ------- ------
Outstanding--end of the
year................... 1,022,872 $20.38 937,451 $25.65 564,048 $24.43
========= ====== ========= ====== ======= ======
Weighted-average fair
value of options
granted during the
year................... $ 25.85 $ 36.89 $ 12.56
</TABLE>
Of the 564,048 outstanding options at December 31, 1998, 125,389 were
exercisable with the remaining having varying vesting periods. Exercise prices
for options outstanding as of December 31, 1998 ranged from $9.56 to $59.19.
Unexercised options with exercise prices of less than $25.00 for 375,623 shares
had a weighted average contractual life of 6.9 years and a weighted average
exercise price of $18.13 while unexercised options with exercise prices greater
than $25.00 for 188,425 shares had a weighted average contractual life of 9.2
years and a weighted average exercise price of $38.42.
In 1993, the Company entered into restricted stock agreements under which
Vesta granted 153,300 shares of common stock at $10.26 per share to officers of
the Company in exchange for promissory notes. In 1994, an additional 60,000
shares of Common Stock at $18.92 per share were issued to an officer of the
Company under a restricted stock agreement in exchange for a promissory note.
The common stock is being held by the Company as security for repayment of the
notes. A portion of the shares will be released to the officers annually as
they repay the promissory notes. The Company intends to pay cash bonuses each
year in amounts sufficient to reduce the notes by the amount of the purchase
price for the shares which are earned in that year. During 1996 the Company
acquired 19,564 shares of its common stock with respect to previously granted
awards of restricted stock in exchange for release of indebtedness of
$169 thousand. The balance of the notes at December 31, 1996 was $3,207
thousand. During 1997 and 1998 the Company did not acquire any shares of its
common stock with respect to previously granted awards of restricted stock. The
balance of the notes at December 31, 1997 and 1998 was $3,891 thousand and
$2,045 thousand, respectively. The promissory notes and the unearned
compensation are shown as deductions from stockholders equity.
In 1995, the Company entered into restricted stock agreements under which
the Company granted 23,333 shares of restricted common stock to certain
officers of the Company. The Company entered into restricted stock agreements
under which the Company granted 20,915 and 30,000 shares of restricted common
stock to certain employees of the Company and 9,632 and 5,399 shares of
restricted common stock to certain directors of the Company in 1997 and 1998,
respectively. The common stock with respect to all awards of restricted stock
is being held by the Company until the restrictions lapse.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note R--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial data, in thousands except
per share data:
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
------------------- ------------------- ------------------- -----------------
As As As
previously As previously As previously As
reported restated reported restated reported restated
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.. $233,217 $233,217 $253,374 $253,374 $196,400 $112,882 $ 159,549
Net premiums written.... 131,885 131,885 169,292 169,292 118,892 52,047 138,367
Premiums earned......... 139,292 139,292 164,076 164,076 131,278 65,352 140,972
Net investment income... 9,300 9,300 8,800 8,800 8,362 8,362 8,596
Operating costs and
expenses............... 144,639 139,693 189,910 194,905 162,076 102,098 214,619
Loss on asset
impairment............. -- -- -- -- -- -- (74,496)
Net Income (loss)....... (1,146) 2,071 (13,839) (17,185) (26,305) (24,773) (101,297)
======== ======== ======== ======== ======== ======== =========
Per share data:
Net income.............. (0.06) 0.11 (0.75) (0.93) (1.41) (1.34) (5.45)
Stockholder's equity per
share.................. 16.56 16.73 15.89 15.72 14.55 14.63 8.47
Cash dividends per
share.................. 0.04 0.04 0.04 0.04 0.04 0.04 0.04
<CAPTION>
Three Months Ended
------------------------------------------------------------
March 31, June 30,
1997 1997 September 30, 1997 December 31, 1997
---------- -------- ------------------- -------------------
As As
previously As previously As
reported restated reported restated
---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.. $171,187 $203,043 $239,794 $239,794 $252,025 $252,025
Net premiums written.... 105,736 137,186 114,405 114,405 169,148 169,148
Premiums earned......... 100,040 133,717 153,287 153,287 130,614 130,614
Net investment income... 6,147 7,178 12,251 12,251 10,384 10,384
Operating costs and
expenses............... 94,504 112,673 136,544 145,684 118,414 126,341
Net income (loss)....... 6,353 15,088 18,261 12,320 8,171 3,099
======== ======== ======== ======== ======== ========
Per share data:
Basic net income........ 0.34 0.81 0.98 0.66 0.44 0.17
Diluted net income...... 0.34 0.80 0.96 0.65 0.43 0.16
Stockholder's equity per
share.................. 14.87 15.78 16.90 16.58 16.71 16.12
Cash dividends per
share.................. 0.04 0.04 0.04 0.04 0.04 0.04
</TABLE>
The Company determined, subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in FAS 113. The Company erroneously
recorded a gain on this contract in the fourth quarter of 1997 and must adjust
its previously issued financial statements to appropriately defer and recognize
such gain. The first three quarters of 1998 and the fourth quarter of 1997 have
been restated to reflect the recognition of the deferred gain in 1998 (See Note
B). The third and fourth quarter of 1997 have also been restated to reflect
adjustments for salvage and subrogation related to the Shelby loss reserves.
Revenues, losses and expenses for the 1998 third quarter have been restated
to reflect changes in presentation. Amounts are restated to present adjustments
recorded in the Company's reinsurance assumed business on gross basis rather
than on a net basis as previously presented. Net income and earnings per share
for the quarters and year to date periods ending September 30, 1998 were not
affected by this change.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note S--Business Acquisition
After the close of business on June 30, 1997, the Company completed its
acquisition of all the issued and outstanding stock of the operating
subsidiaries of Anthem Casualty Insurance Group, Inc., each of which are
property and casualty insurance companies headquartered in Ohio, for $260.9
million. The acquired subsidiaries had $648 million of assets and approximately
$217 million of stockholders' equity at June 30, 1997. The acquisition was
accounted for as a purchase and the results of operations since the acquisition
date were consolidated. Goodwill from the transaction was being amortized
straight line over 15 years. This goodwill was deemed impaired in 1998.
A summary of net assets acquired follows:
<TABLE>
<S> <C>
Assets acquired:
Investments....................................................... $419,271
Cash.............................................................. 15,069
Goodwill.......................................................... 83,341
Other Assets...................................................... 166,944
--------
Total............................................................ 684,625
Liabilities Assumed
Loss and loss adjustment expenses................................. 300,315
Unearned premiums................................................. 98,378
Other............................................................. 25,052
--------
Total............................................................ $423,745
Purchase price.................................................... $238,750
Acquisition expenses.............................................. 22,130
Less cash acquired................................................ (15,069)
--------
Aggregate purchase price.......................................... $245,811
========
</TABLE>
The above table represents the purchase price plus acquisition costs through
December 31, 1997.
The table below presents supplemental pro forma information for 1996 and
1997 as if the Anthem acquisition were made at January 1, 1996, based on
estimates and assumptions considered appropriate:
<TABLE>
<CAPTION>
Twelve months ended
December 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues................................................. 784,858 709,643
Net income............................................... 42,351 44,131
Basic net income per common share........................ 2.25 2.38
Diluted net income per common share...................... 2.21 2.31
</TABLE>
Note T--Subsequent Events (Unaudited)
On March 15, 1999 the Company adopted a plan to discontinue its Commercial
Lines business with the exception of its Partners program, Transportation
program and BOP programs in the States of Alabama, Alaska, Arizona, and Texas.
Implementation of the plan will begin in June of 1999.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
Note T--Subsequent Events (continued)
On March 24, 1999 the Company sold its reinsurance assumed business with the
exception of the homeowner's reinsurance business that is currently being
converted to primary operations. The Company received $15 million in exchange
for its commitment to (a) enter into a 100% quota share treaty, effective
January 1, 1999 for all business written on or after that date; (b) use its
best efforts to novate to the purchaser or renew on the purchaser's paper, all
assumed treaties except those currently being converted to primary business
and; (c) facilitate the hiring by the purchaser of several of the Company's
reinsurance employees.
Summarized pro-forma results of the portion of the commercial and
reinsurance segments discontinued for the last three years are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1997 1998
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C>
Commercial Line
Gross Premiums Written................... $ 32,016 $ 47,466 $ 85,662
-------- -------- --------
Income (Loss) from Operations before
income
tax (expense) benefit .................. (295) 2,850 (13,615)
Income tax (expense) Benefit............. 97 (1,036) 5,434
-------- -------- --------
Income (Loss) from Operations............ $ (198) $ 1,814 $ (8,180)
======== ======== ========
Reinsurance Line
Gross premiums written................... $570,113 $474,981 $183,065
-------- -------- --------
Income (loss) from operations before
income
tax (expense) benefit................... 53,866 55,591 (67,817)
Income tax (expense) benefit............. (17,793) (19,683) 26,950
-------- -------- --------
Income (loss) from operations............ $ 36,073 $ 35,908 $(40,867)
======== ======== ========
</TABLE>
F-28
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
---------- -----------
(Unaudited)
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1999--$402,175; 1998--$446,516)............. $ 397,474 $ 457,219
Equity securities--at fair value: (cost: 1999--
$1,540; 1998--$18,127)............................ 4,121 21,099
Short-term investments............................. 140,617 131,029
---------- ----------
Total investments.................................. 542,212 609,347
Cash................................................. 28,723 25,321
Accrued investment income............................ 6,444 7,194
Premiums in course of collection .................... 91,457 121,948
Reinsurance balances receivable...................... 223,083 265,903
Reinsurance recoverable on paid losses............... 76,550 111,577
Deferred policy acquisition costs.................... 69,863 100,957
Property and equipment............................... 17,904 18,442
Income tax receivable................................ -- 17,950
Deferred income taxes................................ 19,493 19,090
Other assets......................................... 15,577 35,681
Goodwill............................................. 13,818 14,292
---------- ----------
Total assets....................................... $1,105,124 $1,347,702
========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses.................. $ 426,594 $ 504,911
Unearned premiums.................................... 209,284 309,515
---------- ----------
635,878 814,426
Deferred gain on retroactive reinsurance............. 7,254 9,848
Reinsurance balances payable......................... 15,976 49,028
Other liabilities.................................... 31,486 48,071
Short term debt...................................... 55,660 70,000
Long term debt....................................... 98,325 98,302
---------- ----------
Total liabilities.................................. 844,579 1,089,675
Commitments and contingencies: See Note C
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 au-
thorized, issued: 1999--18,964,322 shares; 1998--
18,964,322.......................................... 190 190
Additional paid-in capital........................... 154,001 156,465
Accumulated other Comprehensive Income, net of appli-
cable taxes (benefit) of $(742) and $4.786 in 1999
and 1998, respectively.............................. (1,378) 8,889
Retained earnings.................................... 22,716 10,120
Receivable from issuance of restricted stock......... (1,936) (2,045)
Treasury stock....................................... (13,048) (15,592)
---------- ----------
Total stockholders' equity......................... 160,545 158,027
---------- ----------
Total liabilities and stockholders' equity......... $1,105,124 $1,347,702
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amounts in thousands except per share data)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30,
--------------------- -------------------
1999 1998 1999 1998
-------- ----------- -------- ---------
(restated) (restated)
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Net premiums written............... $ 92,835 $ 169,292 $153,451 $301,177
(Increase) decrease in unearned
premiums.......................... 8,348 (5,216) 71,889 2,192
-------- --------- -------- --------
Net premiums earned................ 101,183 164,076 225,340 303,369
Net investment income.............. 7,896 8,800 16,305 18,100
Gain on sale of assumed reinsurance
renewal rights.................... -- -- 15,000 --
Other, including realized gains and
losses............................ 7,870 1,843 9,205 3,093
-------- --------- -------- --------
Total revenues................... 116,949 174,719 265,850 324,562
Expenses:
Losses and loss adjustment expenses
incurred.......................... 72,005 113,894 145,209 204,291
Policy acquisition expenses........ 17,131 63,681 57,963 95,721
Operating expenses................. 15,899 17,330 31,966 34,586
Interest on debt................... 3,346 3,345 7,103 6,453
Goodwill amortization.............. 270 1,611 540 3,280
-------- --------- -------- --------
Total expenses................... 108,651 199,861 242,781 344,331
Income (loss) before income taxes and
deferrable capital securities....... 8,298 (25,142) 23,069 (19,769)
Income taxes (benefit)............... 2,433 (9,319) 7,049 (7,379)
Deferrable capital securities
interest, net of income tax......... 1,362 1,362 2,724 2,724
-------- --------- -------- --------
Net income (loss)................ $ 4,503 $ (17,185) $ 13,296 $(15,114)
======== ========= ======== ========
Basic net income (loss) per common
share............................. $ .24 $ (.93) $ .71 $ (.82)
======== ========= ======== ========
Diluted net income (loss) per
common share...................... $ .24 $ (.93) $ .71 $ (.82)
======== ========= ======== ========
Dividends declared per common
share............................. $ -- $ .04 -- $ .08
======== ========= ======== ========
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss).................... $ 4,503 $ (17,185) $ 13,296 $(15,114)
Other comprehensive income, net of
tax:
Unrealized holding gains (losses)
on available-for-sale securities,
net of applicable taxes (benefit)
of $(340), $(26), $(1,342) and
$122, respectively................ (631) (48) (2,492) 226
Less Realized gains on available-
for-sale securities, net of
applicable taxes of $2,256, $0,
$2,252 and $73, respectively...... 4,182 -- 4,182 135
-------- --------- -------- --------
(4,813) (48) (6,674) 91
Comprehensive income (loss).......... $ (310) $ (17,233) $ 6,622 $(15,023)
======== ========= ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-30
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
1999 1998
--------- ----------
(restated)
(Unaudited)
<S> <C> <C>
Operating Activities:
Net income (loss)...................................... $ 13,296 $(15,114)
Adjustments to reconcile net income to cash from oper-
ating activities:
Change in:
Loss and LAE reserves.............................. (78,317) 3,097
Unearned premium reserve........................... (100,230) 13,029
Reinsurance balances payable....................... (33,053) 28,313
Accrued income taxes............................... 23,124 11,502
Other liabilities.................................. (17,458) (33,249)
Premiums in course of collection................... 30,491 (5,639)
Reinsurance balances receivable.................... 42,819 31,351
Reinsurance recoverable on paid losses............. 35,027 (56,766)
Other assets....................................... 21,014 7,413
Policy acquisition costs deferred.................... (15,581) (66,867)
Policy acquisition costs amortized................... 44,951 64,264
Amortization and depreciation........................ 3,170 5,935
Investment gains..................................... (6,117) (135)
(Gain) Loss on disposition of property, plant and
equipment........................................... (370) 173
--------- --------
Net cash (used in) operating activites............. (37,234) (12,693)
Investing Activities:
Investments sold or matured:
Fixed maturities available for sale-matured, called.... 153,138 78,386
Equity Securities...................................... 18,284 --
Investments acquired:
Fixed maturities available for sale.................... (104,155) (59,820)
Equity Securities...................................... 0 (4,119)
Net increase in short-term investments................... (9,587) (40,706)
Additions to property, plant and equipment............... (1,588) (2,237)
Dispositions of property, plant and equipment............ 777 292
--------- --------
Net cash provided from (used in) investing activi-
ties................................................ 56,869 (28,204)
Financing Activities:
Issuance (repayment) of long and short term debt....... (14,976) 24,747
Dividends paid......................................... (698) (1,379)
Capital contributions from exercising options.......... (559) 1,298
--------- --------
Net cash provided from financing activities.......... (16,233) 24,666
Increase (Decrease) in cash.............................. 3,402 (16,231)
Cash at beginning of period.............................. 25,321 21,801
--------- --------
Cash at end of period.................................... $ 28,723 $ 5,570
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-31
<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 or the six months ended June 30, 1999.
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, 1999 and 1998 was 18,685,631 and 18,454,982
respectively. Basic weighted average common shares outstanding for the three
month period ended June 30, 1999 and 1998 was 18,680,202 and 18,453,010,
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 produce
anti-dilutive results. Diluted weighted average shares outstanding for the six
month period ended June 30, 1999 and 1998 was 18,685,631 and 18,454,982,
respectively. Diluted weighted average shares outstanding for the three month
period ended June 30, 1999 and 1998 was 18,680,202 and 18,453,010,
respectively.
Recently Issued Accounting Standards: In December 1997, the ACSEC issued SOP
97-3, "Accounting by Insurance and Other Enterprises for Insurance Related
Assessments." SOP 97-3 provides guidance on when an insurance enterprise should
recognize a liability for guaranty fund or other assessments and how to measure
the liability. SOP 97-3 was effective January 1, 1999. The adoption of SOP 97-3
did not have a significant impact on Vesta's consolidated operating results or
financial position.
F-32
<PAGE>
Note B-Restatement of Financial Statements
The Company determined subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in SFAS 113. A contract is deemed
retroactive when an assuming enterprise agrees to reimburse a ceding enterprise
for liabilities incurred as a result of a past insurable events. For such
contracts, SFAS 113 requires that any initial gain and any benefit due from a
reinsurer as a result of subsequent covered losses be deferred in the financial
statements of the ceding enterprise and recognized into income over the
settlement period of the underlying claims. The Company erroneously recorded a
gain on this contract in the fourth quarter of 1997 and has adjusted its
previously issued financial statements to appropriately defer and recognize
such gain. Analysis of this contract under the recovery method resulted in the
following adjustments to the six month period June 30, 1998 financial
statements included herein:
<TABLE>
<CAPTION>
As Previously
Reported Restatement As Restated
------------- ----------- -----------
<S> <C> <C> <C>
Losses incurred and loss adjustment
expense............................... $204,243 $ 48 $204,291
Income taxes............................. (7,360) (19) (7,379)
Net income........................... (15,085) (29) (15,114)
Basic net income per common share........ (.82) -- (.82)
Diluted net income per common share...... (.82) -- (.82)
Deferred income taxes.................... 23,628 (5,947) 17,681
Deferred gain on retroactive
reinsurance............................. (5,947) (16,994) (16,994)
Retained earnings........................ 148,622 (11,047) 137,575
</TABLE>
The deferred gain, which is included in the accompanying balance sheets,
associated with this contract at December 31, 1998 and June 30, 1999 is $9.8
million and $7.3 million, respectively.
Note C--Contingencies
Litigation: 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 accounting irregularities
consisting of inappropriate reductions of reserves and overstatements 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 overstatements. This investigation concluded that
inappropriate amounts had, in fact, been recorded and the Company determined it
should restate its previously issued 1997 financial statements and first
quarter 1998 Form 10-Q. Additionally, during its internal investigation the
Company 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 jin the year in which
the related reinsurance contracts were entered even though the terms of those
contracts frequently bridged two years. The Company determined that reinsurance
premiums should be recognized as earned over the contract period and corrected
the error in its accounting methodology by restating previously issued
financial statements. The Company issued press releases, which were filed with
the Securities and Exchange Commission on June 1, 1998 and June 29, 1998
announcing its intention to restate its h istorical financial statements.
The Company restated its previously issued financial statements for 1995,
1996 and 1997 and its first quarter 1998 Form 10-Q for the above items by
issuance of a current report on Form 8-K dated August 19, 1998. These
restatementsd resulted in a cumulative decrease to stockholder's equity of
$75.2 million through March 31, 1998.
Commencing in June, 1998, Vesta and several of its current and former
officers and directors were named in several purported class action lawsuits in
the United States District Court for the Northern District of
F-33
<PAGE>
Alabama and in one purported class action lawsuit in the Circuit Court of
Jefferson County, Alabama. Several of Vesta's officers and directors also have
been named in a derivative action lawsuit in the Circuit Court of Jefferson
County, Alabama, in which Vesta is a nominal defendant.
The class action lawsuit filed in the Circuit Court of Jefferson County,
Alabama has been dismissed and the derivative case has been placed on the
administrative docket. The class actions filed in the United States District
Court for the Northern District of Alabama have been consolidated into a single
action in that district. The purported class representatives in that action
have filed (a) a consolidated amended complaint alleging that the defendants
violated the federal securities laws and (b) a motion for class certification.
The consolidated amended complaint also added as defendants Torchmark
Corporation and the Company's predecessor auditors, KPMG Peat Marwick, LLP. The
consolidated amended complaint alleges various violations of the federal
securities law and seeks unspecified but potentially significant damages.
The Company has notified its directors and officers liability insurance
companies of these lawsuits and the consolidated amended complaint. The
litigation is still in the preliminary stages and there has been no class
certification. The Company intends to vigorously defend this litigation and
intends to explore all available rights and remedies it may have under the
circumstances. In related litigation, in September, 1998, Cincinnati Insurance
Company ("Cincinnati"), one of the Company's directors and officers liability
insurance carriers, filed a lawsuit in the United States District Court for the
Northern District of Alabama seeking to avoid coverage under its directors and
officers liability and other policies. The Company filed a motion to dismiss
Cincinnati's complaint on jurisdictional grounds in federal court (which was
granted), and filed a lawsuit against Cincinnati in the Circuit Court of
Jefferson County, Alabama seeking damages arising out of Cincinnati's actions.
Cincinnati has filed an answer and counterclaim in that case again seeking to
avoid coverage.
The Company intends to vigorously resist Cincinnati's efforts to avoid
coverage. Because these matters are in their early stages, their ultimate
outcome cannot be determined. Accordingly, no provision for any liability that
may result there from has been made in the accompanying consolidated financial
statements.
As discussed above, the Company corrected its accounting for assumed
reinsurance business through restatement of its previously issued financial
statements. Similar corrections were made on a statutory accounting basis
through recording cumulative adjustments in Vesta Fire's 1997 statutory
financial statements. The impact of this correction has been reflected in
amounts ceded under the Company's 20 percent whole account quota share treaty
which was terminated on June 30, 1998 on a run-off basis. The Company believes
such treatment is appropriate under the terms of this treaty and has calculated
the quarterly reinsurance billings presented to the treaty participants
accordingly. The aggregate amount included herein as recoverable from such
reinsurers totaled $54.0 million at June 30, 1999. The Company has collected
$34.5 million from NRMA, the largest participant on the treaty through the draw
down of a letter of credit which was required to be posted since NRMA is a
foreign reinsurer. NRMA has filed a lawsuit in the United States District Court
for the Northern District of Alabama contesting the Company's claim and the
validity of the treaty, and is seeking return of the $34.5 million. The Company
has filed a demand for arbitration as provided for in the treaty and has filed
a motion to compel arbitration which is currently pending in the United States
District Court action. The Company recently filed for arbitration against the
other two participants on the treaty. While management believes its
interpretation of the treaty's terms and computations based thereon are
correct, these matters are in their early stages and their ultimate outcome
cannot be determined at this time.
The Company, through its subsidiaries, is routinely a party to other pending
or threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation or arbitration to be material.
F-34
<PAGE>
As previously reported in the Company's Form 10-K for the period ended
December 31, 1998, A.M. Best, which rates insurance companies based on factors
of concern to policyholders, lowered its rating on the Company's insurance
subsidiaries on February 24, 1999 to "B++" (Very Good, its fifth highest rating
category) from "A-" (Excellent, its fourth highest rating category). Some of
the factors noted by A.M. Best as contributing to the downgrade include the
Company's operating performance, which was affected in part by heavy
catastrophe losses, the Company's debt level, and the uncertainty associated
with the Company's then ongoing negotiations with its lenders to amend its
credit agreement in light of then existing covenant defaults. The Company
determined that the impact of the A.M. Best downgrade on the commercial line of
business would necessitate corrective actions in excess of what the marketplace
will accept. Therefore, the Company elected to withdraw from certain commercial
lines of business in the second quarter of 1999. The Company also determined
that the impact of the downgrade on the reinsurance segment significantly
impaired the Company's ability to compete effectively in the current
reinsurance marketplace. Therefore, effective March 24, 1999 the Company sold
substantially all of its reinsurance business and operations to another
reinsurer in exchange for $15 million as disclosed in Note D.
On May 3, 1999, A.M. Best further lowered its rating on the Company's
insurance subsidiaries from "B++" to "B" (Fair). As a result of the further
downgrade, the Company has elected to withdraw from its remaining commercial
lines. Also, the further downgrade may negatively impact the Company's current
homeowners lines, and remaining reinsurance lines of business.
Note D--Sale of Assumed Reinsurance Business
On March 24, 1999, the Company entered into an agreement to transfer certain
of its reinsurance assumed business to Hartford Fire Insurance Company (Hart
Re). The agreement calls for the Company to reinsure its North American assumed
business underwritten in the Birmingham office with a January 1, 1999 effective
date to Hart Re under a 100% quota share treaty and for the Company to use its
best efforts to novate the policies to Hart Re and encourage renewals with Hart
Re for policies not novated. The Company received $15 million in consideration
of the transaction, such payment having been conditioned on certain Company
employees entering into employment relationships with Hart Re.
The Company is exiting the reinsurance assumed business with this
transaction and continued conversion or commutation and termination of all
other assumed reinsurance business. First quarter results include recognition
of recoverables and payables under the terms of the Hart Re agreement and
recognition of $15 million as gain associated with the agreement. As of June
30, 1999, the Company had novated certain policies to Hart Re which had written
premiums of $43.8 million for the six months ended June 30, 1999.
F-35
<PAGE>
Note E--Segment Information
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Reinsurance operations
Net premiums earned............................... $ 57,013 $ 149,905
Net investment income and realized gain/(loss).... 5,752 9,010
Other income...................................... 15,000 --
Underwriting gain (loss).......................... (7,391) (11,849)
Personal operations
Net premiums earned............................... 132,336 118,782
Net investment income and realized gain/(loss).... 13,353 7,140
Other income...................................... 2,180 2,290
Underwriting gain (loss).......................... 1,386 (14,603)
Commercial operations
Net premiums earned............................... 35,991 34,682
Net investment income and realized gain/(loss).... 3,632 2,085
Other income...................................... 593 668
Underwriting gain (loss).......................... (3,793) (4,777)
Other operations
Interest expense.................................. 7,103 6,453
Goodwill amortization............................. 540 3,280
------------ ------------
Total pretax income (loss) from operations...... $ 23,069 $ (19,769)
============ ============
Total indentifiable assets
Reinsurance operations
Investments and other assets.................... $ 307,816 $ 451,667
Deferred acquisition costs...................... 22,494 57,764
Personal operations
Investments and other assets.................... 433,596 520,200
Deferred acquisition costs...................... 40,341 35,465
Commercial operations
Investments and other assets.................... 293,849 274,878
Deferred acquisition costs...................... 7,028 7,728
------------ ------------
Total assets.................................. $ 1,105,124 $ 1,347,702
============ ============
</TABLE>
F-36
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
Registration fee under the Securities Act of 1933, as amended.... $ 6,000*
Printing and engraving........................................... 150,000*
Accounting services.............................................. 50,000
Legal fees of Registrant's counsel............................... 20,000
Miscellaneous.................................................... 5,000
Total............................................................ $231,000*
</TABLE>
- --------
*To be paid by the selling stockholder.
Item 14. Indemnification of Directors and Officers.
The Company is a Delaware corporation. Section 145 of the Delaware General
Corporation Law the "DGCL") empowers a Delaware corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including
attorneys' fees) incurred by any officer or director in defending such action,
provided that the director of officer undertakes to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses (including attorneys' fees) which he
actually and reasonably incurred in connection therewith. The indemnification
provided is not deemed to be exclusive of any other rights to which an officer
or director may be entitled under any corporation's bylaws, agreement, vote or
otherwise.
The Company's Certificate of Incorporation provides that no officer or
director of the Company will be personally liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as an officer or
director, except for liability (i) for any breach of the officer's or
director's duty of loyalty to the company or shareholders, (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 Delaware law, which
concerns unlawful payments of dividends, stock purchases or redemptions, or
(iv) for any transaction from which the officer or director received an
improper personal benefit.
The Company's Bylaws provide that each director and officer of the Company,
and each person serving at the request of Vesta or as a director, officer,
employee or agent of any other corporation or of a partnership, joint venture,
trust or other enterprise, who was or is made a party to or is threatened to be
made a party to or
II-1
<PAGE>
is otherwise involved in any action, suit or proceeding, will be indemnified
and held harmless to the fullest extent authorized by Delaware Law against all
expense, liability and loss reasonably incurred by such indemnitee in such
action, suit or proceeding. The Company's Bylaws also provide that the Company
may maintain insurance, at its expense, to protect itself and any director,
officer, employee or agent of the Company or of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss.
The Company has purchased directors' and officers' liability insurance
covering certain liabilities incurred by its officers and directors in
connection with the performance of their duties.
While the Company's Bylaws provide officers and directors with protection
from awards for monetary damage for breaches of their duty of care, they do not
eliminate such duty. Accordingly, the By-laws will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
an officer's or a director's breach of his or her duty of care.
Item 15. Recent Sales of Unregistered Securities.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Capital Securities.
These securities have a 30 year maturity and are not redeemable except in
certain limited circumstances. These securities were sold in a private
placement transaction to qualified institutional buyers and were not registered
under Securities Act of 1933 (the "'33 Act") pursuant to an exemption from
registration provided by Rule 144A promulgated under the '33 Act. A portion of
the proceeds from the sale of these capital securities was used to repay
indebtedness under the Company's existing lines of credit and the remainder was
for general corporate purposes.
On April 13, 1999, the Company issued warrants exercisable for approximately
6.6% of its common stock to its senior lenders. The warrants, which were issued
in reliance on the exemption from registration provided by Section 4(2) of the
33 Act, have been cancelled unexercised.
On September 30, 1999, the Company issued 2,950,000 shares of its Series A
Convertible Preferred Stock to the Birmingham Investment Group, LLC at a
purchase price of $8.50 per share, or an aggregate of $25,075,000, in reliance
on the exemption from registration provided by Section 4(2) of the 33 Act and
Rule 506 of Regulation D promulgated thereunder. Each share of such preferred
stock has a cumulative dividend rate of 9%, compounded semi-annually, and are
convertible into two shares of the Company's common stock, subject to
adjustment.
In each transaction in which securities were issued in reliance on Section
4(2) of the 33 Act or Rule 506 thereunder, the recipients of securities in each
such transaction (i) had adequate access, through their relationships with the
Company, to information about the Company and (ii) represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof. In addition, appropriate
legends were affixed to the share certificates and warrants issued in such
transactions regarding applicable restrictions on their transferability.
Item 16. Exhibits and Financial Statement Schedules.
(a) An index to Exhibits appears at pages II-12 through II-15 hereof.
(b) The following Financial Statement Schedules are included in this
registration statement on the pages indicated:
<TABLE>
<C> <S> <C>
Condensed Financial Information
II. of Registrant (Parent Company).....II-3
Supplemental Insurance
III. Information (Consolidated).........II-6
IV. Reinsurance (Consolidated).........II-8
Valuation and Qualifying
V. Accounts (Consolidated)............II-9
</TABLE>
Schedules not referred to have been omitted as inapplicable or not required
by Regulation S-X.
II-2
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
At December 31,
-------------------
1997 1998
---------- --------
(restated)
<S> <C> <C>
Assets
Investment in affiliates................................ $547,575 $430,910
Short-term investments.................................. 7,015 4,791
-------- --------
Total investments..................................... 554,590 435,701
Cash.................................................... 8 10,523
Other assets............................................ 9,507 11,179
-------- --------
Total assets.......................................... $564,105 $457,403
======== ========
Liabilities
Other liabilities....................................... $ 20,351 $ 27,981
Long term debt.......................................... 246,418 271,395
-------- --------
Total liabilities..................................... 266,769 299,376
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none -- --
issued....................................................
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1997--18,970,695 shares; 1998--18,964,322
shares............................................... 190 190
Additional paid-in capital.............................. 162,550 156,465
Unrealized investment gains, net of applicable taxes.... 9,829 8,889
Retained earnings....................................... 154,074 10,120
Receivable from issuance of restricted stock............ (3,891) (2,045)
Treasury stock.......................................... (25,416) (15,592)
-------- --------
Total stockholders' equity............................ 297,336 158,027
-------- --------
Total liabilities and stockholders' equity............ $564,105 $457,403
======== ========
</TABLE>
II-3
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1996 1997 1998
--------- ------------------------
(restated)
<S> <C> <C> <C>
Revenues:
Net other income (loss)................. $ 213 $ (5,224) $ 8,457
--------- ---------- -----------
Total revenues........................ 213 (5,224) 8,457
Expenses:
Interest expenses....................... 10,059 10,901 22,579
Operating expenses...................... (6,745) (10,327) 2,384
--------- ---------- -----------
Total expenses........................ 3,314 574 24,963
--------- ---------- -----------
Net loss before income tax and equity
in earnings of affiliates............... (3,101) (5,798) (16,506)
Income tax benefit....................... 1,330 1,932 5,698
--------- ---------- -----------
Income before equity in earnings of (1,771) (3,866) (10,808)
affiliates...............................
Equity in earnings of affiliates......... 38,584 40,726 (130,376)
--------- ---------- -----------
Net income (loss)........................ $ 36,813 $ 36,860 $ (141,184)
========= ========== ===========
</TABLE>
II-4
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
Cash provided from operations............. $ 11,181 $ 48,163 $ 6,526
Cash used in investing activities:
Contribution to investments in -- (154,616) (25,000)
affiliates................................
Net (increase) decrease in short-term (6,980) (35) 2,224
investments...............................
---------- ----------- ----------
Cash used in investing activities......... (6,980) (106,488) (22,776)
Cash (used in) provided from financing
activities:
Dividends paid........................... (2,836) (2,797) (2,770)
Acquisition of treasury stock............ (10,597) (21,164) --
Issuance of treasury stock............... 563 6,302 --
Capital Contributions from exercising 1,481 828 4,836
stock options............................
Issuance of debt and deferrable capital 7,116 123,321 24,700
securities................................
---------- ----------- ----------
Cash (used in) provided from financing (4,273) 106,490 26,766
activities................................
Net increase (decrease) in cash........... (72) 2 10,516
Cash balance at beginning of period....... 77 5 7
---------- ----------- ----------
Cash balance at end of period............. $ 5 $ 7 $ 10,523
========== =========== ==========
</TABLE>
II-5
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION (CONSOLIDATED)
As of December 31, 1997 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Reserves for
Deferred Unpaid Claims
Policy and Claim
Acquisition Adjustment Unearned
Costs Expenses Premiums
----------- ------------- --------
<S> <C> <C> <C>
As of December 31, 1997:
Reinsurance................................ $ 52,742 $238,799 $192,922
Commercial................................. 10,610 130,702 47,731
Personal................................... 38,772 227,296 124,399
-------- -------- --------
$102,124 $596,797 $365,052
======== ======== ========
As of December 31, 1998:
Reinsurance................................ $ 57,764 $148,021 $139,663
Commercial................................. 7,728 178,511 42,759
Personal................................... 35,465 178,379 127,093
-------- -------- --------
$100,957 $504,911 $309,515
======== ======== ========
</TABLE>
II-6
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION--(continued)
(CONSOLIDATED)
For the Years Ended December 31, 1996, 1997 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Claim and
Claim
Net Net Adjustment Amortization Other Net
Earned Investment Expenses of Operating Premium
Premium Income Incurred DAC Expenses Written
-------- ---------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Reinsurance............ $342,452 $18,838 $205,005 $ 40,104 $60,025 $373,486
Commercial............. 33,678 1,051 21,148 4,285 11,487 24,801
Personal............... 63,206 3,259 25,630 8,707 21,095 69,769
-------- ------- -------- -------- ------- --------
$439,336 $23,148 $251,783 $ 53,096 $92,607 $468,056
======== ======= ======== ======== ======= ========
As of December 31, 1997:
Reinsurance............ $335,360 $17,023 $193,473 $ 65,725 $51,377 $351,811
Commercial............. 42,873 6,565 16,812 12,088 4,545 33,499
Personal............... 139,425 12,372 88,353 27,396 19,333 141,165
-------- ------- -------- -------- ------- --------
$517,658 $35,960 $298,638 $105,209 $75,255 $526,475
======== ======= ======== ======== ======= ========
As of December 31, 1998:
Reinsurance............ $194,261 $12,846 $175,633 $ 77,706 $20,838 $157,728
Commercial............. 68,368 7,827 54,712 24,717 6,461 69,022
Personal............... 247,064 14,385 164,977 62,177 51,595 264,840
-------- ------- -------- -------- ------- --------
$509,693 $35,058 $395,322 $164,600 $78,894 $491,590
======== ======= ======== ======== ======= ========
</TABLE>
II-7
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE IV--REINSURANCE (CONSOLIDATED)
For the Years Ended December 31, 1996, 1997 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Gross Ceded to Assumed Percentage of
Direct Other from Other Net Amount Assumed
Premiums Earned Amount Companies Companies Amount to Net
- --------------- -------- --------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C>
1996...................... $161,824 $149,964 $427,476 $439,336 97.3%
1997...................... 323,394 300,799 495,063 517,658 95.6%
1998...................... 478,389 310,652 341,956 509,693 67.1%
</TABLE>
II-8
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
For the Years Ended December 31, 1996, 1997 and 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Balance Additions-- Balance
at Charged at End
Beginning to Costs and of
Description of Period Expenses Deductions Period
- ----------- --------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Allowance for premiums in course of
collection:
1996............................... 70 168 168 70
1997............................... 70 797 213 654
1998............................... 654 13,688 130 14,212
</TABLE>
II-9
<PAGE>
Item 17. Undertakings
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in this Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the Company pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered herein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this Registration Statement shall be deemed to be
a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against the public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Birmingham, State of
Alabama, on November 5, 1999.
VESTA INSURANCE GROUP, INC.
/s/ Norman W. Gayle, III
By___________________________________
Norman W. Gayle, III
Its President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
Signature Title
Date
/s/ Norman W. Gayle, III Director, President and September 28, 1999
- ------------------------------- Chief Executive Officer
Norman W. Gayle, III (Principal Executive
Officer)
/s/ James E. Tait Director, Executive Vice September 28, 1999
- ------------------------------- President and Chief
James E. Tait Financial Officer
(Principal Financial
Officer)
/s/ William P. Cronin Senior Vice President, September 28, 1999
- ------------------------------- Controller (Principal
William P. Cronin Accounting Officer)
Director
- -------------------------------
Robert B. D. Batlivala, PhD.
/s/ Walter M. Beale, Jr. Director September 28, 1999
- -------------------------------
Walter M. Beale, Jr.
/s/ Ehney A. Camp, III Director September 28, 1999
- -------------------------------
Ehney A. Camp, III
/s/ Clifford F. Palmer Director September 28, 1999
- -------------------------------
Clifford F. Palmer
/s/ Jarvis W. Palmer Director September 28, 1999
- -------------------------------
Jarvis W. Palmer
Director
- -------------------------------
Larry D. Striplin
Director
- -------------------------------
James A. Taylor
</TABLE>
II-11
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company, dated
September 1, 1993 (filed as an exhibit to the Company's Form 10-
Q for the quarter ended June 30, 1998, filed on June 16, 1998
and incorporated herein by reference (File No. 1-12338))
3.2 By-Laws of the Company (Amended and Restated as of October 1,
1993) (filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No. 33-68114)
of Vesta Insurance Group, Inc., filed on October 18, 1993 and
incorporated herein by reference (File No. 1-12338))
3.3+ Certificate of Designation, filed with the Secretary of State of
the State of Delaware, establishing rights and preferences of
the Company's Series A Convertible Preferred Stock.
4.1 Indenture between the Company and Southtrust Bank of Alabama,
National Association, dated as of 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))
4.2 Supplemental Indenture 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 by reference (File No. 1-12338))
5+ Opinion of Balch & Bingham LLP
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.
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
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))
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+ Employment Agreement between the registrant and Norman W.
Gayle, III, dated as of September 30, 1999.
10.14+ Employment Agreement between the registrant and James E. Tait,
dated as of September 30, 1999.
10.15+ Employment Agreement between the registrant and Donald W.
Thornton, dated as of September 30, 1999.
10.16+ Vesta Insurance Group, Inc. Executive Officer Incentive
Compensation Plan.
10.17 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))
10.18 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))
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.19 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 and its subsidiary and affiliated companies 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.
10.20 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.
10.21 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, 1998 and incorporated herein by
reference (File No. 1-12338)).
10.22 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
10.23 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, 1997
10.24+ Credit Agreement dated September 30, 1999 between Vesta
Insurance Group, Inc. and The Bank establishing a
$15,000,000 revolving credit facility.
10.25+ Credit Agreement, dated September 30, 1999, between Vesta
Insurance Group, Inc. and the Banc Corporation establishing
a $5,000,000 revolving credit facility.
10.26 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 September 30, 1997, filed on November
13, 1997 and incorporated herein by reference (File No.
1-12338))
10.27 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 and incorporated
herein by reference (File No. 1-12338))
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.28 Agreement for Data Processing Services between Shelby
Insurance Company and Policy Management Systems
Corporation, dated January 1, 1998 (filed as an exhibit
to the Company's Form 10-Q for the period from June 30,
1998, filed on August 20, 1998 and incorporated herein by
reference (File No. 1-12338))
10.29 Agreement by and among Hartford Fire Insurance Company,
J. Gordon Gaines, Inc. and Vesta Fire Insurance
Corporation (filed as Exhibit 2.1 to the Company's
Form 8-K filed April 12, 1999)
10.30 Convertible Preferred Stock Purchase Agreement by and
between Vesta Insurance Group, Inc. and Birmingham
Investment Group, LLC (filed as Exhibit 10.1 to the
Company's Form 8-K filed on July 2, 1999)
10.31 Acquisition Agreement between Vesta Insurance Group, Inc.,
Vesta Management Corporation of Texas, Inc. and Employers'
Reinsurance Corporation (filed as Exhibit 10.2 to the
Company's Form 8-K filed on July 2, 1999)
11+ Statement regarding computation of earnings II-
21+ List of subsidiaries
23.1+ Consent of KPMG Peat Marwick LLP
23.2+ Consent of PricewaterhouseCoopers LLP
</TABLE>
- --------
*These are the Company's compensatory plans.
+Filed herewith.
II-15
<PAGE>
EXHIBIT 3.3
Certificate of Designation of Preferences
and Rights of Series A Convertible Preferred Stock
of Vesta Insurance Group, Inc.
The undersigned, Donald W. Thornton, the duly elected and acting Senior
Vice President, General Counsel and Secretary of Vesta Insurance Group, Inc., a
Delaware corporation (the "Corporation") does hereby certify that, pursuant to
the authority conferred upon the Board of Directors (the "Board of Directors")
by the Restated Certificate of Incorporation (the "Certificate of
Incorporation") of the Corporation, on June 27, 1999 and September 28,1999, the
Board of Directors adopted the following resolutions creating a series of
preferred stock designated as Series A Convertible Preferred Stock:
WHEREAS, pursuant to Article IV of the Certificate of Incorporation of the
Corporation, authority was expressly vested in the Board of Directors pursuant
to Section 151 of the General Corporation Law of the State of Delaware to
authorize preferred stock with such powers, preference and relative
participation, optional or other special rights, classifications, limitations or
restrictions thereof as said Board of Directors may deem appropriate; and
WHEREAS, this Board of Directors now desires to fix and deem such matters
with respect to the Corporation's capital stock classified as Series A
Convertible Preferred Stock consisting of 2,950,000 shares with a $.01 per share
par value;
Now, Therefore Be It Resolved As Follows:
Description of Series A Convertible Preferred Stock. The Series A
Convertible Preferred Stock (the "Series A Convertible Preferred Stock,"
sometimes referred to herein as the "Series A Convertible Preferred Shares")
shall consist of 2,950,000 shares, each share having the par value of $.01 per
share. All shares of each class of Series A Convertible Preferred Stock shall
be identical with each other in all respects.
Section 1. Dividends on Series A Convertible Preferred Stock.
1.1 General Dividend Obligation. The Corporation shall pay to the holders
of the Series A Convertible Preferred Stock, out of the assets of the
Corporation at any time available for the payment of dividends under the
provisions of the General Corporation Law of the State of Delaware (the "DGCL"),
preferential dividends at the times and in the amounts provided for in this
Part.
1.2 Accrual of Dividends. Dividends on each Series A Convertible
Preferred Share shall be cumulative from the date of issuance of such Series A
Convertible Preferred Share, whether or not at the time such dividend shall
accrue or become due or at any other time there shall be profits,
<PAGE>
surplus or other funds of the Corporation legally available for the payment of
dividends. Dividends shall accrue on each Series A Convertible Preferred Share
(at the rate and in the manner prescribed by Sections 1.2, 1.3, and 1.5) from
and including the date of issuance of such Series A Convertible Preferred Share
to and including the date on which payment equal to the Redemption Price (as
hereinafter defined) of such Series A Convertible Preferred Share shall have
been paid in the manner prescribed in Section 4.3. For purposes of this Section,
the date on which the Corporation shall initially issue any Series A Convertible
Preferred Share shall be deemed to be the "date of issuance" of such Series A
Convertible Preferred Share regardless of how many times transfer of such Series
A Convertible Preferred Share shall be made on stock records maintained by or
for the Corporation and regardless of the number of certificates which may be
issued to evidence such Series A Convertible Preferred Share (whether by reason
of transfers of such Series A Convertible Preferred Share or for any other
reason).
1.3 Payment of Dividends. Dividends shall accrue on each Series A
Convertible Preferred Share at the rate of 9% per annum of the Purchase Price.
Dividends shall be payable on Series A Preferred Stock on each July 1 and
January 1 beginning January 1, 2000, and each such day is herein called a
"Dividend Payment Date." On each Dividend Payment Date all dividends which
shall have accrued on each Series A Convertible Preferred Share then outstanding
during the six months ending upon such Dividend Payment Date shall be deemed to
become "due" for all purposes of this Section 1.3 regardless of whether the
Corporation shall be able or legally permitted to pay such dividend on such
Dividend Payment Date. If any dividend on any Series A Convertible Preferred
Stock shall for any reason not be paid at the time such dividend shall become
due, then such dividend in arrears shall be paid as soon as payments of same
shall be permissible under the provisions of the DGCL and until such time as the
Vesta Capital Trust I, or successor thereto, pays dividends on its 8.525%
Capital Securities. Notwithstanding the foregoing sentence, until such dividend
in arrears is paid, dividends shall continue to accrue on each Series A
Convertible Preferred Share but the percentage rate expressed herein shall be
applied to the Purchase Price thereof plus all dividends in arrears thereon
(including dividends computed pursuant to this sentence). In the event that any
dividends remain accrued but unpaid at the time of any conversion or redemption
of any of the Series A Preferred Stock as set forth herein, such accrued but
unpaid dividends shall be paid in accordance with this paragraph,
notwithstanding such conversion.
1.4 Distribution of Partial Dividend Payments. If at any time the
Corporation shall pay less than the total amount of dividends due on outstanding
Series A Convertible Preferred Stock at the time of such payment, such payment
shall be distributed among the holders of Series A Convertible Preferred Stock
so that an equal amount shall be paid with respect to each outstanding share of
Series A Convertible Preferred Stock.
1.5 Dividends shall not accrue or accumulate on any share of Series A
Convertible Preferred Stock, except to the extent they are declared but unpaid.
Accumulation of declared but unpaid dividends shall bear no interest other than
as set forth in Section 1.3.
<PAGE>
Section 2. Redemption.
On or after July 1, 2009, the Corporation shall have the right, at its
option and by resolution of its Board of Directors, at any time it may lawfully
do so, to redeem all or any portion of the outstanding shares of the Series A
Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock
to be so redeemed shall be redeemed against payment of an amount in cash equal
to the following redemption prices per share, plus, in each case, all declared
and unpaid dividends thereon to the date fixed for redemption (the "Redemption
Price").
If redeemed during the twelve-month period beginning July 1:
2009 110% 2012 104%
2010 108% 2013 102%
2011 106%
In the event the Corporation elects to redeem less than all of the out-
standing shares of the Series A Convertible Preferred Stock, it shall effect
such redemption ratably according to the number of shares of Series A
Convertible Preferred Stock held by each holder of the then outstanding Series A
Convertible Preferred Stock.
Notice of such redemption (the "Redemption Notice") specifying the date
fixed for said redemption (the "Redemption Date"), the redemption price, the
place where the amount to be paid upon redemption is payable and the date on
which such holder's Conversion Rights (as hereinafter defined) as to such shares
terminate and calling upon such holder to surrender his certificate or
certificates representing the shares to be redeemed to the Corporation in the
manner and at the place to be designated in such Redemption Notice, shall be
mailed, postage prepaid, at least forty-five (45) days but not more than ninety
(90) days prior to said Redemption Date to the holders of record of the Series A
Convertible Preferred Stock at their respective addresses as the same shall
appear on the books of the Corporation. On or after the Redemption Date, each
holder of shares of the Series A Convertible Preferred Stock to be redeemed
shall surrender his certificate or certificates representing such shares to the
Corporation in the manner and at the place designated in the Redemption Notice,
and thereupon the amount payable upon redemption shall be paid to the order of
the person whose name appears on such certificate or certificates as the owner
thereof. In the event that less than all of the shares represented by such
certificate are redeemed, a new certificate shall be issued representing the
unredeemed shares. All shares of redeemed stock shall be canceled and retired
and not reissued.
If the Redemption Notice shall have been so mailed, and if, on or before
the Redemption Date specified in such notice, all funds necessary for such
redemption shall have been set aside by the Corporation, separate and apart from
its other funds, in trust for the account of the holders of the shares to be
redeemed, so as to be and continue to be available therefor, then, on and after
said Redemption Date, notwithstanding that any certificate for shares so called
for redemption shall not have been surrendered for cancellation, the shares
represented thereby so called for redemption shall
<PAGE>
be deemed to be no longer outstanding, the right to receive dividends thereon
shall cease, and all rights with respect to such shares of Series A Convertible
Preferred Stock so called for redemption shall forthwith cease and terminate,
except the right of the holders thereof to receive out of the funds so set aside
in trust the amount payable on redemption thereof but without any interest.
If the funds of the Corporation legally available for redemption on any
Redemption Date are insufficient to redeem the total number of shares of Series
A Convertible Preferred Stock to be redeemed on such date, those funds which are
legally available will be used to redeem the maximum possible number of shares
ratably among the holders of such shares to be redeemed. The shares of Series A
Convertible Preferred Stock not redeemed shall remain outstanding and entitled
to all the rights and preferences provided herein.
Section 3. Preference on Liquidation.
3.1 Series A Preference. In the event of any liquidation, dissolution,
involuntary or voluntary corporate reorganization under the federal bankruptcy
laws or similar state laws, or winding up of the Corporation, the holders of
shares of the Series A Convertible Preferred Stock then outstanding shall be
senior to any other class or series of capital stock of the Corporation, and
shall be entitled to be paid out of the assets and surplus funds of the
Corporation available for distribution to its shareholders, and before any
payment shall be made to the holders of any shares of Corporation Common Stock
(the "Common Stock"), an amount equal to $8.50 per share plus declared and
unpaid dividends thereon to the date fixed for distribution. If upon any such
liquidation, dissolution, bankruptcy or winding up of the Corporation the assets
and surplus funds of the Corporation available for distribution to its
shareholders shall be insufficient to pay the holders of the Series A
Convertible Preferred Stock the full amounts to which they are entitled, the
holders of the Series A Convertible Preferred Stock shall share ratably in the
distribution of such assets and surplus funds in proportion to the full
preferential amounts to which each such holder is otherwise entitled.
3.2 In the event payments provided for in Section 3.1 shall have been
made, the holders of Series A Convertible Preferred Stock shall be entitled to
share pro rata on a per share basis (treating each share of Series A Convertible
Preferred Stock as if converted into Common Stock pursuant to Section 4.6) in
all remaining assets and surplus funds of the Corporation available for
distribution to its shareholders.
3.3 The merger or consolidation of the Corporation into or with another
corporation or other entity or any other corporate reorganization in which the
Corporation shall not be the continuing or surviving entity of such
consolidation, merger or reorganization, the sale of all or substantially all
the assets of the Corporation, or a transaction or series of related
transactions by the Corporation in which in excess of fifty percent (50%) of the
Corporation's voting power is transferred, shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation.
<PAGE>
Section 4. Conversion.
The holders of the Series A Convertible Preferred Stock shall have con-
version rights as follows (the "Conversion Rights"):
4.1 Right to Convert. Each share of Series A Convertible Preferred Stock
shall be convertible, at the option of the holder thereof, without payment of
additional consideration, at any time after the date of issuance of such share,
at the office of the Corporation or any transfer agent for such stock, into
fully-paid and nonassessable shares of Common Stock as set forth in Sections 4.2
and 4.6. Notwithstanding the foregoing, in the event of the mailing of a notice
of redemption of any shares of the Series A Convertible Preferred Stock pursuant
to Section 3 hereof, the Conversion Rights shall terminate as to the number of
shares designated for redemption at the close of business on the fifth day prior
to the Redemption Date, unless default is made in payment of the redemption
price, in which case the Conversion Rights for such shares shall continue until
such default is remedied.
4.2 Conversion Price. The Series A Convertible Preferred Stock shall be
convertible into the number of shares of Common Stock which result from dividing
the Conversion Price, as hereinafter defined, in effect at the time of
conversion into $8.50. The price at which shares of Common Stock shall be
deliverable upon conversion of Series A Convertible Preferred Stock (the
"Conversion Price") shall initially be $4.25 per share of Common Stock. Such
initial Conversion Price shall be subject to adjustment as hereinafter provided.
4.3 Automatic Conversion. Each share of Series A Convertible Preferred
Stock shall automatically be converted into shares of Common Stock at the then
effective Conversion Price, on the date (the "Automatic Conversion Date") that
is the earlier of (a) the date on which the Common Stock of the Corporation
achieves an average closing price of $8.00 per share for twenty consecutive
trading days on which such shares are actually traded (as reported to the
Corporation by the New York Stock Exchange or as reported in The Wall Street
Journal, Eastern Edition, or if not reported there, any other authoritative
source); or (b) the date that is the fifteenth anniversary from the date of
issuance of the Series A Convertible Preferred Stock. If, after the date
hereof, the Corporation shall have declared a stock split (including a reverse
split) of the Common Stock or a dividend payable in Common Stock, or any other
distribution of securities or dividend to holders of Common Stock with respect
to their Common Stock (including, without limitation, such a distribution or
dividend made in connection with a recapitalization, reclassification, merger,
consolidation, reorganization or similar transactions), then the closing price
of $8.00 per share referred to in clause (a) of the preceding sentence shall be
appropriately adjusted to reflect such stock split, dividend or other
distribution of securities. Upon the occurrence of such an event, the
outstanding shares of Series A Convertible Preferred Stock shall be converted
automatically without further action by the holders of said shares and whether
or not the certificates representing said shares are surrendered to the
Corporation or its transfer agent; provided, however, the Corporation shall not
be obligated to issue certificates evidencing the shares of Series A Convertible
Preferred Stock unless certificates evidencing such shares are either delivered
to the Corporation or any transfer agent as hereinafter
<PAGE>
provided, or the holder notifies the Corporation that said certificate or
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation, indemnifying the Corporation against any loss
incurred by it in connection therewith. Upon the occurrence of the automatic
conversion of the Series A Convertible Preferred Stock, the holders of the
Series A Convertible Preferred Stock shall surrender the certificate or
certificates representing their shares at the office of the Corporation or
transfer agent for such stock. The Corporation shall, as soon as practicable
thereafter, issue and deliver to such holder, at such office and in his name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
the Series A Convertible Preferred Stock, as the case may be, were convertible
on the Automatic Conversion Date.
4.4 Mechanics of Conversion. Before any holder of the Series A
Convertible Preferred Stock shall be entitled to convert the same into full
shares of Common Stock, he shall surrender the certificate or certificates
therefore, duly endorsed, at the office of the Corporation or of any transfer
agent for such stock, and shall give written notice to the Corporation at such
office that he elects to convert the same. The Corporation shall, as soon as
practicable thereafter, issue and deliver to such holder, at such office and in
his name as shown on such surrendered certificate or certificates, a certificate
or certificates for the number of shares of Common Stock into which such
converted shares of stock were convertible on the Conversion Date, as
hereinafter defined. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of the Series A Convertible Preferred Stock (the "Conversion Date"). The
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock as of the Conversion Date.
4.5 Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series A Convertible Preferred
Stock. If more than one share of Series A Convertible Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis of the aggregate number of shares of Series A Convertible Preferred
Stock so surrendered. Instead of any fractional shares of Common Stock which
would otherwise be issuable upon conversion of any shares of Series A
Convertible Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional interest in an amount equal to that fractional
interest of the then Current Market Price (as hereinafter defined).
4.6 Conversion Price Adjustments. The Conversion Price shall be subject
to adjustment from time to time as follows:
a. Common Stock Issued at Less Than the Conversion Price. If the
Corporation shall issue any Common Stock other than Excluded Stock (as
hereinafter defined) without consideration or for a consideration per share less
than the Conversion Price in effect immediately prior to such issuance, the
Conversion Price in effect immediately prior to each such issuance shall
immediately (except as provided below) be reduced to the price determined by
dividing (1) an amount equal to
<PAGE>
the sum of (A) the number of shares of Common Stock outstanding immediately
prior to such issuance multiplied by the Conversion Price in effect immediately
prior to such issuance and (B) the consideration, if any, received by the
Corporation upon such issuance, by (2) the total number of shares of Common
Stock outstanding immediately after such issuance.
For the purposes of any adjustment of the Conversion Price pursuant to this
clause, the following provisions shall be applicable:
(1) Cash. In the case of the issuance of Common Stock for cash, the
amount of the consideration received by the Corporation shall be deemed to
be the amount of the cash proceeds received by the Corporation for such
Common Stock before deducting therefrom any discounts, commissions, taxes
or other expenses allowed, paid or incurred by the Corporation for any
underwriting or otherwise in connection with the issuance and sale thereof.
(2) Consideration Other Than Cash. In the case of the issuance of
Common Stock (otherwise than upon the conversion of shares of capital stock
or other securities of the Corporation) for a consideration in whole or in
part other than cash, including securities acquired in exchange therefor
(other than securities by their terms so exchangeable), the consideration
other than cash shall be deemed to be the fair value thereof as determined
by the Board of Directors, irrespective of any accounting treatment;
provided that such fair value as determined by the Board of Directors shall
not exceed the aggregate Current Market Price of the shares of Common Stock
being issued as of the date the Board of Directors authorizes the issuance
of such shares.
(3) Options and Convertible Securities. In the case of the issuance
of (i) options, warrants or other rights to purchase or acquire Common
Stock (whether or not at the time exercisable), (ii) securities by their
terms convertible into or exchangeable for Common Stock (whether or not at
the time so convertible or exchangeable) or options, warrants or rights to
purchase such convertible or exchangeable securities (whether or not at the
time exercisable):
(a) The aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options, warrants or other rights to
purchase or acquire Common Stock shall be deemed to have been issued
at the time such options, warrants or rights were issued and for a
consideration equal to the consideration (determined in the manner
provided in subclauses (A) and (B) above), if any, received by the
Corporation upon the issuance of such options, warrants or rights plus
the minimum purchase price provided in such options, warrants or
rights for the Common Stock covered thereby;
(b) The aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such convertible
or
<PAGE>
exchangeable securities, or upon the exercise of options, warrants or
other rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof, shall be
deemed to have been issued at the time such securities were issued or
such options, warrants or rights were issued and for a consideration
equal to the consideration, if any, received by the Corporation for
any such securities and related options, warrants or rights (excluding
any cash received on account of accrued interest or accrued
dividends), plus the additional consideration (determined in the
manner provided in subclauses (A) and (B) above), if any, to be
received by the Corporation upon the conversion or exchange of such
securities, or upon the exercise of any related options, warrants or
rights to purchase or acquire such convertible or exchangeable
securities and the subsequent conversion or exchange thereof;
(c) On any change in the number of shares of Common Stock
deliverable upon exercise of any such options, warrants or rights or
conversion or exchange of such convertible or exchangeable securities
or any change in the consideration to be received by the Corporation
upon such exercise, conversion or exchange, including, but not limited
to, a change resulting from the antidilution provisions thereof, the
Conversion Price as then in effect shall forth-with be readjusted to
such Conversion Price as would have been obtained had an adjustment
been made upon the issuance of such options, warrants or rights not
exercised prior to such change, or of such convertible or exchangeable
securities not converted or exchanged prior to such change, upon the
basis of such change;
(d) On the expiration or cancellation of any such options,
warrants or rights, or the termination of the right to convert or
exchange such convertible or exchangeable securities, if the
Conversion Price shall have been adjusted upon the issuance thereof,
the Conversion Price shall forthwith be readjusted to such Conversion
Price as would have been obtained had an adjustment been made upon the
issuance of such options, warrants, rights or such convertible or
exchangeable securities on the basis of the issuance of only the
number of shares of Common Stock actually issued upon the exercise of
such options, warrants or rights, or upon the conversion or exchange
of such convertible or exchangeable securities; and
(e) If the Conversion Price shall have been adjusted upon the
issuance of any such options, warrants, rights or convertible or
exchangeable securities, no further adjustment of the Conversion Price
shall be made for the actual issuance of Common Stock upon the
exercise, conversion or exchange thereof; (provided, however, that no
increase in the Conversion Price shall be made pursuant to sub-clauses
(1) and (2) of this subclause (C)).
(4) Excluded Stock. "Excluded Stock" shall mean (A) shares of Common
Stock issued or reserved for issuance by the Corporation as a stock
dividend payable in shares of
<PAGE>
Common Stock, or upon any subdivision or split-up of the outstanding shares
of Common Stock or Series A Convertible Preferred Stock, or upon conversion
of shares of Series A Convertible Preferred Stock and (B) 500,000 shares of
Com-mon Stock to be issued to key employees, consultants, and advisors of
the Corporation together with any such shares that are repurchased by the
Corporation and reissued to any such employee, director, consultant or
advisor. All shares of Excluded Stock which the Corporation has reserved
for issuance shall be deemed to be outstanding for all purposes of
computations under Section 4.
(5) Stock Dividends, Subdivisions, Reclassifications or Combinations.
If the Corporation shall (i) declare a dividend or make a distribution on
its Common Stock in shares of its Common Stock, (ii) subdivide or
reclassify the outstanding shares of Common Stock into a greater number of
shares, or (iii) combine or reclassify the outstanding Common Stock into a
smaller number of shares, the Conversion Price in effect at the time of the
record date for such dividend or distribution or the effective date of such
subdivision, combination or reclassification shall be proportionately
adjusted so that the holder of any shares of Series A Convertible Preferred
Stock surrendered for conversion after such date shall be entitled to
receive the number of shares of Common Stock which he would have owned or
been entitled to receive had such Series A Convertible Preferred Stock been
converted immediately prior to such date. Successive adjustments in the
Conversion Price shall be made whenever any event specified above shall
occur.
(6) Other Distributions. In case the Corporation shall fix a record
date for the making of a distribution to all holders of shares of its
Common Stock (i) of shares of any class other than its Common Stock or (ii)
of evidence of indebtedness of the Corporation or any Subsidiary or (iii)
of assets (excluding cash dividends or distributions, and dividends of
distributions referred to in subparagraph 4.6(a)(5) above) or (iv) of
rights or warrants (excluding those referred to in subparagraph 4.6(a)(3)
above), in each such case the Conversion Price in effect immediately prior
thereto shall be reduced immediately thereafter to the price determined by
dividing (1) an amount equal to the difference resulting from (A) the
number or shares of Common Stock outstanding on such record date multiplied
by the Conversion Price per share on such record date, less (B) the fair
market value (as determined by the Board of Directors, whose determination
shall be conclusive) of said shares or evidences of indebtedness or assets
or rights or warrants to be so distributed, by (2) the number of shares of
Common Stock outstanding on such record date. Such adjustment shall be
made successively whenever such a record date is fixed. In the event that
such distribution is not so made, the Conversion Price then in effect shall
be readjusted, effective as of the date when the Board of Directors deter-
mines not to distribute such shares, evidence of indebtedness, assets,
rights or warrants, as the case may be, to the Conversion Price which would
then be in effect if such record date had not been fixed.
(7) Consolidation, Merger, Sale, Lease or Conveyance. In case of any
consolidation with or merger of the Corporation with or into another
corporation, or in case of any sale, lease or conveyance to another
corporation of the assets of the Corporation as
<PAGE>
an entirety or substantially as an entirety, each share of Series A
Convertible Preferred Stock shall after the date of such consolidation,
merger, sale, lease or conveyance be convertible into the number of shares
of stock or other securities or property (including cash) to which the
Common Stock issuable (at the time of such consolidation, merger, sale,
lease or conveyance) upon conversion of such share of Series A Convertible
Preferred Stock would have been entitled upon such consolidation, merger,
sale, lease or conveyance; and in any such case, if necessary, the
provisions set forth herein with respect to the rights and interests
thereafter of the holders of the shares of Series A Convertible Preferred
Stock shall be appropriately adjusted so as to be applicable, as nearly as
may reasonably be, to any shares of stock or other securities or property
thereafter deliverable on the conversion of the shares of Series A
Convertible Preferred Stock.
(8) Rounding of Calculations; Minimum Adjustment. All calculations
under this Section 4 shall be made to the nearest cent or to the nearest
one hundredth (1/100th) of a share, as the case may be. Any provision of
this paragraph 4 to the contrary notwithstanding, no adjustment in the
Conversion Price shall be made if the amount of such adjustment would be
less than $0.05, but any such amount shall be carried forward and an
adjustment with respect thereto shall be made at the time of and together
with any subsequent adjustment which, together with such amount and any
other amount or amounts so carried forward, shall aggregate $0.05 or more.
(9) Timing of Issuance of Additional Common Stock Upon Certain
Adjustments. In any case in which the provisions of this Section 4 shall
require that an adjustment shall become effective immediately after a
record date for an event, the Corporation may defer until the occurrence of
such event (A) issuing to the holder of any share of Series A Convertible
Preferred Stock converted after such record date and before the occurrence
of such event the additional shares of Common Stock issuable upon such
conversion by reason of the adjustment required by such event over and
above the shares of Common Stock issuable upon such conversion before
giving effect to such adjustment and (B) paying to such holder any amount
of cash in lieu of a fractional share of Common Stock pursuant to
subparagraph (e) of this Section 4; provided that the Corporation upon
request shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional
shares, and such cash, upon the occurrence of the event requiring such
adjustment.
4.7 Current Market Price. The Current Market Price at any date shall
mean, in the event the Common Stock is publicly traded, the average of the daily
closing prices per share of Common Stock for thirty (30) consecutive trading
days ending five (5) business days before such date (as adjusted for any stock
dividend, split, combination or reclassification that took effect during such
thirty (30) business day period) on which such shares are actually traded (as
reported to the Corporation by the New York Stock Exchange or as reported in The
Wall Street Journal, Eastern Edition, or if not reported there, any other
authoritative source).
<PAGE>
4.8 Statement Regarding Adjustments. Whenever the Conversion Price shall
be adjusted as provided in subparagraph 4.6, the Corporation shall forthwith
file, at the office of any transfer agent for the Series A Convertible Preferred
Stock and at the principal office of the Corporation, a statement showing in
detail the facts requiring such adjustment and the Conversion Price that shall
be in effect after such adjustment, and the Corporation shall also cause a copy
of such statement to be sent by mail, first class postage prepaid, to each
holder of shares of Series A Convertible Preferred Stock at its address
appearing on the Corporation's records. Each such statement shall be signed by
the Corporation's independent public accountants, if applicable.
4.9 Notice to Holders. In the event the Corporation shall propose to take
any action of the type described herein (but only if the action of the type
described would result in an adjustment in the Conversion Price), the
Corporation shall give notice to each holder of shares of Series A Convertible
Preferred Stock, in the manner set forth herein, which notice shall specify the
record date, if any, with respect to any such action and the approximate date on
which such action is to take place. Such notice shall also set forth such facts
with respect thereto as shall be reasonably necessary to indicate the effect of
such action (to the extent such effect may be known at the date of such notice)
on the Conversion Price and the number, kind or class of shares or other
securities or property which shall be deliverable upon conversion of shares of
Series A Convertible Preferred Stock. In the case of any action which would
require the fixing of a record date, such notice shall be given at least ten
(10) days prior to the date so fixed, and in case of all other action, such
notice shall be given at least fifteen (15) days prior to the taking of such
proposed action; Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any such action.
4.10 Treasury Stock. For the purposes of this Section 4, the sale or other
disposition of Common Stock theretofore held in the Corporation's treasury shall
be deemed to be an issuance thereof.
4.11 Costs. The Corporation shall pay all documentary, stamp, transfer or
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock upon conversion of any shares of Series A Convertible Preferred
Stock; provided that the Corporation shall not be required to pay any taxes
which may be payable in respect of any transfer involved in the issuance or
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series A Convertible Preferred Stock in respect of which
such shares are being issued.
4.12 Reservation of Shares. The Corporation shall reserve at all times so
long as any shares of Series A Convertible Preferred Stock remain outstanding,
free from preemptive rights, out of its treasury stock (if applicable) or its
authorized but unissued shares of Common Stock, or both, solely for the purpose
of effecting the conversion of the shares of Series A Convertible Preferred
Stock, sufficient shares of Common Stock to provide for the con-version of all
outstanding shares of Series A Convertible Preferred Stock.
4.13 Approvals. If any shares of Common Stock to be reserved for the
purpose of conversion of shares of Series A Convertible Preferred Stock require
registration with or approval
<PAGE>
of any governmental authority under any federal or state law before such shares
may be validly issued or delivered upon conversion, then the Corporation will in
good faith and as expeditiously as possible endeavor to secure such registration
or approval, as the case may be. If, and so long as, any Common Stock into which
the shares of Series A Convertible Preferred Stock are then convertible is
listed on any national securities exchange, the Corporation will, if permitted
by the rules of such exchange, list and keep listed on such exchange, upon
official notice of issuance, all shares of such Common Stock issuable upon
conversion.
4.14 Valid Issuance. All shares of Common Stock which may be issued upon
conversion of the shares of Series A Convertible Preferred Stock will upon
issuance by the Corporation be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof, and the Corporation shall take no action which will cause a
contrary result (including without limitation, any action which would cause the
Conversion Price to be less than the par value, if any, of the Common Stock).
Section 5. Voting Rights.
The holder of each share of Series A Convertible Preferred Stock shall have
the right to one vote for each share of Common Stock into which such shares of
Series A Convertible Preferred Stock could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, such holder shall have
full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any shareholders' meeting in accordance with the bylaws of
the Corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote. In addition, as long as at least 1,976,500 shares of Series A
Convertible Preferred Stock remain outstanding, the Series A Convertible
Preferred Stock, voting as a separate class, shall have the right to elect
members of the Board of Directors (the "Class A Directors") of the Corporation
as follows: a minimum of two members on the Board of Directors assuming that
the total number of members of the Board of Directors remains at seven; in the
event that the number of members of the Board of Directors increases, the Series
A Convertible Preferred Stock, voting as a separate class, shall have the right
to elect three members if the total number of members on the Board of Directors
is eight, nine or ten, or to elect four members if the total number of members
on the Board of Directors is eleven or twelve.
The Class A Directors shall be elected to serve for an initial term (the
"Initial Term") expiring at the annual meeting of the Corporation's stockholders
to be held in 2002. Beginning with the 2002 annual meeting, the Class A
Directors shall be divided into classes as nearly equal in number as possible
and designated Class I, Class II and Class III. Members of Class I shall hold
office for a term expiring at the 2005 annual meeting of stockholders. Members
of Class II shall hold office for a term expiring at the 2004 annual meeting of
stockholders and members of Class III shall hold office for a term expiring at
the 2003 annual meeting of stockholders. Members of each Class shall hold
office until their successors are elected and qualified. At each succeeding
annual
<PAGE>
meeting of the stockholders of the Corporation, the successors of the class of
Class A Directors whose term expires at that meeting shall be elected by a
plurality vote of all votes cast by the holders of the Series A Convertible
Preferred Stock 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. Any Class A
Director may be removed from office at any time, but only for cause and only by
the affirmative vote of at least 80 percent of the holders of the Series A
Convertible Preferred Stock then outstanding, voting together as a single class.
In the event that the number of shares of Class A Convertible Preferred
Stock outstanding should be less (other than through an Automatic Conversion
pursuant to Section 4.3(a)) than 1,976,500 shares but more than 973,500 shares,
then the number of Class A Directors shall be immediately reduced by one member
through the automatic termination of the seat of the Class A Director whose term
is next scheduled to expire or in the event that this occurs during the Initial
Term, by mutual agreement of the Class A Directors, of if they are unable to
agree, by a majority of the remaining directors. In the event that the number
of shares of Class A Convertible Stock outstanding should be less (other than
through an Automatic Conversion pursuant to Section 4.3(a)) than 973,500 shares,
then the number of Class A Directors shall be immediately reduced by an
additional one member through the automatic termination of the seat of the Class
A Director whose term is next scheduled to expire or in the event that this
occurs during the Initial Term, by mutual agreement of the Class A Directors, of
if they are unable to agree, by a majority of the remaining directors.
Notwithstanding anything to the contrary herein, in the event of an Automatic
Conversion pursuant to Section 4.3(a) hereof during the Initial Term, all Class
A Directors shall be entitled to serve out the unexpired portion of their term.
In the event that less than 1,976,500, but more than 973,500, shares of
Series A Convertible Preferred Stock remain outstanding, the number of Class A
Directors which the Series A Convertible Preferred Stock voting as a separate
class shall have the right to elect, shall be one member if the total number of
the members of the Board of Directors remains at seven, two members if the total
number of members on the Board of Directors is eight, nine or ten, or three
members if the total number of members on the Board of Directors is eleven or
twelve. In the event that less than 973,500 shares of Series A Convertible
Preferred Stock remain outstanding, the holders of the Series A Convertible
Preferred Stock shall not be entitled to vote as a separate class for the
election of directors. The Class A Directors elected by the Series A
Convertible Preferred Stock shall be represented proportionately (but shall not
be less than one) on all committees of the Board of Directors other than any
committee created for the special purpose of negotiating with the holders of the
Series A Convertible Preferred Stock or affiliates thereof. As long as more
than 973,500 shares of Series A Convertible Preferred Stock remain outstanding,
the Series A Convertible Preferred Stock, voting as a separate class, shall have
the right to call special stockholders' meetings upon the minimum notice
required by applicable law or regulation. Other than as set forth above, the
Series A Convertible Preferred Stock will vote with the Common Stock as a single
class with each share of Series A Convertible Preferred Stock having the number
of votes equal to the number of shares of Common Stock into which such shares of
Series A Convertible Preferred Stock would have been convertible immediately
prior to any vote in which the Common Stock is entitled to
<PAGE>
participate.
Additionally, the holders of the Series A Convertible Preferred Stock,
acting through the Class A Directors will have the right to nominate directors
(the "Class A Director Nominees"), in addition to those directors (the "Class A
Directors") elected by the Series A Convertible Preferred Stock voting as a
separate class, if (A) the fraction the numerator of which is (i) the number of
Class A Directors, and (ii) the denominator of which is the total number of
directors, is smaller than (B) the fraction the numerator of which is (i) voting
power for the general election of directors (including Class A Preferred Stock,
Common Stock and any other voting securities of the Corporation (the "Voting
Power") beneficially owned in the aggregate by the holders of the Class A
Preferred Stock and the denominator of which is (ii) the total Voting Power
outstanding. In such a circumstance, the holders of the Class A Preferred Stock
shall be entitled to nominate the smallest number of Class A Director Nominees
which, when added to the number of Class A Directors, would comprise the
numerator of (C) a fraction whose denominator is (i) the total number of
directors and (ii) that is equal to or larger than the fraction set forth in the
preceding clause (B) provided, that prior to the time, if any, when the holders
of the Series A Convertible Preferred Stock own a majority of the outstanding
Corporation Voting Power, a majority of the Board of Directors shall consist of
persons other than Class A Director Nominees and Class A Directors. The number
of Class A Director Nominees under this clause shall increase proportionately to
holders of the Series A Convertible Preferred Stock ownership of the Corporation
Voting Power upon any increase in holders of the Series A Convertible Preferred
Stock percentage of the Corporation Voting Power. The Class A Director Nominees
shall be allocated as evenly as possible to the respective classes of directors.
The Board of Directors shall exercise all authority under applicable law to
cause the Class A Director Nominees to be elected as directors of the
Corporation. "Voting Securities" shall mean all securities then generally
entitled to vote for directors of the Corporation. Any action required to be
taken at any annual or special meeting of the holders of the Series A
Convertible Preferred Stock may be taken by written consent in lieu of a meeting
pursuant to Section 228 of the Delaware Corporation Laws Annotated.
Section 6. Protective Provisions.
The Corporation may not merge into or consolidate with any other
corporation (other than a wholly owned subsidiary corporation) if the
Corporation is not the surviving entity in such merger or consolidation, or
sell, convey or otherwise dispose of all or substantially all of its property or
business, without the approval (by vote or written consent, as provided by law)
of the holders of at least a majority of the outstanding shares of Series A
Convertible Preferred Stock, voting together as a class, if, as a result of such
merger, consolidation, sale, conveyance or disposition, the documents
memorializing such transaction did not make appropriate provisions (in the
reasonable judgment of the holders of the Preferred Stock) for the Preferred
Stock to be converted into, or exchanged for, shares of such surviving
corporation or acquiring entity, having the same (or more favorable) rights and
preferences with respect to such surviving corporation or acquiring entity as
the Preferred Stock had immediately prior to such transaction with respect to
the Company.
<PAGE>
So long as shares of Series A Convertible Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by law) of the holders of at least a majority of
the then outstanding shares of the Series A Convertible Preferred Stock:
a. alter or change the rights, preferences or privileges of the Series A
Convertible Preferred Stock as to adversely affect such series;
b. increase the authorized number of shares of Series A Convertible
Preferred Stock;
c. create any new class or series of stock having rights, preferences or
privileges superior to the Series A Convertible Preferred Stock.
Nothing herein shall require the consent or approval of the holders of the
Corporation's Common Stock to modify, change, amend or otherwise alter the
provisions of this Certificate of Designation.
IN WITNESS WHEREOF, the undersigned has executed this certificate on
September 29, 1999.
/s/ Donald W. Thornton
-------------------------------------------
Donald W. Thornton
Senior Vice President, General Counsel and
Secretary
<PAGE>
EXHIBIT 5
[Letterhead of Balch & Bingham LLP]
November 4, 1999
Vesta Insurance Group, Inc.
3760 River Run Drive
Birmingham, Alabama 35243
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Vesta Insurance Group, Inc. (the
"Company") in connection with the preparation of a Registration Statement on
Form S-1 (the "Registration Statement") to be filed with the Securities and
Exchange Commission (the "Commission") in connection with the registration under
the Securities Act of 1933, as amended (the "Act") of 5,130,000 shares of your
common stock, $.01 par value (the "Shares") held by Torchmark Corporation (the
"Selling Stockholder"). As your counsel in connection with this Registration
Statement, we have examined certified copies of the Company's Restated
certificate of Incorporation, as amended, its by-laws and records of the
proceedings taken by the Company relating to the issuance of the Shares.
We are of the opinion that the Shares have been, and, when sold by the
Selling Stockholder in the manner described in the Registration Statement, will
continue to be, legally issued, fully paid and non-assessable
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statements with respect to our firm under the
caption "Validity of Securities" in the prospectus contained therein.
Very truly yours,
/s/ Balch & Bingham LLP
<PAGE>
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made by and between Vesta
Insurance Group, Inc. and J. Gordon Gaines, Inc., both Delaware corporations,
and Vesta Fire Insurance Corporation, an Alabama corporation (collectively, the
"Company"), and Norman W. Gayle, III, an individual resident of Birmingham,
Alabama (the "Executive"), effective the 30th day of September, 1999, (the
"Effective Date").
RECITALS:
A. The Company is a holding company for a group of property and casualty
insurance subsidiaries which offer primary insurance primarily on personal
risks;
B. The Executive serves as President and Chief Executive Officer of the
Company and as a member of its Board of Directors;
C. The Company wishes to assure itself of the continued services of the
Executive so that it will have the continued benefit of his ability, experience
and services, and the Executive is willing to enter into an agreement to that
end, upon the terms and conditions hereinafter set forth; and
D. Certain capitalized terms used in this Agreement shall have the
meanings given them in Section 16 hereof.
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. Employment.
----------
(a) The Company hereby agrees to continue to employ the Executive as
President and Chief Executive Officer of the Company and any other position
agreed upon by the parties; the Company agrees to use its best efforts to cause
Executive to be elected as a member of the Board; and Executive hereby agrees to
serve the Company in the foregoing capacities, upon the terms and conditions set
forth herein. The Executive shall have such authority and responsibilities
consistent with his position that may be set forth in the Company's Bylaws or
assigned by the Board from time to time.
(b) The Executive agrees to devote such amount of his time, efforts and
skills as is reasonably necessary to the performance of his duties and
responsibilities under this Agreement; provided, however, that nothing in this
-------- -------
Agreement shall preclude the Executive from devoting reasonable periods required
for (i) participating in professional, educational, philanthropic, public
<PAGE>
interest, charitable, social or community activities, (ii) serving as a director
or member of an advisory committee of any corporation or other entity that the
Executive is serving on or any other corporation or entity that is not in direct
competition with the Company, or (iii) managing his personal investments,
provided that such activities do not materially interfere with the Executive's
regular performance of his duties and responsibilities hereunder.
2. Term. Unless earlier terminated as provided herein, the Executive's
----
employment under this Agreement shall be for a term (the "Term") of three (3)
years from the Effective Date. The Term shall be automatically extended for an
additional year on each anniversary of the Effective Date, unless written notice
of non-extension is provided by either party to the other party at least 90 days
prior to such anniversary.
3. Compensation and Benefits. In consideration of the services rendered
-------------------------
by the Executive during the Term, the Company shall pay or provide to the
Executive the amounts and benefits set forth below.
(a) Salary. Executive shall receive an annual base salary of $365,500.
-------
The base salary shall be paid in accordance with the Company's normal payroll
practices. The Executive's base salary shall be reviewed at least annually by
the Compensation Committee for consideration of appropriate merit increases and,
once established, the base salary shall not be decreased during the Employment
Period.
(b) Executive Officer Incentive Compensation Plan. In addition to any
---------------------------------------------
bonus amounts granted or payable to the Executive under the Company's regular
executive compensation plans or practices, the Executive shall participate in
that certain Executive Officer Incentive Compensation Plan, a copy of which is
attached hereto as Exhibit A.
(c) Other Incentive Plans. The Executive shall participate in all annual
---------------------
and long-term bonus or incentive plans or arrangements in which other senior
executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, the Company's Cash Bonus Plan. The
Executive's incentive compensation opportunities under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(d) Equity Incentives. The Executive shall be given consideration, at
-----------------
least annually, by the Compensation Committee for the grant of options to
purchase shares of the common stock of the Company. In addition, the Executive
shall be entitled to receive awards under any stock option, stock purchase or
equity-based incentive compensation plan or arrangement adopted by the Company
from time to time for which senior executives of the Company of a comparable
level are eligible to participate. The Executive's awards under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(e) Employee Benefits. The Executive shall be entitled to participate in
-----------------
all employee benefit plans, programs, practices or arrangements of the Company
in which other senior
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executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, any qualified or non-qualified
pension, profit sharing and savings plans, any death benefit and disability
benefit plans, and any medical, dental, health and welfare plans. Without
limiting the generality of the foregoing, the Company shall provide the
Executive with the following:
(i) long-term disability insurance coverage in an amount and on terms
consistent with the coverage in place for the Executive on the Effective
Date;
(ii) continued provision of life insurance coverage in an amount and
on terms consistent with the coverage in place for the Executive on the
Effective Date; and
(iii) provision of the pension benefits provided under the Company's
Post-Retirement Benefits Plan.
(f) Fringe Benefits and Perquisites. The Executive shall be entitled to
-------------------------------
continuation of all fringe benefits and perquisites provided to the Executive on
the Effective Date, and to all fringe benefits and perquisites which are
generally made available to senior executives of the Company of a comparable
level from time to time. Without limiting the generality of the foregoing, the
Company shall provide the Executive with the following:
(i) provision of executive offices and secretarial staff;
(ii) vacation in accordance with the Company's policy for other senior
executives of a comparable level;
(iii) an automobile owned or leased by the Company of a make and
model appropriate for the Executive's position or, in lieu thereof,
provision of a non-accountable automobile allowance in an amount to be
determined from time to time by the Board or the Compensation Committee;
and
(iv) continued payment of initiation and other fees and annual dues
for one or more country clubs (but in no event less than one country club
membership of Executive's choice) and/or dining clubs which the Company was
paying for on the Effective Date, and payment of dues for any professional
associations of which Executive is a member in furtherance of his duties
hereunder;
(v) reimbursement of all reasonable travel and other business expenses
and disbursements incurred by the Executive in the performance of his duties
under this Agreement, upon proper accounting in accordance with the Company's
normal practices and procedures for reimbursement of business expenses.
4. Termination.
-----------
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(a) The Executive's employment under this Agreement may be terminated prior
to the end of the Term only as follows:
(i) upon the resignation or death of the Executive;
(ii) by the Company due to the Disability of the Executive upon
delivery of a Notice of Termination to the Executive;
(iii) by the Company for Cause upon delivery of a Notice of
Termination to the Executive; and
(iv) by the Executive for Good Reason upon delivery of a Notice of
Termination to the Company after any occurrence of a Change in Control.
(b) If the Executive's employment with the Company shall be terminated
during the Term (i) by reason of the Executive's resignation or death, or (ii)
by the Company for Disability or Cause, the Company shall pay to the Executive
(or in the case of his death, the Executive's estate) within thirty (30) days
after the Termination Date a lump sum cash payment equal to the Accrued
Compensation and, if such termination is other than as a result of Executive's
resignation or by the Company for Cause, the Pro Rata Bonus.
(c) If the Executive's employment with the Company shall be terminated by
the Company in violation of this Agreement or by the Executive for Good Reason,
in addition to other rights and remedies available in law or equity, the
Executive shall be entitled to the following:
(i) the Company shall pay the Executive in cash within thirty (30)
days of the Termination Date an amount equal to all Accrued Compensation
and the Pro Rata Bonus;
(ii) the Company shall pay to the Executive in cash at the end of
each of the thirty-six consecutive 30-day periods following the Termination
Date an amount equal to one-twelfth of the sum of the Base Amount
(including any increases in base salary) plus the Bonus Amount (including
any increases in bonus amount) plus all benefits provided in Section 3
hereof, or in the alternative, the Executive may elect to receive a lump
sum equal to the present value of the payments due under this paragraph
(c)(ii), to be payable within thirty (30) days of such election; provided,
-------- --------
however, that such lump sum amount shall be reduced to its net present
value assuming an interest rate equal to six percent (6%) and 36 equal
monthly payments commencing on the Termination Date;
(iii) for the period from the Termination Date through the date that
Executive attains the age of sixty-five (65) (the "Continuation Period"),
the Company shall at its expense continue on behalf of the Executive and
his dependents and beneficiaries the life insurance, disability, medical,
dental and hospitalization benefits provided (x) in the case of
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a Change in Control, to the Executive at any time during the 90-day period
prior to the Change in Control or at any time thereafter or (y) in other
instances, to other similarly situated executives who continue in the
employ of the Company during the Continuation Period. The coverage and
benefits (including deductibles and costs) provided in this Section
4(c)(iii) during the Continuation Period shall be no less favorable to the
Executive and his dependents and beneficiaries than the most favorable of
such coverages and benefits during either of the periods referred to in
clauses (x) and (y) above; provided, however, the Company's obligation
-------- -------
hereunder with respect to the foregoing benefits shall be limited to the
extent that the Executive obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case the Company may reduce
the coverage of any benefits it is required to provide the Executive
hereunder as long as the aggregate coverages and benefits of the combined
benefit plans are no less favorable to the Executive than the coverages and
benefits required to be provided hereunder; provided, further, subject to
-------- -------
the last sentence of this Section 4(c), life insurance shall not be
continued longer than three years after the Termination Date, even if the
Executive has not obtained such other benefits under another employer's
benefit plan; and
(iv) the restrictions on any incentive awards whether now in effect
for, or hereafter granted to, the Executive under any stock option plan or
under any other incentive plan, deferred compensation plan, agreement or
arrangement of the Company of any of its affiliates shall lapse and such
incentive awards shall become 100% accrued and vested, so that, for
example, all stock options and stock appreciation rights granted to the
Executive shall be immediately exercisable and shall be 100% vested, all
restrictions on any restricted stock held by the Executive shall lapse such
that the Executive has full title to such shares, and any deferred
compensation payable under any plan, agreement or arrangement shall accrue
in total and be immediately due and payable in full. The period in which
Executive may exercise any option granted shall be the full term of such
option.
This Section 4(c) shall not be interpreted so as to limit any benefits to which
the Executive or his dependents or beneficiaries may be entitled under any of
the Company's employee benefit plans, programs or practices following the
Executive's termination of employment, including, without limitation, retiree
medical and life insurance benefits.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 4(c)(iii).
(e) In the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")) to the
Executive (or for his benefit) paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise in connection with, or
arising out of, his relationship with the Company or a change in ownership or
effective control of the Company or of a substantial portion of its assets (a
"Payment" or
5
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"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
any such excise or other taxes (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax" and
any other tax together with any such interest and penalties are herein referred
to as "Other Taxes"), then the Executive will be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all Excise Taxes and Other Taxes on the Payments and All
Excise Taxes or Other Taxes imposed upon the Gross-Up Payment, the Executive
shall retain that portion of the Gross-Up Payment equal to the Excise Tax or
Other Taxes imposed upon the Payments.
5. Confidential Information. During the Term and at all times thereafter,
------------------------
the Executive agrees that he will not divulge to anyone (other than the Company
or any persons employed or designated by the Company) any knowledge or
information of a confidential nature relating to the business of the Company or
any of its subsidiaries or affiliates, including, without limitation, all types
of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further agrees not to disclose, publish or make use of any such
knowledge or information without the consent of the Company.
6. Successors; Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company (including each of its subsidiaries), its successors and assigns and
any person, firm, corporation or other entity which succeeds to all or
substantially all of the business, assets or property of the Company. The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the
business, assets or property of the Company, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, the "Company" shall mean the Company as hereinbefore
defined and any successor to its business, assets or property as aforesaid which
executes and delivers an agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due
and payable to him hereunder, all such amounts, unless otherwise provided
herein, shall be paid to the Executive's designated beneficiary or, if there be
no such designated beneficiary, to the legal representatives of the Executive's
estate.
7. Fees and Expenses. To induce the Executive to execute this Agreement
-----------------
and to provide the Executive with reasonable assurance that the purposes of this
Agreement will not be frustrated by the cost of its enforcement should the
Company fail to perform its obligations under
6
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this Agreement or should the Company or any subsidiary, affiliate or stockholder
of the Company contest the validity or enforceability of this Agreement, the
Company shall pay and be solely responsible for any attorneys' fees and expenses
and courts costs incurred by the Executive as a result of a claim that the
Company has breached or otherwise failed to perform this Agreement or any
provision hereof to be performed by the Company or as a result of the Company or
any subsidiary, affiliate or stockholder of the Company contesting the validity
or enforceability of this Agreement or any provision hereof to be performed by
the Company, in each case regardless of which party, if any, prevails in the
contest.
8. Notice. All notices and other communications provided for in this
------
Agreement (including the Notice of Termination) shall be in writing and shall be
deemed to have been duly given upon personal delivery or receipt when sent by
certified mail, return receipt requested, postage prepaid, or a nationally
recognized overnight courier service that provides written proof of delivery,
addressed to the respective addresses last given by each party to the other;
provided, however, that all notices to the Company shall be directed to the
- -------- -------
attention of the Board of Directors with a copy to the Chief Executive Officer
and the General Counsel of the Company.
9. Settlement of Claims. The Company's obligation to make the payments
--------------------
provided for in this Agreement and to otherwise perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others. The Company may, however,
withhold from any benefits payable under this Agreement all federal, state, city
or other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
10. Modification and Waiver. No provisions of this Agreement may be
-----------------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and the Company. No waiver by
any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Alabama without giving
effect to the conflict of laws principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
------------
severable, and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreement, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
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<PAGE>
14. Headings. The headings of Sections herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each shall be deemed an original but all of which together shall
constitute one and the same instrument.
16. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the Termination Date but not paid as of the
Termination Date, including without limitation, (i) base salary, (ii) deferred
compensation accumulated under any plan, arrangement or agreement, (iii)
reimbursement for reasonable and necessary expenses incurred by the Executive on
behalf of the Company prior to Termination Date, and (iv) bonuses and incentive
compensation, including stock options (other than the Pro Rata Bonus).
(b) "Base Amount" shall mean the greater of the Executive's annual base
salary (i) at the rate in effect on the Termination Date or (ii) the highest
rate in effect at any time during the 90-day period prior to a Change in
Control, and shall include all amounts of his base salary that are deferred
under any plans, arrangements or agreements of the Company or any of its
affiliates.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Bonus Amount" shall mean the greater of (i) the most recent annual
cash bonus paid or payable to the Executive, or, if greater, the annual cash
bonus paid or payable for the year ended prior to the fiscal year during which a
Change in Control occurred, or (ii) the average of the annual cash bonuses paid
or payable during the three full fiscal years ended prior to the Termination
Date or, if greater, the three full fiscal years prior to a Change in Control
(or, in each case, such lesser period for which annual bonuses were paid or
payable to the Executive). The Bonus Amount shall not include any amounts paid
or payable under the Executive Officer Incentive Compensation Plan.
(e) The termination of the Executive's employment shall be for "Cause" if
it is a result of any act that (A) constitutes, on the part of the Executive,
fraud, dishonesty gross malfeasance of duty and (B) is demonstrably likely to
lead to material injury to the Company; provided, however, that, such conduct
-------- -------
shall not constitute Cause:
(x) unless (A) there shall have been delivered to the Executive a
written notice setting forth with specificity the reasons that the Board
believes the Executive's conduct meets the criteria set forth in clause
(i), (B) the Executive shall have been provided the opportunity to be heard
in person by the Board (with the assistance of the Executive's counsel if
the Executive so desires), and (C) after such hearing, the termination is
evidenced
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by a resolution adopted in good faith by two-thirds of the members of the
Board (other than the Executive); or
(y) if such conduct was believed by the Executive in good faith to
have been in or not opposed to the interests of the Company.
(f) A "Change in Control" shall mean the occurrence during the Term of any
of the following events:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by an "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) immediately after which
such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of the combined voting power
of the Company's then outstanding Voting Securities; provided, however,
-------- -------
that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would cause
a Change in Control. A "Non-Control Acquisition" shall mean an acquisition
by (A) an employee benefit plan (or a trust forming a part thereof)
maintained by (x) the Company or (y) any corporation or other Person of
which a majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by the Company (a "Subsidiary"),
(B) the Company or any 80% owned subsidiary, (C) Birmingham Investment
Group, LLC or any affiliate of Birmingham Investment Group, LLC, or (D) any
Person in connection with a "Non-Control Transaction" (as hereinafter
defined).
(ii) The individuals who, as of the date of this Agreement, are
members of the Board (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
-------- -------
election, or nomination for election by the Company's stockholders, of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board with no more than one (1) member of the Incumbent Board voting
against such new director, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board; provided,
--------
further, that no individual shall be considered a member of the Incumbent
-------
Board if such individual initially assumed office as a result of either an
actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) A merger, consolidation of reorganization involving the
Company, unless
9
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(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation or
reorganization, a least two-thirds of the combined voting power
of the outstanding voting securities of the corporation resulting
from such merger of consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Corporation.
(A transaction described in the immediately preceding clauses (1)
and (2) shall herein be referred to as a "Non-Control
Transaction.")
(B) A complete liquidation, or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person.
(iv) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a Change in
Control and the Executive reasonably demonstrates that such termination (A)
was at the request of a third party who has indicated an intention or taken
steps reasonably calculated to effect a Change in Control and who
effectuates a Change in Control (a "Third Party") or (B) otherwise occurred
in connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes of this Agreement, the date of a
Change in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the Executive's
employment.
(g) "Compensation Committee" shall mean the Compensation Committee of the
Board.
(h) "Disability" shall mean the inability of the Executive to perform his
duties to the Company on account of physical or mental illness for a period of
six consecutive full months, or for a period of eight full months during any 12-
month period. The Executive's employment shall terminate in such a case on the
last day of the applicable period; provided, however, in no event shall the
-------- -------
Executive be terminated by reason of Disability unless (i) the Executive is
eligible for the long-term disability benefits set forth in Section 3(e)(i)
hereof and (ii) the Executive receives written notice from the Company, at least
30 days in advance of such termination, stating its
10
<PAGE>
intention to terminate the Executive for reason of Disability and setting forth
in reasonable detail the facts and circumstances claimed to provide a basis for
such termination.
(i) "Effective Date" shall mean the day and year first above written.
(j) "Good Reason" shall mean the occurrence at any time within three (3)
years following a Change in Control of any of the events or conditions
described in subsections (i) through (viii) hereof:
(i) a change in the Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his
status, office, title, position or responsibilities as in effect at any
time within 90 days preceding the date of a Change in Control or at any
time thereafter the assignment to the Executive of any duties or
responsibilities which, in the Executive's reasonable judgment, are
inconsistent with his status, office, title, position or responsibilities
as in effect at any time within 90 days preceding the date of a Change in
Control or at any time thereafter; any removal of the Executive from, or
failure to reappoint or reelect him to, any such status, office, title,
position or responsibility; or any other change in condition or
circumstances that in the Executive's reasonable judgment makes it
materially more difficult for the Executive to carry out the duties and
responsibilities of his office that existed at any time within 90 days
preceding the date of a Change in Control or at any time thereafter;
(ii) a reduction in the Executive's base salary or any failure to pay
the Executive any compensation or benefits to which he is entitled within
five days of the date due;
(iii) the Company's requiring the Executive to be based at any place
outside a 30-mile radius from the executive offices occupied by the
Executive immediately prior to a Change in Control, except for reasonably
required travel on the Company's business which is not materially greater
than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to (A) continue in effect (without
reduction in benefit level and/or reward opportunities) any material
compensation or employee benefit plan in which the Executive was
participating at any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter, unless such plan is replaced
with a plan that provides substantially equivalent compensation or benefits
to the Executive or (B) provide the Executive with compensation and
benefits, in the aggregate, at least equal (in terms of benefit levels
and/or reward opportunities) to those provided for under each other
employee benefit plan, program and practice in which the Executive was
participating at any time within 90 days preceding the date of a Change in
Control or at any time thereafter;
(v) the insolvency, or the filing by any person or entity, including
the Company or any of its subsidiaries, of a petition for bankruptcy of the
Company, or other relief under any other moratorium or similar law, which
petition is not dismissed within 60 days;
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(vi) any material breach by the Company of this Agreement;
(vii) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms of this
Agreement; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any Successors and Assigns to assume
and agree to perform this Agreement, as required by Section 6(a) hereof.
Any event or condition described in clause (i) through (viii) above which occurs
prior to a Change in Control but which the Executive reasonably demonstrates (A)
was at the request of a Third Party, or (B) otherwise arose in connection with,
or in anticipation of, a Change in Control which actually occurs, shall
constitute Good Reason for purposes of this Agreement, notwithstanding that it
occurred prior to the Change in Control. The Executive's right to terminate his
employment for Good Reason shall not be affected by his incapacity due to
physical or mental illness.
(k) "Notice of Termination" shall mean a written notice of termination from
the Company or the Executive which specifies an effective date of termination,
indicates the specific termination provision in this Agreement relied upon, and
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment.
(l) "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount
multiplied by a fraction the numerator of which is the number of days in the
applicable year through the Termination Date and the denominator of which is
365.
(m) "Successors and Assigns" shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement), whether by operation of law or otherwise.
(n) "Termination Date" shall mean, in the case of the Executive's death,
his date of death, and in all other cases, the date specified in the Notice of
Termination.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its officers thereunto duly authorized, and the Executive has signed and sealed
this Agreement, effective as of the date first above written.
VESTA INSURANCE GROUP, INC.
By: /s/ James E. Tait
-------------------------------------
Its: Executive Vice President
J. GORDON GAINES, INC.
By: /s/ James E. Tait
-------------------------------------
Its: Executive Vice President
VESTA FIRE INSURANCE CORPORATION
By: /s/ James E. Tait
-------------------------------------
Its: Executive Vice President
EXECUTIVE:
/s/ Norman W. Gayle, III
------------------------------------------
Norman W. Gayle, III
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EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made by and between Vesta
Insurance Group, Inc. and J. Gordon Gaines, Inc., both Delaware corporations,
and Vesta Fire Insurance Corporation, an Alabama corporation (collectively, the
"Company"), and James E. Tait, an individual resident of Birmingham, Alabama
(the "Executive"), effective the 30th day of September, 1999 (the "Effective
Date").
RECITALS:
A. The Company is a holding company for a group of property and casualty
insurance subsidiaries which offer primary insurance primarily on personal
risks;
B. The Executive serves as Executive Vice President and Chief Financial
Officer of the Company and as a member of its Board of Directors;
C. The Company wishes to assure itself of the continued services of the
Executive so that it will have the continued benefit of his ability, experience
and services, and the Executive is willing to enter into an agreement to that
end, upon the terms and conditions hereinafter set forth; and
D. Certain capitalized terms used in this Agreement shall have the
meanings given them in Section 16 hereof.
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. Employment.
----------
(a) The Company hereby agrees to continue to employ the Executive as
Executive Vice President and Chief Financial Officer of the Company and any
other position agreed upon by the parties; the Company agrees to use its best
efforts to cause Executive to be elected as a member of the Board; and Executive
hereby agrees to serve the Company in the foregoing capacities, upon the terms
and conditions set forth herein. The Executive shall have such authority and
responsibilities consistent with his position that may be set forth in the
Company's Bylaws or assigned by the Board from time to time.
(b) The Executive agrees to devote such amount of his time, efforts and
skills as is reasonably necessary to the performance of his duties and
responsibilities under this Agreement; provided, however, that nothing in this
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Agreement shall preclude the Executive from devoting reasonable periods required
for (i) participating in professional, educational, philanthropic, public
<PAGE>
interest, charitable, social or community activities, (ii) serving as a director
or member of an advisory committee of any corporation or other entity that the
Executive is serving on or any other corporation or entity that is not in direct
competition with the Company, or (iii) managing his personal investments,
provided that such activities do not materially interfere with the Executive's
regular performance of his duties and responsibilities hereunder.
2. Term. Unless earlier terminated as provided herein, the Executive's
----
employment under this Agreement shall be for a term (the "Term") of three (3)
years from the Effective Date. The Term shall be automatically extended for an
additional year on each anniversary of the Effective Date, unless written notice
of non-extension is provided by either party to the other party at least 90 days
prior to such anniversary.
3. Compensation and Benefits. In consideration of the services rendered
-------------------------
by the Executive during the Term, the Company shall pay or provide to the
Executive the amounts and benefits set forth below.
(a) Salary. Executive shall receive an annual base salary of $446,250.
-------
The base salary shall be paid in accordance with the Company's normal payroll
practices. The Executive's base salary shall be reviewed at least annually by
the Compensation Committee for consideration of appropriate merit increases and,
once established, the base salary shall not be decreased during the Employment
Period.
(b) Executive Officer Incentive Compensation Plan. In addition to any
---------------------------------------------
bonus amounts granted or payable to the Executive under the Company's regular
executive compensation plans or practices, the Executive shall participate in
that certain Executive Officer Incentive Compensation Plan, a copy of which is
attached hereto as Exhibit A.
(c) Other Incentive Plans. The Executive shall participate in all annual
---------------------
and long-term bonus or incentive plans or arrangements in which other senior
executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, the Company's Cash Bonus Plan. The
Executive's incentive compensation opportunities under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(d) Equity Incentives. The Executive shall be given consideration, at
-----------------
least annually, by the Compensation Committee for the grant of options to
purchase shares of the common stock of the Company. In addition, the Executive
shall be entitled to receive awards under any stock option, stock purchase or
equity-based incentive compensation plan or arrangement adopted by the Company
from time to time for which senior executives of the Company of a comparable
level are eligible to participate. The Executive's awards under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(e) Employee Benefits. The Executive shall be entitled to participate in
-----------------
all employee benefit plans, programs, practices or arrangements of the Company
in which other senior
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executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, any qualified or non-qualified
pension, profit sharing and savings plans, any death benefit and disability
benefit plans, and any medical, dental, health and welfare plans. Without
limiting the generality of the foregoing, the Company shall provide the
Executive with the following:
(i) long-term disability insurance coverage in an amount and on terms
consistent with the coverage in place for the Executive on the Effective
Date;
(ii) continued provision of life insurance coverage in an amount and
on terms consistent with the coverage in place for the Executive on the
Effective Date; and
(iii) provision of the pension benefits provided under the Company's
Post-Retirement Benefits Plan.
(f) Fringe Benefits and Perquisites. The Executive shall be entitled to
-------------------------------
continuation of all fringe benefits and perquisites provided to the Executive on
the Effective Date, and to all fringe benefits and perquisites which are
generally made available to senior executives of the Company of a comparable
level from time to time. Without limiting the generality of the foregoing, the
Company shall provide the Executive with the following:
(i) provision of executive offices and secretarial staff;
(ii) vacation in accordance with the Company's policy for other senior
executives of a comparable level;
(iii) an automobile owned or leased by the Company of a make and
model appropriate for the Executive's position or, in lieu thereof,
provision of a non-accountable automobile allowance in an amount to be
determined from time to time by the Board or the Compensation Committee;
and
(iv) continued payment of initiation and other fees and annual dues
for one or more country clubs (but in no event less than one country club
membership of Executive's choice) and/or dining clubs which the Company was
paying for on the Effective Date, and payment of dues for any professional
associations of which Executive is a member in furtherance of his duties
hereunder;
(v) reimbursement of all reasonable travel and other business expenses
and disbursements incurred by the Executive in the performance of his duties
under this Agreement, upon proper accounting in accordance with the Company's
normal practices and procedures for reimbursement of business expenses.
4. Termination.
-----------
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(a) The Executive's employment under this Agreement may be terminated prior
to the end of the Term only as follows:
(i) upon the resignation or death of the Executive;
(ii) by the Company due to the Disability of the Executive upon
delivery of a Notice of Termination to the Executive;
(iii) by the Company for Cause upon delivery of a Notice of
Termination to the Executive; and
(iv) by the Executive for Good Reason upon delivery of a Notice of
Termination to the Company after any occurrence of a Change in Control.
(b) If the Executive's employment with the Company shall be terminated
during the Term (i) by reason of the Executive's resignation or death, or (ii)
by the Company for Disability or Cause, the Company shall pay to the Executive
(or in the case of his death, the Executive's estate) within thirty (30) days
after the Termination Date a lump sum cash payment equal to the Accrued
Compensation and, if such termination is other than as a result of Executive's
resignation or by the Company for Cause, the Pro Rata Bonus.
(c) If the Executive's employment with the Company shall be terminated by
the Company in violation of this Agreement or by the Executive for Good Reason,
in addition to other rights and remedies available in law or equity, the
Executive shall be entitled to the following:
(i) the Company shall pay the Executive in cash within thirty (30)
days of the Termination Date an amount equal to all Accrued Compensation
and the Pro Rata Bonus;
(ii) the Company shall pay to the Executive in cash at the end of each
of the thirty-six consecutive 30-day periods following the Termination Date
an amount equal to one-twelfth of the sum of the Base Amount (including any
increases in base salary) plus the Bonus Amount (including any increases in
bonus amount) plus all benefits provided in Section 3 hereof, or in the
alternative, the Executive may elect to receive a lump sum equal to the
present value of the payments due under this paragraph (c)(ii), to be
payable within thirty (30) days of such election; provided, however, that
-------- -------
such lump sum amount shall be reduced to its net present value assuming an
interest rate equal to six percent (6%) and 36 equal monthly payments
commencing on the Termination Date;
(iii) for the period from the Termination Date through the date that
Executive attains the age of sixty-five (65) (the "Continuation Period"),
the Company shall at its expense continue on behalf of the Executive and
his dependents and beneficiaries the life insurance, disability, medical,
dental and hospitalization benefits provided (x) in the case of
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a Change in Control, to the Executive at any time during the 90-day period
prior to the Change in Control or at any time thereafter or (y) in other
instances, to other similarly situated executives who continue in the
employ of the Company during the Continuation Period. The coverage and
benefits (including deductibles and costs) provided in this Section
4(c)(iii) during the Continuation Period shall be no less favorable to the
Executive and his dependents and beneficiaries than the most favorable of
such coverages and benefits during either of the periods referred to in
clauses (x) and (y) above; provided, however, the Company's obligation
-------- -------
hereunder with respect to the foregoing benefits shall be limited to the
extent that the Executive obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case the Company may reduce
the coverage of any benefits it is required to provide the Executive
hereunder as long as the aggregate coverages and benefits of the combined
benefit plans are no less favorable to the Executive than the coverages and
benefits required to be provided hereunder; provided, further, subject to
-------- -------
the last sentence of this Section 4(c), life insurance shall not be
continued longer than three years after the Termination Date, even if the
Executive has not obtained such other benefits under another employer's
benefit plan; and
(iv) the restrictions on any incentive awards whether now in effect
for, or hereafter granted to, the Executive under any stock option plan or
under any other incentive plan, deferred compensation plan, agreement or
arrangement of the Company of any of its affiliates shall lapse and such
incentive awards shall become 100% accrued and vested, so that, for
example, all stock options and stock appreciation rights granted to the
Executive shall be immediately exercisable and shall be 100% vested, all
restrictions on any restricted stock held by the Executive shall lapse such
that the Executive has full title to such shares, and any deferred
compensation payable under any plan, agreement or arrangement shall accrue
in total and be immediately due and payable in full. The period in which
Executive may exercise any option granted shall be the full term of such
option.
This Section 4(c) shall not be interpreted so as to limit any benefits to which
the Executive or his dependents or beneficiaries may be entitled under any of
the Company's employee benefit plans, programs or practices following the
Executive's termination of employment, including, without limitation, retiree
medical and life insurance benefits.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 4(c)(iii).
(e) In the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")) to the
Executive (or for his benefit) paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise in connection with, or
arising out of, his relationship with the Company or a change in ownership or
effective control of the Company or of a substantial portion of its assets (a
"Payment" or
5
<PAGE>
"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
any such excise or other taxes (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax" and
any other tax together with any such interest and penalties are herein referred
to as "Other Taxes"), then the Executive will be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all Excise Taxes and Other Taxes on the Payments and All
Excise Taxes or Other Taxes imposed upon the Gross-Up Payment, the Executive
shall retain that portion of the Gross-Up Payment equal to the Excise Tax or
Other Taxes imposed upon the Payments.
5. Confidential Information. During the Term and at all times thereafter,
------------------------
the Executive agrees that he will not divulge to anyone (other than the Company
or any persons employed or designated by the Company) any knowledge or
information of a confidential nature relating to the business of the Company or
any of its subsidiaries or affiliates, including, without limitation, all types
of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further agrees not to disclose, publish or make use of any such
knowledge or information without the consent of the Company.
6. Successors; Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company (including each of its subsidiaries), its successors and assigns and
any person, firm, corporation or other entity which succeeds to all or
substantially all of the business, assets or property of the Company. The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the
business, assets or property of the Company, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, the "Company" shall mean the Company as hereinbefore
defined and any successor to its business, assets or property as aforesaid which
executes and delivers an agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due
and payable to him hereunder, all such amounts, unless otherwise provided
herein, shall be paid to the Executive's designated beneficiary or, if there be
no such designated beneficiary, to the legal representatives of the Executive's
estate.
7. Fees and Expenses. To induce the Executive to execute this Agreement
-----------------
and to provide the Executive with reasonable assurance that the purposes of this
Agreement will not be frustrated by the cost of its enforcement should the
Company fail to perform its obligations under
6
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this Agreement or should the Company or any subsidiary, affiliate or stockholder
of the Company contest the validity or enforceability of this Agreement, the
Company shall pay and be solely responsible for any attorneys' fees and expenses
and courts costs incurred by the Executive as a result of a claim that the
Company has breached or otherwise failed to perform this Agreement or any
provision hereof to be performed by the Company or as a result of the Company or
any subsidiary, affiliate or stockholder of the Company contesting the validity
or enforceability of this Agreement or any provision hereof to be performed by
the Company, in each case regardless of which party, if any, prevails in the
contest.
8. Notice. All notices and other communications provided for in this
------
Agreement (including the Notice of Termination) shall be in writing and shall be
deemed to have been duly given upon personal delivery or receipt when sent by
certified mail, return receipt requested, postage prepaid, or a nationally
recognized overnight courier service that provides written proof of delivery,
addressed to the respective addresses last given by each party to the other;
provided, however, that all notices to the Company shall be directed to the
- -------- -------
attention of the Board of Directors with a copy to the Chief Executive Officer
and the General Counsel of the Company.
9. Settlement of Claims. The Company's obligation to make the payments
--------------------
provided for in this Agreement and to otherwise perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others. The Company may, however,
withhold from any benefits payable under this Agreement all federal, state, city
or other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
10. Modification and Waiver. No provisions of this Agreement may be
-----------------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and the Company. No waiver by
any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Alabama without giving
effect to the conflict of laws principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
------------
severable, and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreement, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
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<PAGE>
14. Headings. The headings of Sections herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each shall be deemed an original but all of which together shall
constitute one and the same instrument.
16. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the Termination Date but not paid as of the
Termination Date, including without limitation, (i) base salary, (ii) deferred
compensation accumulated under any plan, arrangement or agreement, (iii)
reimbursement for reasonable and necessary expenses incurred by the Executive on
behalf of the Company prior to Termination Date, and (iv) bonuses and incentive
compensation, including stock options (other than the Pro Rata Bonus).
(b) "Base Amount" shall mean the greater of the Executive's annual base
salary (i) at the rate in effect on the Termination Date or (ii) the highest
rate in effect at any time during the 90-day period prior to a Change in
Control, and shall include all amounts of his base salary that are deferred
under any plans, arrangements or agreements of the Company or any of its
affiliates.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Bonus Amount" shall mean the greater of (i) the most recent annual
cash bonus paid or payable to the Executive, or, if greater, the annual cash
bonus paid or payable for the year ended prior to the fiscal year during which a
Change in Control occurred, or (ii) the average of the annual cash bonuses paid
or payable during the three full fiscal years ended prior to the Termination
Date or, if greater, the three full fiscal years prior to a Change in Control
(or, in each case, such lesser period for which annual bonuses were paid or
payable to the Executive). The Bonus Amount shall not include any amounts paid
or payable under the Executive Officer Incentive Compensation Plan.
(e) The termination of the Executive's employment shall be for "Cause" if
it is a result of any act that (A) constitutes, on the part of the Executive,
fraud, dishonesty gross malfeasance of duty and (B) is demonstrably likely to
lead to material injury to the Company; provided, however, that, such conduct
-------- -------
shall not constitute Cause:
(x) unless (A) there shall have been delivered to the Executive a
written notice setting forth with specificity the reasons that the Board
believes the Executive's conduct meets the criteria set forth in clause
(i), (B) the Executive shall have been provided the opportunity to be heard
in person by the Board (with the assistance of the Executive's counsel if
the Executive so desires), and (C) after such hearing, the termination is
evidenced
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by a resolution adopted in good faith by two-thirds of the members of the
Board (other than the Executive); or
(y) if such conduct was believed by the Executive in good faith to
have been in or not opposed to the interests of the Company.
(f) A "Change in Control" shall mean the occurrence during the Term of any
of the following events:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by an "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) immediately after which
such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of the combined voting power
of the Company's then outstanding Voting Securities; provided, however,
-------- -------
that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would cause
a Change in Control. A "Non-Control Acquisition" shall mean an acquisition
by (A) an employee benefit plan (or a trust forming a part thereof)
maintained by (x) the Company or (y) any corporation or other Person of
which a majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by the Company (a "Subsidiary"),
(B) the Company or any 80% owned subsidiary, (C) Birmingham Investment
Group, LLC or any affiliate of Birmingham Investment Group, LLC, or (D) any
Person in connection with a "Non-Control Transaction" (as hereinafter
defined).
(ii) The individuals who, as of the date of this Agreement, are
members of the Board (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
-------- -------
election, or nomination for election by the Company's stockholders, of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board with no more than one (1) member of the Incumbent Board voting
against such new director, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board; provided,
--------
further, that no individual shall be considered a member of the Incumbent
-------
Board if such individual initially assumed office as a result of either an
actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) A merger, consolidation of reorganization involving the
Company, unless
9
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(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation or
reorganization, a least two-thirds of the combined voting power
of the outstanding voting securities of the corporation resulting
from such merger of consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Corporation.
(A transaction described in the immediately preceding clauses (1)
and (2) shall herein be referred to as a "Non-Control
Transaction.")
(B) A complete liquidation, or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person.
(iv) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a Change in
Control and the Executive reasonably demonstrates that such termination (A)
was at the request of a third party who has indicated an intention or taken
steps reasonably calculated to effect a Change in Control and who
effectuates a Change in Control (a "Third Party") or (B) otherwise occurred
in connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes of this Agreement, the date of a
Change in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the Executive's
employment.
(g) "Compensation Committee" shall mean the Compensation Committee of the
Board.
(h) "Disability" shall mean the inability of the Executive to perform his
duties to the Company on account of physical or mental illness for a period of
six consecutive full months, or for a period of eight full months during any 12-
month period. The Executive's employment shall terminate in such a case on the
last day of the applicable period; provided, however, in no event shall the
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Executive be terminated by reason of Disability unless (i) the Executive is
eligible for the long-term disability benefits set forth in Section 3(e)(i)
hereof and (ii) the Executive receives written notice from the Company, at least
30 days in advance of such termination, stating its
10
<PAGE>
intention to terminate the Executive for reason of Disability and setting forth
in reasonable detail the facts and circumstances claimed to provide a basis for
such termination.
(i) "Effective Date" shall mean the day and year first above written.
(j) "Good Reason" shall mean the occurrence at any time within three (3)
years following a Change in Control of any of the events or conditions
described in subsections (i) through (viii) hereof:
(i) a change in the Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his
status, office, title, position or responsibilities as in effect at any
time within 90 days preceding the date of a Change in Control or at any
time thereafter the assignment to the Executive of any duties or
responsibilities which, in the Executive's reasonable judgment, are
inconsistent with his status, office, title, position or responsibilities
as in effect at any time within 90 days preceding the date of a Change in
Control or at any time thereafter; any removal of the Executive from, or
failure to reappoint or reelect him to, any such status, office, title,
position or responsibility; or any other change in condition or
circumstances that in the Executive's reasonable judgment makes it
materially more difficult for the Executive to carry out the duties and
responsibilities of his office that existed at any time within 90 days
preceding the date of a Change in Control or at any time thereafter;
(ii) a reduction in the Executive's base salary or any failure to pay
the Executive any compensation or benefits to which he is entitled within
five days of the date due;
(iii) the Company's requiring the Executive to be based at any place
outside a 30-mile radius from the executive offices occupied by the
Executive immediately prior to a Change in Control, except for reasonably
required travel on the Company's business which is not materially greater
than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to (A) continue in effect (without
reduction in benefit level and/or reward opportunities) any material
compensation or employee benefit plan in which the Executive was
participating at any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter, unless such plan is replaced
with a plan that provides substantially equivalent compensation or benefits
to the Executive or (B) provide the Executive with compensation and
benefits, in the aggregate, at least equal (in terms of benefit levels
and/or reward opportunities) to those provided for under each other
employee benefit plan, program and practice in which the Executive was
participating at any time within 90 days preceding the date of a Change in
Control or at any time thereafter;
(v) the insolvency, or the filing by any person or entity, including
the Company or any of its subsidiaries, of a petition for bankruptcy of the
Company, or other relief under any other moratorium or similar law, which
petition is not dismissed within 60 days;
11
<PAGE>
(vi) any material breach by the Company of this Agreement;
(vii) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms of this
Agreement; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any Successors and Assigns to assume
and agree to perform this Agreement, as required by Section 6(a) hereof.
Any event or condition described in clause (i) through (viii) above which occurs
prior to a Change in Control but which the Executive reasonably demonstrates (A)
was at the request of a Third Party, or (B) otherwise arose in connection with,
or in anticipation of, a Change in Control which actually occurs, shall
constitute Good Reason for purposes of this Agreement, notwithstanding that it
occurred prior to the Change in Control. The Executive's right to terminate his
employment for Good Reason shall not be affected by his incapacity due to
physical or mental illness.
(k) "Notice of Termination" shall mean a written notice of termination from
the Company or the Executive which specifies an effective date of termination,
indicates the specific termination provision in this Agreement relied upon, and
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment.
(l) "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount
multiplied by a fraction the numerator of which is the number of days in the
applicable year through the Termination Date and the denominator of which is
365.
(m) "Successors and Assigns" shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement), whether by operation of law or otherwise.
(n) "Termination Date" shall mean, in the case of the Executive's death,
his date of death, and in all other cases, the date specified in the Notice of
Termination.
12
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its officers thereunto duly authorized, and the Executive has signed and sealed
this Agreement, effective as of the date first above written.
VESTA INSURANCE GROUP, INC.
By: /s/ Donald W. Thornton
----------------------------------------
Its: Senior Vice Presient
J. GORDON GAINES, INC.
By: /s/ Donald W. Thornton
----------------------------------------
Its: Senior Vice Presient
VESTA FIRE INSURANCE CORPORATION
By: /s/ Donald W. Thornton
----------------------------------------
Its: Senior Vice Presient
EXECUTIVE:
/s/ James E. Tait
--------------------------------------------
James E. Tait
13
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EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made by and between Vesta
Insurance Group, Inc. and J. Gordon Gaines, Inc., both Delaware corporations,
and Vesta Fire Insurance Corporation, an Alabama corporation (collectively, the
"Company"), and Donald W. Thornton, an individual resident of Birmingham,
Alabama (the "Executive") effective the 30th day of September, 1999 (the
"Effective Date").
RECITALS:
A. The Company is a holding company for a group of property and casualty
insurance subsidiaries which offer primary insurance primarily on personal
risks;
B. The Executive serves as Senior Vice President, Secretary and General
Counsel of the Company and as a member of the Board of Directors of J. Gordon
Gaines, Inc. and Vesta Fire Insurance Corporation;
C. The Company wishes to assure itself of the continued services of the
Executive so that it will have the continued benefit of his ability, experience
and services, and the Executive is willing to enter into an agreement to that
end, upon the terms and conditions hereinafter set forth; and
D. Certain capitalized terms used in this Agreement shall have the
meanings given them in Section 16 hereof.
NOW, THEREFORE, in consideration of good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
covenant and agree as follows:
1. Employment.
----------
(a) The Company hereby agrees to continue to employ the Executive as Senior
Vice President, Secretary and General Counsel of the Company and any other
position agreed upon by the parties; the Company agrees to use its best efforts
to cause Executive to be elected as a member of the Board of Directors of J.
Gordon Gaines, Inc. and Vesta Fire Insurance Corporation and Executive hereby
agrees to serve the Company in the foregoing capacities, upon the terms and
conditions set forth herein. The Executive shall have such authority and
responsibilities consistent with his position that may be set forth in the
Company's Bylaws or assigned by the Board from time to time.
(b) The Executive agrees to devote such amount of his time, efforts and
skills as is reasonably necessary to the performance of his duties and
responsibilities under this Agreement; provided, however, that nothing in this
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Agreement shall preclude the Executive from devoting reasonable periods required
for (i) participating in professional, educational, philanthropic, public
interest, charitable, social or community activities, (ii) serving as a director
or member of an
<PAGE>
advisory committee of any corporation or other entity that the Executive is
serving on or any other corporation or entity that is not in direct competition
with the Company, or (iii) managing his personal investments, provided that such
activities do not materially interfere with the Executive's regular performance
of his duties and responsibilities hereunder.
2. Term. Unless earlier terminated as provided herein, the Executive's
----
employment under this Agreement shall be for a term (the "Term") of three (3)
years from the Effective Date. The Term shall be automatically extended for an
additional year on each anniversary of the Effective Date, unless written notice
of non-extension is provided by either party to the other party at least 90 days
prior to such anniversary.
3. Compensation and Benefits. In consideration of the services rendered
-------------------------
by the Executive during the Term, the Company shall pay or provide to the
Executive the amounts and benefits set forth below.
(a) Salary. Executive shall receive an annual base salary of $207,000.
-------
The base salary shall be paid in accordance with the Company's normal payroll
practices. The Executive's base salary shall be reviewed at least annually by
the Compensation Committee for consideration of appropriate merit increases and,
once established, the base salary shall not be decreased during the Employment
Period.
(b) Executive Officer Incentive Compensation Plan. In addition to any
---------------------------------------------
bonus amounts granted or payable to the Executive under the Company's regular
executive compensation plans or practices, the Executive shall participate in
that certain Executive Officer Incentive Compensation Plan, a copy of which is
attached hereto as Exhibit A.
(c) Other Incentive Plans. The Executive shall participate in all annual
---------------------
and long-term bonus or incentive plans or arrangements in which other senior
executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, the Company's Cash Bonus Plan. The
Executive's incentive compensation opportunities under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(d) Equity Incentives. The Executive shall be given consideration, at
-----------------
least annually, by the Compensation Committee for the grant of options to
purchase shares of the common stock of the Company. In addition, the Executive
shall be entitled to receive awards under any stock option, stock purchase or
equity-based incentive compensation plan or arrangement adopted by the Company
from time to time for which senior executives of the Company of a comparable
level are eligible to participate. The Executive's awards under such plans and
arrangements shall be determined from time to time by the Compensation
Committee.
(e) Employee Benefits. The Executive shall be entitled to participate in
-----------------
all employee benefit plans, programs, practices or arrangements of the Company
in which other senior
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executives of the Company of a comparable level are eligible to participate from
time to time, including, without limitation, any qualified or non-qualified
pension, profit sharing and savings plans, any death benefit and disability
benefit plans, and any medical, dental, health and welfare plans. Without
limiting the generality of the foregoing, the Company shall provide the
Executive with the following:
(i) long-term disability insurance coverage in an amount and on
terms consistent with the coverage in place for the Executive on the
Effective Date;
(ii) continued provision of life insurance coverage in an amount and
on terms consistent with the coverage in place for the Executive on the
Effective Date; and
(iii) provision of the pension benefits provided under the Company's
Post-Retirement Benefits Plan.
(f) Fringe Benefits and Perquisites. The Executive shall be entitled to
-------------------------------
continuation of all fringe benefits and perquisites provided to the Executive on
the Effective Date, and to all fringe benefits and perquisites which are
generally made available to senior executives of the Company of a comparable
level from time to time. Without limiting the generality of the foregoing, the
Company shall provide the Executive with the following:
(i) provision of executive offices and secretarial staff;
(ii) vacation in accordance with the Company's policy for other
senior executives of a comparable level;
(iii) an automobile owned or leased by the Company of a make and
model appropriate for the Executive's position or, in lieu thereof,
provision of a non-accountable automobile allowance in an amount to be
determined from time to time by the Board or the Compensation Committee;
and
(iv) continued payment of initiation and other fees and annual dues
for one or more country clubs (but in no event less than one country club
membership of Executive's choice) and/or dining clubs which the Company was
paying for on the Effective Date, and payment of dues for any professional
associations of which Executive is a member in furtherance of his duties
hereunder;
(v) reimbursement of all reasonable travel and other business
expenses and disbursements incurred by the Executive in the performance of his
duties under this Agreement, upon proper accounting in accordance with the
Company's normal practices and procedures for reimbursement of business
expenses.
4. Termination.
-----------
3
<PAGE>
(a) The Executive's employment under this Agreement may be terminated prior
to the end of the Term only as follows:
(i) upon the resignation or death of the Executive;
(ii) by the Company due to the Disability of the Executive upon
delivery of a Notice of Termination to the Executive;
(iii) by the Company for Cause upon delivery of a Notice of
Termination to the Executive; and
(iv) by the Executive for Good Reason upon delivery of a Notice of
Termination to the Company after any occurrence of a Change in Control.
(b) If the Executive's employment with the Company shall be terminated
during the Term (i) by reason of the Executive's resignation or death, or (ii)
by the Company for Disability or Cause, the Company shall pay to the Executive
(or in the case of his death, the Executive's estate) within thirty (30) days
after the Termination Date a lump sum cash payment equal to the Accrued
Compensation and, if such termination is other than as a result of Executive's
resignation or by the Company for Cause, the Pro Rata Bonus.
(c) If the Executive's employment with the Company shall be terminated by
the Company in violation of this Agreement or by the Executive for Good Reason,
in addition to other rights and remedies available in law or equity, the
Executive shall be entitled to the following:
(i) the Company shall pay the Executive in cash within thirty (30)
days of the Termination Date an amount equal to all Accrued Compensation
and the Pro Rata Bonus;
(ii) the Company shall pay to the Executive in cash at the end of
each of the thirty-six consecutive 30-day periods following the Termination
Date an amount equal to one-twelfth of the sum of the Base Amount
(including any increases in base salary) plus the Bonus Amount (including
any increases in bonus amount) plus all benefits provided in Section 3
hereof, or in the alternative, the Executive may elect to receive a lump
sum equal to the present value of the payments due under this paragraph
(c)(ii), to be payable within thirty (30) days of such election; provided,
--------
however, that such lump sum amount shall be reduced to its net present
-------
value assuming an interest rate equal to six percent (6%) and 36 equal
monthly payments commencing on the Termination Date;
(iii) for the period from the Termination Date through the date that
Executive attains the age of sixty-five (65) (the "Continuation Period"),
the Company shall at its expense continue on behalf of the Executive and
his dependents and beneficiaries the life insurance, disability, medical,
dental and hospitalization benefits provided (x) in the case of
4
<PAGE>
a Change in Control, to the Executive at any time during the 90-day period
prior to the Change in Control or at any time thereafter or (y) in other
instances, to other similarly situated executives who continue in the
employ of the Company during the Continuation Period. The coverage and
benefits (including deductibles and costs) provided in this Section
4(c)(iii) during the Continuation Period shall be no less favorable to the
Executive and his dependents and beneficiaries than the most favorable of
such coverages and benefits during either of the periods referred to in
clauses (x) and (y) above; provided, however, the Company's obligation
-----------------
hereunder with respect to the foregoing benefits shall be limited to the
extent that the Executive obtains any such benefits pursuant to a
subsequent employer's benefit plans, in which case the Company may reduce
the coverage of any benefits it is required to provide the Executive
hereunder as long as the aggregate coverages and benefits of the combined
benefit plans are no less favorable to the Executive than the coverages and
benefits required to be provided hereunder; provided, further, subject to
-----------------
the last sentence of this Section 4(c), life insurance shall not be
continued longer than three years after the Termination Date, even if the
Executive has not obtained such other benefits under another employer's
benefit plan; and
(iv) the restrictions on any incentive awards whether now in effect
for, or hereafter granted to, the Executive under any stock option plan or
under any other incentive plan, deferred compensation plan, agreement or
arrangement of the Company of any of its affiliates shall lapse and such
incentive awards shall become 100% accrued and vested, so that, for
example, all stock options and stock appreciation rights granted to the
Executive shall be immediately exercisable and shall be 100% vested, all
restrictions on any restricted stock held by the Executive shall lapse such
that the Executive has full title to such shares, and any deferred
compensation payable under any plan, agreement or arrangement shall accrue
in total and be immediately due and payable in full. The period in which
Executive may exercise any option granted shall be the full term of such
option.
This Section 4(c) shall not be interpreted so as to limit any benefits to which
the Executive or his dependents or beneficiaries may be entitled under any of
the Company's employee benefit plans, programs or practices following the
Executive's termination of employment, including, without limitation, retiree
medical and life insurance benefits.
(d) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
and no such payment shall be offset or reduced by the amount of any compensation
or benefits provided to the Executive in any subsequent employment except as
provided in Section 4(c)(iii).
(e) In the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")) to the
Executive (or for his benefit) paid or payable or distributed or distributable
pursuant to the terms of this Agreement or otherwise in connection with, or
arising out of, his relationship with the Company or a change in ownership or
effective control of the Company or of a substantial portion of its assets (a
"Payment" or
5
<PAGE>
"Payments"), would be subject to the excise tax imposed by Section 4999 of the
Code or any interest or penalties are incurred by the Executive with respect to
any such excise or other taxes (such excise tax, together with any such interest
and penalties, are hereinafter collectively referred to as the "Excise Tax" and
any other tax together with any such interest and penalties are herein referred
to as "Other Taxes"), then the Executive will be entitled to receive an
additional payment (a "Gross-Up Payment") in an amount such that after payment
by the Executive of all Excise Taxes and Other Taxes on the Payments and All
Excise Taxes or Other Taxes imposed upon the Gross-Up Payment, the Executive
shall retain that portion of the Gross-Up Payment equal to the Excise Tax or
Other Taxes imposed upon the Payments.
5. Confidential Information. During the Term and at all times thereafter,
------------------------
the Executive agrees that he will not divulge to anyone (other than the Company
or any persons employed or designated by the Company) any knowledge or
information of a confidential nature relating to the business of the Company or
any of its subsidiaries or affiliates, including, without limitation, all types
of trade secrets (unless readily ascertainable from public or published
information or trade sources) and confidential commercial information, and the
Executive further agrees not to disclose, publish or make use of any such
knowledge or information without the consent of the Company.
6. Successors; Binding Agreement.
-----------------------------
(a) This Agreement shall be binding upon and shall inure to the benefit of
the Company (including each of its subsidiaries), its successors and assigns and
any person, firm, corporation or other entity which succeeds to all or
substantially all of the business, assets or property of the Company. The
Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation, or otherwise) to all or substantially all of the
business, assets or property of the Company, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, the "Company" shall mean the Company as hereinbefore
defined and any successor to its business, assets or property as aforesaid which
executes and delivers an agreement provided for in this Section 6 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement and all rights of the Executive hereunder shall inure to
the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amounts are due
and payable to him hereunder, all such amounts, unless otherwise provided
herein, shall be paid to the Executive's designated beneficiary or, if there be
no such designated beneficiary, to the legal representatives of the Executive's
estate.
7. Fees and Expenses. To induce the Executive to execute this Agreement
-----------------
and to provide the Executive with reasonable assurance that the purposes of this
Agreement will not be frustrated by the cost of its enforcement should the
Company fail to perform its obligations under
6
<PAGE>
this Agreement or should the Company or any subsidiary, affiliate or stockholder
of the Company contest the validity or enforceability of this Agreement, the
Company shall pay and be solely responsible for any attorneys' fees and expenses
and courts costs incurred by the Executive as a result of a claim that the
Company has breached or otherwise failed to perform this Agreement or any
provision hereof to be performed by the Company or as a result of the Company or
any subsidiary, affiliate or stockholder of the Company contesting the validity
or enforceability of this Agreement or any provision hereof to be performed by
the Company, in each case regardless of which party, if any, prevails in the
contest.
8. Notice. All notices and other communications provided for in this
------
Agreement (including the Notice of Termination) shall be in writing and shall be
deemed to have been duly given upon personal delivery or receipt when sent by
certified mail, return receipt requested, postage prepaid, or a nationally
recognized overnight courier service that provides written proof of delivery,
addressed to the respective addresses last given by each party to the other;
provided, however, that all notices to the Company shall be directed to the
- -------- -------
attention of the Board of Directors with a copy to the Chief Executive Officer
and the General Counsel of the Company.
9. Settlement of Claims. The Company's obligation to make the payments
--------------------
provided for in this Agreement and to otherwise perform its obligations
hereunder shall not be affected by any circumstances, including, without
limitation, any set-off, counterclaim, recoupment, defense or other right which
the Company may have against the Executive or others. The Company may, however,
withhold from any benefits payable under this Agreement all federal, state, city
or other taxes as shall be required pursuant to any law or governmental
regulation or ruling.
10. Modification and Waiver. No provisions of this Agreement may be
-----------------------
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and the Company. No waiver by
any party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
11. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Alabama without giving
effect to the conflict of laws principles thereof.
12. Severability. The provisions of this Agreement shall be deemed
------------
severable, and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
13. Entire Agreement. This Agreement constitutes the entire agreement
----------------
between the parties hereto and supersedes all prior agreement, if any,
understandings and arrangements, oral or written, between the parties hereto
with respect to the subject matter hereof.
7
<PAGE>
14. Headings. The headings of Sections herein are included solely for
--------
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each shall be deemed an original but all of which together shall
constitute one and the same instrument.
16. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the following meanings:
(a) "Accrued Compensation" shall mean an amount which shall include all
amounts earned or accrued through the Termination Date but not paid as of the
Termination Date, including without limitation, (i) base salary, (ii) deferred
compensation accumulated under any plan, arrangement or agreement, (iii)
reimbursement for reasonable and necessary expenses incurred by the Executive on
behalf of the Company prior to Termination Date, and (iv) bonuses and incentive
compensation, including stock options (other than the Pro Rata Bonus).
(b) "Base Amount" shall mean the greater of the Executive's annual base
salary (i) at the rate in effect on the Termination Date or (ii) the highest
rate in effect at any time during the 90-day period prior to a Change in
Control, and shall include all amounts of his base salary that are deferred
under any plans, arrangements or agreements of the Company or any of its
affiliates.
(c) "Board" shall mean the Board of Directors of the Company.
(d) "Bonus Amount" shall mean the greater of (i) the most recent annual
cash bonus paid or payable to the Executive, or, if greater, the annual cash
bonus paid or payable for the year ended prior to the fiscal year during which a
Change in Control occurred, or (ii) the average of the annual cash bonuses paid
or payable during the three full fiscal years ended prior to the Termination
Date or, if greater, the three full fiscal years prior to a Change in Control
(or, in each case, such lesser period for which annual bonuses were paid or
payable to the Executive). The Bonus Amount shall not include any amounts paid
or payable under the Executive Officer Incentive Compensation Plan.
(e) The termination of the Executive's employment shall be for "Cause" if
it is a result of any act that (A) constitutes, on the part of the Executive,
fraud, dishonesty gross malfeasance of duty and (B) is demonstrably likely to
lead to material injury to the Company; provided, however, that, such conduct
-------- -------
shall not constitute Cause:
(x) unless (A) there shall have been delivered to the Executive a
written notice setting forth with specificity the reasons that the Board
believes the Executive's conduct meets the criteria set forth in clause
(i), (B) the Executive shall have been provided the opportunity to be heard
in person by the Board (with the assistance of the Executive's counsel if
the Executive so desires), and (C) after such hearing, the termination is
evidenced
8
<PAGE>
by a resolution adopted in good faith by two-thirds of the members of the
Board (other than the Executive); or
(y) if such conduct was believed by the Executive in good faith to
have been in or not opposed to the interests of the Company.
(f) A "Change in Control" shall mean the occurrence during the Term of any
of the following events:
(i) An acquisition (other than directly from the Company) of any
voting securities of the Company (the "Voting Securities") by an "Person"
(as the term person is used for purposes of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) immediately after which
such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of the combined voting power
of the Company's then outstanding Voting Securities; provided, however,
-------- -------
that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would cause
a Change in Control. A "Non-Control Acquisition" shall mean an acquisition
by (A) an employee benefit plan (or a trust forming a part thereof)
maintained by (x) the Company or (y) any corporation or other Person of
which a majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by the Company (a "Subsidiary"),
(B) the Company or any 80% owned subsidiary, (C) Birmingham Investment
Group, LLC or any affiliate of Birmingham Investment Group, LLC, or (D) any
Person in connection with a "Non-Control Transaction" (as hereinafter
defined).
(ii) The individuals who, as of the date of this Agreement, are
members of the Board (the "Incumbent Board") cease for any reason to
constitute at least two-thirds of the Board; provided, however, that if the
-------- -------
election, or nomination for election by the Company's stockholders, of any
new director was approved by a vote of at least two-thirds of the Incumbent
Board with no more than one (1) member of the Incumbent Board voting
against such new director, such new director shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board; provided,
--------
further, that no individual shall be considered a member of the Incumbent
-------
Board if such individual initially assumed office as a result of either an
actual or threatened "Election Contest" (as described in Rule 14a-11
promulgated under the 1934 Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than the Board (a
"Proxy Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
(iii) Approval by stockholders of the Company of:
(A) A merger, consolidation of reorganization involving the
Company, unless
9
<PAGE>
(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation or
reorganization, a least two-thirds of the combined voting power
of the outstanding voting securities of the corporation resulting
from such merger of consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Corporation.
(A transaction described in the immediately preceding clauses (1)
and (2) shall herein be referred to as a "Non-Control
Transaction.")
(B) A complete liquidation, or dissolution of the Company; or
(C) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person.
(iv) Notwithstanding anything contained in this Agreement to the
contrary, if the Executive's employment is terminated prior to a Change in
Control and the Executive reasonably demonstrates that such termination (A)
was at the request of a third party who has indicated an intention or taken
steps reasonably calculated to effect a Change in Control and who
effectuates a Change in Control (a "Third Party") or (B) otherwise occurred
in connection with, or in anticipation of, a Change in Control which
actually occurs, then for all purposes of this Agreement, the date of a
Change in Control with respect to the Executive shall mean the date
immediately prior to the date of such termination of the Executive's
employment.
(g) "Compensation Committee" shall mean the Compensation Committee of the
Board.
(h) "Disability" shall mean the inability of the Executive to perform his
duties to the Company on account of physical or mental illness for a period of
six consecutive full months, or for a period of eight full months during any 12-
month period. The Executive's employment shall terminate in such a case on the
last day of the applicable period; provided, however, in no event shall the
-------- -------
Executive be terminated by reason of Disability unless (i) the Executive is
eligible for the long-term disability benefits set forth in Section 3(e)(i)
hereof and (ii) the Executive receives written notice from the Company, at least
30 days in advance of such termination, stating its
10
<PAGE>
intention to terminate the Executive for reason of Disability and setting forth
in reasonable detail the facts and circumstances claimed to provide a basis for
such termination.
(i) "Effective Date" shall mean the day and year first above written.
(j) "Good Reason" shall mean the occurrence at any time within three (3)
years following a Change in Control of any of the events or conditions
described in subsections (i) through (viii) hereof:
(i) a change in the Executive's status, title, position or
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his
status, office, title, position or responsibilities as in effect at any
time within 90 days preceding the date of a Change in Control or at any
time thereafter the assignment to the Executive of any duties or
responsibilities which, in the Executive's reasonable judgment, are
inconsistent with his status, office, title, position or responsibilities
as in effect at any time within 90 days preceding the date of a Change in
Control or at any time thereafter; any removal of the Executive from, or
failure to reappoint or reelect him to, any such status, office, title,
position or responsibility; or any other change in condition or
circumstances that in the Executive's reasonable judgment makes it
materially more difficult for the Executive to carry out the duties and
responsibilities of his office that existed at any time within 90 days
preceding the date of a Change in Control or at any time thereafter;
(ii) a reduction in the Executive's base salary or any failure to pay
the Executive any compensation or benefits to which he is entitled within
five days of the date due;
(iii) the Company's requiring the Executive to be based at any place
outside a 30-mile radius from the executive offices occupied by the
Executive immediately prior to a Change in Control, except for reasonably
required travel on the Company's business which is not materially greater
than such travel requirements prior to the Change in Control;
(iv) the failure by the Company to (A) continue in effect (without
reduction in benefit level and/or reward opportunities) any material
compensation or employee benefit plan in which the Executive was
participating at any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter, unless such plan is replaced
with a plan that provides substantially equivalent compensation or benefits
to the Executive or (B) provide the Executive with compensation and
benefits, in the aggregate, at least equal (in terms of benefit levels
and/or reward opportunities) to those provided for under each other
employee benefit plan, program and practice in which the Executive was
participating at any time within 90 days preceding the date of a Change in
Control or at any time thereafter;
(v) the insolvency, or the filing by any person or entity, including
the Company or any of its subsidiaries, of a petition for bankruptcy of the
Company, or other relief under any other moratorium or similar law, which
petition is not dismissed within 60 days;
11
<PAGE>
(vi) any material breach by the Company of this Agreement;
(vii) any purported termination of the Executive's employment for
Cause by the Company which does not comply with the terms of this
Agreement; or
(viii) the failure of the Company to obtain an agreement,
satisfactory to the Executive, from any Successors and Assigns to assume
and agree to perform this Agreement, as required by Section 6(a) hereof.
Any event or condition described in clause (i) through (viii) above which occurs
prior to a Change in Control but which the Executive reasonably demonstrates (A)
was at the request of a Third Party, or (B) otherwise arose in connection with,
or in anticipation of, a Change in Control which actually occurs, shall
constitute Good Reason for purposes of this Agreement, notwithstanding that it
occurred prior to the Change in Control. The Executive's right to terminate his
employment for Good Reason shall not be affected by his incapacity due to
physical or mental illness.
(k) "Notice of Termination" shall mean a written notice of termination from
the Company or the Executive which specifies an effective date of termination,
indicates the specific termination provision in this Agreement relied upon, and
sets forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Executive's employment.
(l) "Pro Rata Bonus" shall mean an amount equal to the Bonus Amount
multiplied by a fraction the numerator of which is the number of days in the
applicable year through the Termination Date and the denominator of which is
365.
(m) "Successors and Assigns" shall mean a corporation or other entity
acquiring all or substantially all the assets and business of the Company
(including this Agreement), whether by operation of law or otherwise.
(n) "Termination Date" shall mean, in the case of the Executive's death,
his date of death, and in all other cases, the date specified in the Notice of
Termination.
12
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its officers thereunto duly authorized, and the Executive has signed and sealed
this Agreement, effective as of the date first above written.
VESTA INSURANCE GROUP, INC.
By:/s/ James E. Tait
----------------------------------------
Its: Executive Vice President
J. GORDON GAINES, INC.
By:/s/ James E. Tait
----------------------------------------
Its: Executive Vice President
VESTA FIRE INSURANCE CORPORATION
By:/s/ James E. Tait
----------------------------------------
Its: Executive Vice President
EXECUTIVE:
/s/ Donald W. Thorton
------------------------------------------
Donald W. Thornton
13
<PAGE>
EXHIBIT 10.16
VESTA INSURANCE GROUP, INC.
EXECUTIVE OFFICER INCENTIVE COMPENSATION PLAN
Section 1. Purpose of the Plan. The Vesta Insurance Group, Inc.
-------------------
Executive Officer Incentive Compensation Plan (the "Plan") has been established
by the Board of Directors (the "Board") of Vesta Insurance Group, Inc. ("the
Company") to motivate certain of the Company's executive officers by providing
them with the opportunity to earn a one-time cash bonus and thereby assist the
Company in reaching its growth and earnings objectives.
Section 2. Certain Definitions.
-------------------
(a) "Board" means the Board of Directors of the Company.
(b) "Bonus Amount" means the cash bonus amount payable to the
Participants hereunder, to be determined in accordance with Sections 5 and 7
below.
(c) "Cause" shall mean the termination of a Participant's
employment as a result of any act that (A) constitutes, on the part of the
Participant, fraud, dishonesty gross malfeasance of duty and (B) is demonstrably
likely to lead to material injury to the Company; provided, however, that such
-------- -------
conduct shall not constitute Cause:
(x) unless (A) there shall have been delivered to the
Participant a written notice setting forth with specificity the
reasons that the Board believes the Participant's conduct meets the
criteria set forth in clause (i), (B) the Participant shall have been
provided the opportunity to be heard in person by the Board (with the
assistance of the Participant's counsel if the Participant so
desires), and (C) after such hearing, the termination is evidenced by
a resolution adopted in good faith by two-thirds of the members of the
Board (other than the Participant); or
(y) if such conduct was believed by the Participant in good
faith to have been in or not opposed to the interests of the Company.
(d) "Company" shall have the meaning set forth in Section 1
above.
(e) "Compensation Committee" means the Compensation Committee
of the Board.
(f) "Disability" means the inability of a Participant to
perform his duties to the Company on account of physical or mental illness for a
period of six consecutive full months, or for a period of eight full months
during any 12-month period. A Participant's employment shall terminate in such a
case on the last day of the applicable period; provided, however, in no event
-------- -------
shall the Participant be terminated by reason of Disability unless (i) the
Participant is eligible for the long-term disability benefits provided by the
Company as part of its
<PAGE>
group disability policy or otherwise and (ii) the Participant receives written
notice from the Company, at least 30 days in advance of such termination,
stating its intention to terminate the Participant for reason of Disability and
setting forth in reasonable detail the facts and circumstances claimed to
provide a basis for such termination.
(g) "Participant" means each of the executive officers of the
Company whose names are listed on Exhibit A hereto; provided, however, that the
Participants may, by unanimous written consent, add one or more additional
participants to the Plan in addition to those listed on Exhibit A, and once
added such additional participants shall become, and be treated as, a
Participant hereunder.
(h) "Total Market Capitalization" shall mean the total number
of fully diluted common shares of the Company as of a given date multiplied by
the closing price of the Company's common stock on such date on the New York
Stock Exchange Composite Tape or, if not listed on such exchange, any other
national exchange in which the Company's common stock is listed or on NASDAQ, as
adjusted for share repurchases and extraordinary dividends. If there is no
regular public trading market for such stock, the fair market value of the
Company's common stock shall be determined by the Compensation Committee in good
faith.
Section 3. Administration. Other than as set forth herein, the Plan
--------------
shall be administered by the Compensation Committee, such administrative and
other authority described in this Section 3 to be subject to the approval and
oversight of the Board. Other than as set forth herein, the Compensation
Committee shall have full power and authority to administer and interpret the
Plan and to adopt such rules, regulations, agreements, guidelines and
instruments for the administration of the Plan and the payment of Bonus Awards
as the Compensation Committee deems necessary or advisable. The Compensation
Committee's interpretations of the Plan, and all actions taken and
determinations made by the Compensation Committee pursuant to the powers vested
in it hereunder, shall be conclusive and binding on all parties concerned,
including the Company and the Participants. The Compensation Committee shall
not have the discretion to decrease the amount of compensation payable hereunder
or to adjust the basis upon which the Bonus Awards are determined, nor shall
this Section 3 give the Compensation Committee the authority reserved to the
Participants under Section 2(g) or Section 6 hereunder.
Section 4. Eligibility and Participation. Participation in this Plan
-----------------------------
shall be limited to those executive officers of the Company whose names are
listed on Exhibit A hereto as amended from time to time pursuant to Section 2(g)
or Section 6(ii).
Section 5. Determination of Bonus Amounts.
------------------------------
(a) The Company shall pay to the Participants a one-time cash
bonus in an aggregate amount equal to five percent (5%) of the amount by which
the Total Market Capitalization of the Company on the earlier of: (1) September
29, 2002; or (2) the date on which the Company ceases to be publicly traded (the
"Determination Date") exceeds the Total Market
2
<PAGE>
Capitalization of the Company on September 29, 1999 (the "Base Date") (such
amount referred to herein as the "Total Bonus Amount"). In the event that the
Company ceases to be publicly traded, the Determination Date shall be whichever
of the following dates which results in the greater Total Market Capitalization:
(i) as of the date immediately preceding the public announcement of the
transaction pursuant to which the Company ceases to be publicly traded, or (ii)
the date of the closing of the transaction pursuant to which the Company ceases
to be publicly traded.
(b) The Total Bonus Amount payable hereunder (if any) shall be
allocated among the Participants in accordance with the percentages set forth
opposite their respective names on Exhibit A hereto.
(c) The Bonus Amounts payable to the Participants under this
Plan shall be in addition to and shall not otherwise affect the amount of any
annual salary, bonus or other cash compensation payable to the Participants,
whether pursuant to a separate plan or otherwise; provided, however, that the
Bonus Amount payable to each Participant shall have deducted therefrom the total
amounts paid to such Participant under the Company's Cash Bonus Plan during the
period beginning at the Base Date and ending on the Determination Date.
Section 6. Adjustments to Bonus Amounts, Etc. In the event that one or
----------------------------------
more Participants cease to be employed by the Company prior to the Determination
Date, the remaining Participants, in their sole and absolute discretion, shall
be entitled by majority vote, either before or after the Determination Date, to
(i) decrease the Total Bonus Amount based upon the allocable share of the
terminated or departing Participant, (ii) permit one or more executive officers
of the Company who are not then Participants to participate in the Plan and
assume all or a part of the former Participant's allocated percentage, (iii) pay
to the terminated or departing Participant all or part of his allocable share of
the Total Bonus Amount in a manner consistent with Section 8 hereof, or (iv)
reallocate the former Participant's allocated percentage among themselves.
Section 7. Determination and Payment of Bonus Amounts.
------------------------------------------
(a) As soon as practicable following the Determination Date,
but in no event later than October 15, 2002, the Compensation Committee shall
determine the Company's Total Market Capitalization as of the Determination Date
in accordance with Section 2(h) hereof and, based upon such determination, shall
determine the actual Total Bonus Amount payable hereunder and each Participant's
allocable share thereof.
(b) The final Bonus Amount payable to each Participant, as
determined pursuant to Section 7(a) above, shall be payable in a single lump sum
payment no later than thirty (30) days following the Determination Date. If the
Company is unable to pay the Bonus Amount payment, due to availability under
bank credit lines or otherwise, the unpaid portion of such Bonus Amount payment
shall bear interest at the prime rate of interest as in effect at the Company's
lead commercial bank on the due date of such payment.
3
<PAGE>
(c) The Participant shall have no interest whatsoever in any
specific asset of the Company as a result of his participation in this Plan. To
the extent that the Participant acquires a right to receive payments under this
Plan, such right shall be equivalent to that of an unsecured general creditor of
the Company.
Section 8. Vesting; Termination of Employment.
----------------------------------
(a) If a Participant's employment with the Company continues
through the Determination Date, such Participant shall be entitled to receive
his respective allocable share of the Total Bonus Award payable under Section 5
in accordance with the terms of the Plan.
(b) In the event of the death or Disability of a Participant
prior to the Determination Date, the Participant shall be entitled to such
percentage of his allocable share of the Total Bonus Amount which is determined
by taking the total number of full months that have elapsed since the Base Date
divided by thirty-six (36) (the "Pro Rata Bonus Amount"). Payments (if any) will
be made in accordance with the terms of the Plan.
(c) If prior to the second anniversary of the Base Date, a
Participant's employment with the Company terminates by reason of resignation or
discharge by the Company for Cause, the Participant shall not receive any
portion of the Total Bonus Amount. In such case, the remaining Participants
shall share pro rata in any forfeited Bonus Amount. If at any time following the
second anniversary of the Base Date but prior to the Determination Date, a
Participant's employment with the Company terminates by reason of resignation or
discharge by the Company for Cause, the Participant shall be entitled to receive
his Pro Rata Bonus Amount. Payments (if any) will be made in accordance with the
terms of the Plan.
(d) In the event of the termination of a Participant's
employment by the Company other than for Cause at any time after the second
anniversary of Base Date, such Participant shall be entitled to his allocable
share of the Total Bonus Amount payable under Section 5 in accordance with the
terms of the Plan as if such Participant had continued as an employee of the
Company through the Determination Date.
(e) Each Participant may designate, in writing and on such form
as the Company may prescribe, one or more beneficiaries to receive any amount
that becomes payable in the event of Participant's death. In the event of a
Participant's death, any Bonus Award that becomes payable to the Participant
shall be paid to his beneficiary or, in the event that no beneficiary has been
designated, to his estate.
4
<PAGE>
Section 9. Successors; Binding Effect.
--------------------------
(a) This Plan shall be binding upon and shall inure to the
benefit of the Company, its successors and assigns and any person, firm,
corporation or other entity which succeeds to all or substantially all of the
business, assets or property of the Company. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business, assets or property of
the Company, to expressly assume and agree to perform this Plan in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. As used in this Agreement, the "Company"
shall mean the Company as hereinbefore defined and any successor to its
business, assets or property as aforesaid which executes and delivers an
agreement provided for in this Section 9 or which otherwise becomes bound by all
the terms and provisions of this Plan by operation of law.
(b) This Plan and all rights of the Participants hereunder
shall inure to the benefit of and be enforceable by the Participant's personal
or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If a Participant should die while any
amounts are due and payable to him hereunder, all such amounts, unless otherwise
provided herein, shall be paid to the Participant's designated beneficiary or,
if there be no such designated beneficiary, to the legal representatives of the
Participant's estate.
Section 10. Rights of Participant. Nothing in the Plan shall interfere
---------------------
with or limit in any way the right of the Company to terminate a Participant's
employment at any time, nor confer upon any Participant any right to continue in
the employment of the Company.
Section 11. Amendment or Modification. The Board, in its sole discretion,
-------------------------
without notice, at any time and from time to time, may modify or amend, in whole
or in part, any or all of the provisions of the Plan, or suspend or terminate it
entirely; provided, however, that no such modification, amendment, suspension,
or termination may, without the consent of the Participants, reduce the right of
a Participant to receive payment hereunder to which he is otherwise entitled;
and provided further, that, except as specifically provided in Section 6 hereof,
no amendment of the Plan shall be effective which would change the criteria upon
which Bonus Amounts may be payable or which would decrease the amounts which are
payable to the Participants under this Plan.
Section 12. Miscellaneous.
-------------
(a) The Plan shall be governed by and construed in accordance
with the laws of the State of Alabama.
(b) The Company shall have the right to deduct from all
payments to be made under the Plan any federal, state or local taxes required by
law to be withheld with respect to such payments.
5
<PAGE>
(c) In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
(d) All costs of implementing and administering the Plan shall
be borne by the Company.
(e) Nothing contained in this Plan and no action taken pursuant
hereto shall create or be construed to create a trust of any kind, or a
fiduciary relationship between the Company and a Participant or any other
person.
(f) No Bonus Amount payable under the Plan shall be subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge, either voluntary or involuntary, and any attempt to so
alienate, anticipate, sell, transfer, assign, pledge, encumber or charge the
same shall be null and void. No such amount shall be liable for or subject to
the debts, contracts, liabilities, engagements, or torts of a Participant or any
person to whom such benefits or funds are or may be payable.
6
<PAGE>
EXHIBIT A
Allocable Share of
Name of Participant Total Bonus Amount (%)
------------------- ----------------------
Norman W. Gayle, III 40
James E. Tait 40
Donald W. Thornton 20
<PAGE>
================================================================================
CREDIT AGREEMENT
between
VESTA INSURANCE GROUP, INC.
and
THE BANK
$15,000,000 Revolving Credit Facility
Dated as of September 30, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I-DEFINITIONS...................................................... 1
1.1 Defined Terms................................................... 1
1.2 Accounting Terms................................................ 10
1.3 Other Terms; Construction....................................... 11
ARTICLE II-AMOUNT AND TERMS OF THE LOANS................................... 11
2.1 Commitment; Loans............................................... 11
2.2 Borrowings...................................................... 11
2.3 Note............................................................ 11
2.4 Security........................................................ 12
2.5 Termination and Reduction of Commitment......................... 12
2.6 Mandatory and Voluntary Payments and Prepayments................ 12
2.7 Interest........................................................ 13
2.8 Method of Payments; Computations................................ 13
2.9 Recovery of Payments............................................ 14
2.10 Use of Proceeds................................................. 14
2.11 Increased Costs; Change in Circumstances; Illegality; etc....... 14
2.12 Taxes........................................................... 15
ARTICLE III-CONDITIONS OF BORROWING........................................ 16
3.1 Conditions to Effectiveness of this Agreement................... 16
3.2 Conditions to All Loans......................................... 18
ARTICLE IV-REPRESENTATIONS AND WARRANTIES.................................. 18
4.1 Corporate Organization and Power................................ 18
4.2 Authorization; Enforceability................................... 19
4.3 No Violation.................................................... 19
4.4 Governmental Authorization; Permits............................. 19
4.5 Litigation...................................................... 20
4.6 Taxes........................................................... 20
4.7 Subsidiaries.................................................... 20
4.8 Full Disclosure................................................. 20
4.9 Margin Regulations.............................................. 21
4.10 No Material Adverse Change...................................... 21
4.11 Financial Matters............................................... 21
4.12 Ownership of Properties......................................... 22
4.13 ERISA........................................................... 22
4.14 Environmental Matters........................................... 22
4.15 Compliance With Laws............................................ 23
4.16 Regulated Industries............................................ 23
4.17 Insurance....................................................... 23
ARTICLE V-AFFIRMATIVE COVENANTS............................................ 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
5.1 GAAP Financial Statements....................................... 24
5.2 Statutory Financial Statements.................................. 25
5.3 Other Business and Financial Information........................ 26
5.4 Corporate Existence; Franchises; Maintenance of Properties...... 28
5.5 Compliance with Laws............................................ 28
5.6 Payment of Obligations.......................................... 28
5.7 Insurance....................................................... 28
5.8 Maintenance of Books and Records; Inspection.................... 28
5.9 Subsidiary Dividends............................................ 29
5.10 Further Assurances.............................................. 29
ARTICLE VI-FINANCIAL COVENANTS............................................. 29
6.1 Statutory Consolidated Net Income............................... 29
6.2 Consolidated Net Income......................................... 30
6.3 Statutory Surplus............................................... 30
6.4 Risk-Based Capital.............................................. 30
ARTICLE VII-NEGATIVE COVENANTS............................................. 31
7.1 Merger; Consolidation........................................... 31
7.2 Indebtedness.................................................... 31
7.3 Liens........................................................... 31
7.4 Disposition of Assets........................................... 33
7.5 Transactions with Affiliates.................................... 34
7.6 Lines of Business............................................... 34
7.7 Fiscal Year..................................................... 34
7.8 Accounting Changes.............................................. 35
7.9 Dividends....................................................... 35
ARTICLE VIII-EVENTS OF DEFAULT............................................. 35
8.1 Events of Default............................................... 35
8.2 Remedies; Termination of Commitment, Acceleration, etc.......... 37
8.3 Remedies; Set-Off............................................... 38
ARTICLE IX-MISCELLANEOUS................................................... 38
9.1 Fees and Expenses............................................... 38
9.2 Indemnification................................................. 39
9.3 Governing Law; Consent to Jurisdiction.......................... 39
9.4 Arbitration; Preservation and Limitation of Remedies............ 39
9.5 Notices......................................................... 40
9.6 Amendments, Waivers, etc........................................ 41
9.7 Participations.................................................. 41
9.8 No Waiver....................................................... 41
9.9 Successors and Assigns.......................................... 42
9.10 Survival........................................................ 42
9.11 Severability.................................................... 42
9.12 Construction.................................................... 42
9.13 Confidentiality................................................. 42
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
9.14 Reliance by Lender.............................................. 43
9.15 Counterparts.................................................... 43
9.16 Entire Agreement................................................ 43
</TABLE>
iii
<PAGE>
iv
<PAGE>
EXHIBITS
Exhibit A Form of Note
Exhibit B Form of Pledge Agreement
Exhibit C Form of Notice of Borrowing
Exhibit D-1 Form of Compliance Certificate (for Section 5.1)
Exhibit D-2 Form of Compliance Certificate (for Section 5.2)
Exhibit E Form of Opinion
SCHEDULES
Schedule 4.3 Subsidiaries Subject to Restrictions or Encumbrance
Schedule 4.4(a) Approval or Consent for Credit Agreement
Schedule 4.4(b) Governmental Approvals, Etc.
Schedule 4.5 Litigation Against Borrower
Schedule 4.6 Taxes
Schedule 4.7 Subsidiaries
Schedule 4.11(a) Financial Statements Exceptions
Schedule 4.11(b) Exceptions Regarding Historical Statutory Statements
Schedule 4.15 Compliance with Law Exceptions
Schedule 7.3 Existing Liens
[others]
v
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of the 30th day of September, 1999 (this
"Agreement"), is made between VESTA INSURANCE GROUP, INC., a Delaware
corporation with its principal offices in Birmingham, Alabama (the "Borrower")
and THE BANK, an Alabama banking corporation (the "Lender").
R E C I T A L S
The Borrower and certain banks and other financial institutions are parties
to an Amended and Restated Credit Agreement that was amended and restated as of
April 8, 1997, as further amended on April 14, 1999 (the "Existing Facility"),
providing for the availability to the Borrower of a revolving credit facility in
the aggregate principal amount of $200,000,000 on the terms and subject to the
conditions set forth therein. The Borrower has requested that the Lender
provide to the Borrower a revolving credit facility of $15,000,000 for the
purpose of refinancing the Existing Facility and providing a source of ongoing
working capital for the Borrower, all on the terms and subject to the conditions
hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual provisions, covenants and
agreements herein contained, the parties DO HEREBY AGREE as follows:
ARTICLE I
DEFINITIONS
I.1 Defined Terms. For purposes of this Agreement, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth below (such meanings to be equally applicable to the singular and plural
forms thereof):
"Account Designation Letter" shall mean a letter from the Borrower to the
Lender, duly completed and signed by an Authorized Officer of the Borrower and
in form and substance satisfactory to the Lender, listing any one or more
accounts to which the Borrower may from time to time request the Lender to
forward the proceeds of any Loans made hereunder.
"Affiliate" shall mean, as to any Person, each other Person that directly,
or indirectly through one or more intermediaries, owns or controls, is
controlled by or under common control with, such Person or is a director or
officer of such Person. For purposes of this definition, with respect to any
Person "control" shall mean (i) the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by
1
<PAGE>
contract or otherwise, or (ii) the beneficial ownership of securities or other
ownership interests of such Person having 25% or more of the combined voting
power of the then outstanding securities or other ownership interests of such
Person ordinarily (and apart from rights accruing under special circumstances)
having the right to vote in the election of directors or other governing body of
such Person.
"Agreement" shall mean this Credit Agreement, as amended, modified or
supplemented from time to time.
"Annual Statement" shall mean, with respect to any Insurance Subsidiary for
any fiscal year, the annual financial statements of such Insurance Subsidiary as
required to be filed with the Insurance Regulatory Authority of its jurisdiction
of domicile and in accordance with the laws of such jurisdiction, together with
all exhibits, schedules, certificates and actuarial opinions required to be
filed or delivered therewith.
"Authorized Officer" shall mean any officer of the Borrower authorized by
resolution of the board of directors of the Borrower to take the action
specified herein with respect to such officer and whose signature and incumbency
shall have been certified to the Lender by the secretary or an assistant
secretary of the Borrower.
"Bankruptcy Code" shall mean 11 U.S.C. (S)(S) 101 et seq., as amended from
time to time, and any successor statute.
"Base Rate" shall mean 2% per annum above the rate from time to time paid
by the Lender on the Certificate of Deposit.
"Birmingham Investment Group" shall mean that certain limited liability
company organized under the laws of Delaware under the name "Birmingham
Investment Group, L.L.C."
"Borrower Margin Stock" shall mean shares of capital stock of the Borrower
that are held by the Borrower or any of its Subsidiaries and that constitute
Margin Stock.
"Borrowing" shall mean the incurrence by the Borrower on a single date of a
Loan.
"Borrowing Date" shall mean, with respect to any Borrowing, the date upon
which such Borrowing is made.
"Business Day" shall mean any day other than a Saturday or Sunday, a legal
holiday or a day on which commercial banks in Birmingham, Alabama, are required
by law to be closed.
"Certificate of Deposit" shall mean the Certificate of Deposit purchased by
the Borrower from the Lender in the amount of the Commitment in which the Lender
shall have a security interest pursuant to the Pledge Agreement.
"Commitment" shall have the meaning given to such term in Section 2.1.
2
<PAGE>
"Compliance Certificate" shall mean a fully completed and duly executed
certificate in the form of Exhibit D-1 or D-2 in such form and detail as will
demonstrate compliance with the provisions of Article VI.
"Consolidated Group" shall have the meaning given to such term in the
Consolidated Tax Allocation Agreement.
"Consolidated Net Income" shall mean, for any period, net income (or loss)
for the Borrower and its Subsidiaries for such period, determined on a
consolidated basis in accordance with Generally Accepted Accounting Principles.
"Consolidated Tax Allocation Agreement" shall mean that certain
Consolidated Tax Allocation Agreement dated June 28, 1995, among the Borrower
and the Subsidiaries listed on Exhibit A thereto, without giving effect to any
amendments thereto after the date thereof.
"Contingent Obligation" shall mean, with respect to any Person, any direct
or indirect liability of such Person with respect to any Indebtedness, liability
or other obligation (the "primary obligation") of another Person (the "primary
obligor"), whether or not contingent, (i) to purchase, repurchase or otherwise
acquire such primary obligation or any property constituting direct or indirect
security therefor, (ii) to advance or provide funds (A) for the payment or
discharge of any such primary obligation or (B) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor in respect thereof to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner of any
such primary obligation against loss or failure or inability to perform in
respect thereof, provided, however, that, with respect to the Borrower and its
Subsidiaries, the term Contingent Obligation shall not include (y) endorsements
for collection or deposit in the ordinary course of business or (z) obligations
entered into by an Insurance Subsidiary in the ordinary course of its business
under insurance policies or contracts issued by it or to which it is a party,
including reinsurance agreements (and security posted by any such Insurance
Subsidiary in the ordinary course of its business to secure obligations
thereunder).
"Covenant Compliance Worksheet" shall mean a fully completed worksheet in
the form of Attachment A to Exhibit D-1 or Exhibit D-2, as applicable, in such
form and detail as will demonstrate compliance with the provisions of Article
VI.
"Credit Documents" shall mean this Agreement, the Note, the Pledge
Agreement, and all other agreements, instruments, documents and certificates now
or hereafter executed and delivered to the Lender by or on behalf of the
Borrower or any of its Subsidiaries with respect to this Agreement and the
transactions contemplated hereby, in each case as amended, modified,
supplemented or restated from time to time.
"Default" shall mean any event or condition that, with the passage of time
or giving of notice, or both, would constitute an Event of Default.
"Dollars" or "$" shall mean dollars of the United States of America.
3
<PAGE>
"Effective Date" shall mean the date and year first above written.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"ERISA Affiliate" shall mean any Person (including any trade or business,
whether or not incorporated) that would be deemed to be under "common control"
with, or a member of the same "controlled group" as, the Borrower or any of its
Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the
Internal Revenue Code or Section 4001 of ERISA.
"ERISA Event" shall mean any of the following with respect to a Plan or
Multiemployer Plan, as applicable: (i) a Reportable Event with respect to a
Plan or a Multiemployer Plan, (ii) a complete or partial withdrawal by the
Borrower or any ERISA Affiliate from a Multiemployer Plan that results in
liability under Section 4201 or 4204 of ERISA, or the receipt by the Borrower or
any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that
it intends to terminate or has terminated under Section 4041A of ERISA, (iii)
the distribution by the Borrower or any ERISA Affiliate under Section 4041 or
4041A of ERISA of a notice of intent to terminate any Plan or the taking of any
action to terminate any Plan, (iv) the commencement of proceedings by the PBGC
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Borrower or any ERISA
Affiliate of a notice from any Multiemployer Plan that such action has been
taken by the PBGC with respect to such Multiemployer Plan, (v) the institution
of a proceeding by any fiduciary of any Multiemployer Plan against the Borrower
or any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed
within thirty (30) days, (vi) the imposition upon the Borrower or any ERISA
Affiliate of any liability under Title IV of ERISA, other than for PBGC premiums
due but not delinquent under Section 4007 of ERISA, or the imposition or
threatened imposition of any Lien upon any assets of the Borrower or any ERISA
Affiliate as a result of any alleged failure to comply with the Internal Revenue
Code or ERISA in respect of any Plan, (vii) the engaging in or otherwise
becoming liable for a nonexempt Prohibited Transaction by the Borrower or any
ERISA Affiliate, (viii) a violation of the applicable requirements of Section
404 or 405 of ERISA or the exclusive benefit rule under Section 401(a) of the
Internal Revenue Code by any fiduciary of any Plan for which the Borrower or any
of its ERISA Affiliates may be directly or indirectly liable or (ix) the
adoption of an amendment to any Plan that, pursuant to Section 401 (a)(29) of
the Internal Revenue Code or Section 307 of ERISA, would result in the loss of
tax-exempt status of the trust of which such Plan is a part if the Borrower or
an ERISA Affiliate fails to timely provide security to such Plan in accordance
with the provisions of such sections.
"Environmental Claims" shall mean any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations (other than internal reports prepared
by any Person in the ordinary course of its business and not in response to any
third party action or request of any kind) or proceedings relating in any way to
any Environmental Law or any permit issued, or any approval given, under any
such Environmental Law (collectively, "Claims"), including, without limitation,
(i) any and all Claims by Governmental Authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Substances or arising from alleged
injury or threat of injury to human health or the environment.
4
<PAGE>
"Environmental Laws" shall mean any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations, rules of common law and orders of courts or Governmental
Authorities, relating to the protection of human health or occupational safety
or the environment, now or hereafter in effect and in each case as amended from
time to time, including, without limitation, requirements pertaining to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transportation, handling, reporting, licensing, permitting, investigation or
remediation of Hazardous Substances.
"Event of Default" shall have the meaning given to such term in Section
8.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and any successor statute, and all rules and regulations from
time to time promulgated thereunder.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System or any successor thereto.
"$5,000,000 Credit Agreement" shall mean the Credit Agreement of even date
herewith between the Borrower and The Banc Corporation.
"Generally Accepted Accounting Principles" shall mean generally accepted
accounting principles, as set forth in the statements, opinions and
pronouncements of the Accounting Principles Board, the American Institute of
Certified Public Accountants and the Financial Accounting Standards Board (or,
to the extent not so set forth in such statements, opinions and pronouncements,
as generally followed by entities similar in size to the Borrower and engaged in
generally similar lines of business), consistently applied and maintained and in
conformity with those used in the preparation of the most recent financial
statements of the Borrower referred to in Section 4.11(a).
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof and any central bank thereof, any municipal,
local, city or county government, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Hazardous Substances" shall mean any substances or materials (i) that are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any Environmental Law, (ii) that are
defined by any Environmental Law as toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of
which require investigation or response under any Environmental Law, (iv) that
constitute a nuisance, trespass or health or safety hazard to Persons or
neighboring properties, (v) that consist of underground or aboveground storage
tanks, whether empty, filled or partially filled with any hazardous substance or
(vi) that contain, without limitation, asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas.
"Historical Statutory Statements" shall have the meaning given to such term
in Section 4.11(b).
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"Income Tax Benefits" shall mean an amount equal to 100% of the portion of
the federal or state income tax benefits received on a quarterly basis by the
Borrower that, pursuant to the Consolidated Tax Allocation Agreement, may be
retained by the Borrower and not paid over to any other member of the
Consolidated Group.
"Indebtedness" shall mean, with respect to any Person (without
duplication), (i) all indebtedness of such Person for borrowed money or in
respect of loans or advances, (ii) all obligations of such Person evidenced by
notes, bonds, debentures or similar instruments, (iii) all reimbursement
obligations of such Person with respect to surety bonds, letters of credit and
bankers' acceptances (in each case, whether or not drawn or matured and in the
stated amount thereof), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person, (vi) all obligations of such Person as lessee
under leases that are or should be, in accordance with Generally Accepted
Accounting Principles, recorded as capital leases, to the extent such
obligations are required to be so recorded, (vii) all obligations of such Person
to purchase, redeem, retire, defease or otherwise make any payment in respect of
any capital stock or other equity securities that, by their stated terms (or by
the terms of any equity securities issuable upon conversion thereof or in
exchange therefor), or upon the occurrence of any event, mature or are
mandatorily redeemable, or are redeemable at the option of the holder thereof,
in whole or in part, at any time prior to the Maturity Date, (viii) all
Contingent Obligations of such Person and (ix) all indebtedness referred to in
clauses (i) through (viii) above secured by any Lien on any property or asset
owned or held by such Person regardless of whether the indebtedness secured
thereby shall have been assumed by such Person or is nonrecourse to the credit
of such Person, and with respect to the Borrower and its Subsidiaries shall
include, without limitation (but without duplication), the Junior Subordinated
Debentures, the beneficial interests of the Trust in the Junior Subordinated
Debentures, and the Borrower's guarantee to the holders of the Trust Securities
of all of the Trust's obligations under the Trust Securities.
"Insurance Regulatory Authority" shall mean, with respect to any Insurance
Subsidiary, the insurance department or similar Governmental Authority charged
with regulating insurance companies or insurance holding companies, in its state
of domicile and, to the extent that it has regulatory authority over such
Insurance Subsidiary, in each other jurisdiction in which such Insurance
Subsidiary conducts business or is licensed to conduct business.
"Insurance Subsidiary" shall mean any Subsidiary of the Borrower the
ability of which to pay dividends is regulated by an Insurance Regulatory
Authority or that is otherwise required to be regulated thereby in accordance
with the applicable Requirements of Law of its state of domicile.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"Junior Subordinated Debentures" shall mean the Borrower's 8.525% Junior
Subordinated Deferrable Interest Debentures due January 15, 2027, issued
pursuant to the Indenture, dated as of January 31, 1997, between the Borrower
and The National Bank of North Carolina, as Debenture Trustee, as amended,
modified or supplemented from time to time.
"Lender" shall mean The Bank and its successors and assigns.
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"Licenses" shall have the meaning given to such term in Section 4.4(c).
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, security
interest, lien (statutory or otherwise), preference, priority, charge or other
encumbrance of any nature, whether voluntary or involuntary, including, without
limitation, the interest of any vendor or lessor under any conditional sale
agreement, title retention agreement, capital lease or any other lease or
arrangement having substantially the same effect as any of the foregoing.
"Loans" shall have the meaning given to such term in Section 2.1.
"Margin Stock" shall have the meaning given to such term in Regulation U.
"Material Adverse Change" shall mean a material adverse change in the
condition (financial or otherwise), operations, business, properties or
financial prospects of the Borrower or the Borrower and its Subsidiaries, taken
as a whole.
"Material Adverse Effect" shall mean a material adverse effect upon (i) the
condition (financial or otherwise), operations, business, properties or
financial prospects of the Borrower or the Borrower and its Subsidiaries, taken
as a whole, (ii) the ability of the Borrower to perform its obligations under
this Agreement or any of the other Credit Documents or (iii) the legality,
validity or enforceability of this Agreement or any of the other Credit
Documents or the rights and remedies of the Lender hereunder and thereunder.
"Maturity Date" shall mean September 29, 2001.
"Moody's" shall mean Moody's Investors Service, Inc., its successors and
assigns.
"Multiemployer Plan" shall mean any "multiemployer plan" within the meaning
of Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate
makes, is making or is obligated to make contributions or has made or been
obligated to make contributions.
"NAIC" shall mean the National Association of Insurance Commissioners and
any successor thereto.
"Note" shall mean the promissory note of the Borrower in substantially the
form of Exhibit A, together with any amendments, modifications and supplements
thereto, substitutions therefore and restatements thereof.
"Notice of Borrowing" shall have the meaning given to such term in Section
2.2(a).
"Obligations" shall mean all principal of and interest (including, to the
greatest extent permitted by law, post-petition interest) on the Loans and all
fees, expenses, indemnities and other obligations owing, due or payable at any
time by the Borrower to the Lender or any other Person entitled thereto, under
this Agreement or any of the other Credit Documents.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
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"Participant" shall have the meaning given to such term in Section 9.7(a).
"Permitted Liens" shall have the meaning given to such term in Section 7.3.
"Person" shall mean any corporation, association, joint venture,
partnership, limited liability company, organization, business, individual,
trust, government or agency or political subdivision thereof or any other legal
entity.
"Plan" shall mean any "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA that is subject to the provisions of Title IV of ERISA
(other than a Multiemployer Plan) and to which the Borrower or any ERISA
Affiliate may have any liability.
"Pledge Agreement" shall mean the Pledge Agreement (for Certificates of
Deposit) in the form attached hereto and marked Exhibit B, as amended and
---------
supplemented from time to time.
"Prohibited Transaction" shall mean any transaction described in (i)
Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by
reason of a Department of Labor prohibited transaction individual or class
exemption or (ii) Section 4975(c) of the Internal Revenue Code that is not
exempt by reason of Section 4975(c)(2) or 4975(d) of the Internal Revenue Code.
"Quarterly Statement" shall mean, with respect to any Insurance Subsidiary
for any fiscal quarter, the quarterly financial statements of such Insurance
Subsidiary as required to be filed with the Insurance Regulatory Authority of
its jurisdiction of domicile, together with all exhibits, schedules,
certificates and actuarial opinions required to be filed or delivered therewith.
"Regulations D, G, T, U and X" shall mean Regulations D, G, T, U and X,
respectively, of the Federal Reserve Board, and any successor regulations.
"Reportable Event" shall mean (i) any "reportable event" within the meaning
of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of
ERISA has not been waived by the PBGC (including any failure to meet the minimum
funding standard of, or timely make any required installment under, Section 412
of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance
of any waivers in accordance with Section 412(d) of the Internal Revenue Code),
(ii) any such "reportable event" subject to advance notice to the PBGC under
Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of the Internal
Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of
ERISA.
"Requirement of Law" shall mean, with respect to any Person, the charter,
articles or certificate of organization or incorporation and bylaws or other
organizational or governing documents of such Person, and any statute, law,
treaty, rule, regulation, order, decree, writ, injunction or determination of
any arbitrator or court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject or otherwise pertaining to any or all of the
transactions contemplated by this Agreement and the other Credit Documents.
"Significant Subsidiary" shall mean, at the relevant time of determination,
any Subsidiary of the Borrower having (after the elimination of intercompany
accounts) (i) assets constituting at least 10% of the
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total assets of the Borrower and its Subsidiaries on a consolidated basis, (ii)
revenues constituting at least 10% of the total revenues of the Borrower and its
Subsidiaries on a consolidated basis, or (iii) net earnings constituting at
least 10% of the total net earnings of the Borrower and its Subsidiaries on a
consolidated basis, in each case as determined as of the date of the financial
statements of the Borrower and its Subsidiaries most recently delivered under
Section 5.1 prior to such time (or, with regard to determinations at any time
prior to the initial delivery of financial statements under Section 5.1, as of
the date of the most recent financial statements referred to in Section
4.11(a)).
"Standard & Poor's" shall mean Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, its successors and assigns.
"Statutory Accounting Principles" shall mean, with respect to any Insurance
Subsidiary, the statutory accounting practices prescribed or permitted by the
relevant Insurance Regulatory Authority of its state of domicile, consistently
applied and maintained and in conformity with those used in the preparation of
the most recent Historical Financial Statements.
"Statutory Consolidated Net Income" shall mean, for any period, net income
(or loss) for the VFIC and the other Insurance Subsidiaries for such period,
determined on a consolidated basis in accordance with Statutory Accounting
Principles.
"Statutory Surplus" shall mean the total amount reported on line 27, page
3, column 1 of the Annual Statement, or an amount determined in a consistent
manner in accordance with Statutory Accounting Principles for any date other
than one as of which an Annual Statement is prepared. Notwithstanding the
foregoing, if the format of the Annual Statement is changed in future years so
that different information is contained in such line or such line no longer
exists, it is understood that the foregoing shall refer to information
consistent with that reported on the referenced line in the 1998 Annual
Statement.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other Person of which more than fifty percent (50%) of the outstanding capital
stock having ordinary voting power to elect a majority of the board of
directors, in the case of a corporation, or of the ownership or beneficial
interests, in the case of a Person not a corporation, is at the time, directly
or indirectly, owned or controlled by such Person and one or more of its other
Subsidiaries or a combination thereof (irrespective of whether, at the time,
securities of any other class or classes of any such corporation or other Person
shall or might have voting power by reason of the happening of any contingency).
When used without reference to a parent entity, the term "Subsidiary" shall be
deemed to refer to a Subsidiary of the Borrower.
"Termination Date" shall mean the Maturity Date or such earlier date of
termination of the Commitment pursuant to Section 2.5 or Section 8.2.
"Transaction Expenses" shall mean all costs and expenses of, and fees
payable to, the Lender that are required to be reimbursed or paid by the
Borrower pursuant to Section 9.1 of the Credit Agreement.
"Trust" shall mean Vesta Capital Trust I, a Delaware statutory business
trust.
"Trust Securities" shall mean the 8.525% Capital Securities issued by the
Trust and representing preferred beneficial interests in the Trust.
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"Unfunded Pension Liability" shall mean, with respect to any Plan or
Multiemployer Plan, the excess of its benefit liabilities under Section
4001(a)(16) of ERISA over the current value of its assets, determined in
accordance with the applicable assumptions used for funding under Section 412 of
the Code for the applicable plan year.
"Unutilized Commitment" shall mean, at any time, (i) the Commitment at such
time less (ii) the aggregate principal amount of Loans outstanding at such time.
"VFIC" shall mean Vesta Fire Insurance Corporation, an Alabama corporation.
"Wholly Owned" shall mean, with respect to any Subsidiary of any Person,
that 100% of the outstanding capital stock or other ownership interests of such
Subsidiary is owned, directly or indirectly, by such Person.
I.2 Accounting Terms. Except as specifically provided otherwise in this
Agreement, all accounting terms used herein that are not specifically defined
shall have the meanings customarily given them, and all financial computations
hereunder shall be made, in accordance with Generally Accepted Accounting
Principles (or, to the extent that such terms apply solely to any Insurance
Subsidiary or if otherwise expressly required, Statutory Accounting Principles).
Notwithstanding the foregoing, in the event that any changes in Generally
Accepted Accounting Principles or Statutory Accounting Principles after the date
hereof are required to be applied to the transactions described herein and would
affect the computation of the financial covenants contained in Sections 6.1
through 6.4, as applicable, such changes shall be followed only from and after
the date this Agreement shall have been amended to take into account any such
changes. References to amounts on particular exhibits, schedules, lines, pages
and columns of an Annual Statement or Quarterly Statement are based on the
format promulgated by the NAIC for the 1995 Annual Statements and Quarterly
Statements. In the event such format is changed in future years so that
different information is contained in such items or they no longer exist, or if
the Annual Statement or Quarterly Statement is replaced by the NAIC or by any
Insurance Regulatory Authority after the date hereof such that different forms
of financial statements are required to be furnished by the Insurance
Subsidiaries in lieu thereof, such references shall be to information consistent
with that reported in the referenced item in the 1995 Annual Statements or
Quarterly Statements, as the case may be.
I.3 Other Terms; Construction. Unless otherwise specified or unless the
context otherwise requires, all references herein to sections, annexes,
schedules and exhibits are references to sections, annexes, schedules and
exhibits in and to this Agreement, and all terms defined in this Agreement shall
have the defined meanings when used in any other Credit Document or any
certificate or other document made or delivered pursuant hereto.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
II.1 Commitment; Loans. The Lender agrees, subject to and on the terms
and conditions of this Agreement, to make loans (each, a "Loan," and
collectively, the "Loans") to the Borrower, from time to time on any Business
Day during the period from and including the Effective Date to but not including
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the Termination Date, in an aggregate principal amount at any time outstanding
not exceeding $15,000,000 (as such amount may be permanently reduced in
accordance with Section 2.5(b) the "Commitment"), provided that no Borrowing of
Loans shall be made if, immediately after giving effect thereto, the aggregate
principal amount of Loans outstanding at such time would exceed the Commitment.
Subject to and on the terms and conditions of this Agreement, the Borrower may
borrow, repay and reborrow Loans.
II.2 Borrowings. (a) In order to make a Borrowing, the Borrower will
give the Lender written notice not later than 10:00 a.m., Birmingham time, one
(1) Business Day prior to each Borrowing; provided, however, that a request for
a Borrowing to be made on the Effective Date may, at the discretion of the
Lender, be given later than the time specified therefor as set forth
hereinabove. Each such notice (each, a "Notice of Borrowing") shall be
irrevocable, shall be given in the form of Exhibit C and shall specify (i) the
aggregate principal amount of the Loans to be made pursuant to such Borrowing,
and (ii) the requested Borrowing Date, which shall be a Business Day.
Notwithstanding anything to the contrary contained herein, the aggregate
principal amount of each Borrowing shall not be less than $1,000,000 or, if
greater, an integral multiple of $500,000 in excess thereof (or, if less, in the
amount of the Unutilized Commitment).
(b) Not later than noon, Birmingham time, on the requested Borrowing
Date, the Lender will make the requested amount available to the Borrower
subject to the provisions of subsection (a) hereof and Section 2.1.
(c) The Borrower hereby authorizes the Lender to disburse the proceeds of
each Borrowing in accordance with the terms of any written instructions from any
of the Authorized Officers, provided that the Lender shall not be obligated
under any circumstances to forward amounts to any account not listed in an
Account Designation Letter. The Borrower may at any time deliver to the Lender
an Account Designation Letter listing any additional accounts or deleting any
accounts listed in a previous Account Designation Letter.
II.3 Note. (a) The Loan shall be evidenced by a Note appropriately
completed in substantially the form of Exhibit A.
(b) The Note shall (i) be executed by the Borrower, (ii) be payable to
the order of the Lender, (iii) be dated as of the Effective Date, (iv) be in a
stated principal amount equal to the Commitment, (v) bear interest in accordance
with the provisions of Section 2.7, as the same may be applicable to the Loans
made by the Lender from time to time, and (vi) be entitled to all of the
benefits of this Agreement and the other Credit Documents and subject to the
provisions hereof and thereof.
(c) The Lender will record on its internal records the amount of each
Loan made by it and each payment received by it in respect thereof and will, in
the event of any transfer of the Note, either endorse on the reverse side
thereof or on a schedule attached thereto (or any continuation thereof) the
outstanding principal amount of the Loans evidenced thereby as of the date of
transfer or provide such information on a schedule to the documents relating to
such transfer; provided, however, that the failure of the Lender to make any
such recordation or provide any such information, or any error therein, shall
not affect the Borrower's obligations under this Agreement or the Notes.
II.4 Security. The Borrower shall purchase a Certificate of Deposit
from the Lender in the minimum amount of the Commitment, which Certificate of
Deposit will mature on the Maturity Date and will be pledged to the Lender as
security for the Loans pursuant to the Pledge Agreement.
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II.5 Termination and Reduction of Commitment. (a) The Commitment shall
be automatically and permanently terminated on the Maturity Date unless sooner
terminated pursuant to subsection (b) below or Section 8.2.
(b) At any time and from time to time after the date hereof, upon not
less than five (5) Business Days' prior written notice to the Lender, the
Borrower, without premium or penalty, may terminate in whole or reduce in part
the Unutilized Commitment, provided that any such partial reduction shall be in
an aggregate amount of not less than $1,000,000 or, if greater, an integral
multiple thereof. The amount of any termination or reduction made under this
subsection (b) may not thereafter be reinstated. Upon such permanent reduction,
the Certificate of Deposit will be reduced in an equal amount without penalty
for early withdrawal.
II.6 Mandatory and Voluntary Payments and Prepayments. (a) Except to
the extent due or made sooner pursuant to the provisions of this Agreement, the
Borrower will repay the aggregate outstanding principal amount of the Loans in
full on the Maturity Date.
(b) In the event that, at any time, the aggregate principal amount of
Loans outstanding at such time shall exceed the Commitment at such time (after
giving effect to any concurrent termination or reduction thereof), the Borrower
will immediately prepay the outstanding principal amount of the Loans in the
amount of such excess.
(c) At any time and from time to time, the Borrower shall have the right
to prepay the Loans, in whole or in part, without premium or penalty, upon
written notice to the Lender given not later than noon, Birmingham time, one (1)
Business Day prior to each intended prepayment of Loans, provided that each
partial prepayment shall be in an aggregate principal amount of not less than
$1,000,000 or, if greater, an integral multiple of $500,000 in excess thereof.
Each such notice shall specify the proposed date of such prepayment and the
aggregate principal amount of the Loan to be prepaid and shall be irrevocable
and shall bind the Borrower to make such prepayment on the terms specified
therein. Amounts prepaid pursuant to this subsection (c) may be reborrowed,
subject to the terms and conditions of this Agreement.
II.7 Interest. (a) The Borrower will pay interest in respect of the
unpaid principal amount of each Loan, from the date of Borrowing thereof until
such principal amount shall be paid in full, at the Base Rate.
(b) Any principal amounts of the Loans not paid when due and, to the
greatest extent permitted by law, all interest accrued on the Loans and all
other fees and amounts hereunder not paid when due (whether at maturity,
pursuant to acceleration or otherwise), shall bear interest at a rate per annum
equal to the Base Rate plus 3% per annum and such default interest shall be
payable on demand. To the greatest extent permitted by law, interest shall
continue to accrue after the filing by or against the Borrower of any petition
seeking any relief in bankruptcy or under any law pertaining to insolvency or
debtor relief.
(c) Accrued (and theretofore unpaid) interest shall be payable as
follows:
(i) in arrears on the last Business Day of each calendar month;
provided, that in the event the Loan is repaid or prepaid in full and the
Commitment has been terminated,
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then accrued interest in respect of the Loan shall be payable together with
such repayment or prepayment on the date thereof, and
(ii) at maturity (whether pursuant to acceleration or otherwise)
and, after maturity, on demand.
(d) Nothing contained in this Agreement or in any other Credit Document
shall be deemed to establish or require the payment of interest to the Lender at
a rate in excess of the maximum rate permitted by applicable law. If the amount
of interest payable on any interest payment date would exceed the maximum amount
permitted by applicable law to be charged by the Lender, the amount of interest
payable on such interest payment date shall be automatically reduced to such
maximum permissible amount. In the event of any such reduction affecting the
Lender, if from time to time thereafter the amount of interest payable for the
account of the Lender on any interest payment date would be less than the
maximum amount permitted by applicable law to be charged by the Lender, then the
amount of interest payable for its account on such subsequent interest payment
date shall be automatically increased to such maximum permissible amount,
provided that at no time shall the aggregate amount by which interest paid for
the account of the Lender has been increased pursuant to this sentence exceed
the aggregate amount by which interest paid for its account has theretofore been
reduced pursuant to the previous sentence.
II.8 Method of Payments; Computations. (a) All payments by the Borrower
hereunder shall be made without setoff, counterclaim or other defense, in
Dollars and in immediately available funds to the Lender at its office referred
to in Section 9.5, prior to 11:00 a.m., Birmingham time, on the date payment is
due. Any payment made as required hereinabove, but after 11:00 a.m., Birmingham
time, shall be deemed to have been made on the next succeeding Business Day. If
any payment falls due on a day that is not a Business Day, then such due date
shall be extended to the next succeeding Business Day, and such extension of
time shall then be included in the computation of payment of interest, fees or
other applicable amounts.
(b) The Lender may, but shall not be obligated to, debit the amount of
any such payment not made as and when required hereunder to any ordinary deposit
account of the Borrower with the Lender (with prompt notice to the Lender and
the Borrower); provided, however, that the failure to give such notice shall not
affect the validity of such debit by the Lender.
(c) All computations of interest and fees hereunder shall be made on the
basis of a year consisting of 360 days and the actual number of days (including
the first day, but excluding the last day) elapsed.
II.9 Recovery of Payments. The Borrower agrees that to the extent the
Borrower makes a payment or payments to or for the account of the Lender, which
payment or payments or any part thereof are subsequently invalidated, declared
to be fraudulent or preferential, set aside or required to be repaid to a
trustee, receiver or any other party under any bankruptcy, insolvency or similar
state or federal law, common law or equitable cause, then, to the extent of such
payment or repayment, the Obligation intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been received.
II.10 Use of Proceeds. The proceeds of the Loans shall be used first to
repay the Borrower's Obligations under the Existing Facility and then to provide
a source of ongoing working capital for the Borrower.
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II.11 Increased Costs; Change in Circumstances; Illegality; etc. (a)
If, at any time after the date hereof and from time to time, the introduction of
or any change in any applicable law, rule or regulation or in the interpretation
or administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance by the Lender with any
guideline or request from any such Governmental Authority (whether or not having
the force of law), shall (i) subject the Lender to any tax or other charge, or
change the basis of taxation of payments to the Lender, (ii) impose, modify or
deem applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, the
Lender, or (iii) impose on the Lender any other condition affecting its Loans,
and the result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining any Loans or to reduce the amount of any sum
received or receivable by the Lender hereunder, the Borrower will, promptly upon
demand therefor by the Lender, pay to the Lender such additional amounts,
excluding amounts in respect of income, franchise and excise taxes as shall
compensate the Lender for such increase in costs or reduction in return.
(b) If, at any time after the date hereof and from time to time, the
Lender shall have reasonably determined that the introduction of or any change
in any applicable law, rule or regulation regarding capital adequacy or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof, or compliance by the Lender
with any guideline or request from any such Governmental Authority (whether or
not having the force of law), has or would have the effect, as a consequence of
the Lender's Commitment or Loans hereunder, of reducing the rate of return on
the capital of the Lender or any Person controlling the Lender to a level below
that which the Lender or controlling Person could have achieved but for such
introduction, change or compliance (taking into account the Lender's or
controlling Person's policies with respect to capital adequacy), the Borrower
will, promptly upon demand therefor by the Lender therefor, pay to the Lender
such additional amounts, excluding amounts in respect of income, franchise and
excise taxes, as will compensate the Lender or controlling Person for such
reduction in return.
(c) Determinations by the Lender for purposes of this Section 2.11 of
any increased costs, reduction in return, market contingencies, illegality or
any other matter shall, absent manifest error, be conclusive, provided that such
determinations are made in good faith. No failure by the Lender at any time to
demand payment of any amounts payable under this Section 2.11 shall constitute a
waiver of its right to demand payment of any additional amounts arising at any
subsequent time. Nothing in this Section 2.11 shall require or be construed to
require the Borrower to pay any interest, fees, costs or other amounts in excess
of that permitted by applicable law.
II.12 Taxes. (a) Any and all payments by the Borrower hereunder or
under any Note shall be made, in accordance with the terms hereof and thereof,
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, other than net income, excise and franchise taxes imposed on
the Lender by the United States or by the jurisdiction under the laws of which
the Lender, as the case may be, is organized or in which its principal office is
located, or any political subdivision or taxing authority thereof (all such non-
excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note to the Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.12), the Lender, as the case may be, receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Borrower will
make such deductions, (iii)
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the Borrower will pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) the
Borrower will deliver to the Lender evidence of such payment.
(b) The Borrower will indemnify the Lender for the full amount of Taxes
(including, without limitation, any Taxes imposed by any jurisdiction on amounts
payable under this Section 2.12) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally asserted. This
indemnification shall be made within 30 days from the date the Lender, makes
written demand therefor.
(c) The Lender agrees that if it subsequently recovers, or receives a
permanent net tax benefit with respect to, any amount of Taxes (i) previously
paid by it and as to which it has been indemnified by or on behalf of the
Borrower or (ii) previously deducted by the Borrower (including, without
limitation, any Taxes deducted from any additional sums payable under clause (i)
of subsection (a) above), the Lender shall reimburse the Borrower to the extent
of the amount of any such recovery or permanent net tax benefit (but only to the
extent of indemnity payments made, or additional amounts paid, by or on behalf
of the Borrower under this Section 2.12 with respect to the Taxes giving rise to
such recovery or tax benefit); provided, however, that the Borrower, upon the
request of the Lender, agrees to repay to the Lender the amount paid over to the
Borrower (together with any penalties, interest or other charges), in the event
the Lender is required to repay such amount to the relevant taxing authority or
other Governmental Authority. The determination by the Lender of the amount of
any such recovery or permanent net tax benefit shall, in the absence of manifest
error, be conclusive and binding.
ARTICLE III
CONDITIONS OF BORROWING
III.1 Conditions to Effectiveness of this Agreement. The effectiveness
of this Agreement is subject to the satisfaction of the following conditions
precedent:
(a) The Lender shall have received the following, each dated the
Effective Date (unless otherwise specified):
(i) the Note in the amount of the Commitment and duly completed
and executed by the Borrower;
(ii) the Pledge Agreement pledging the Certificate of Deposit
executed by the Borrower;
(iii) the Certificate of Deposit;
(iv) a certificate, signed by the chief executive officer, vice
president--finance or treasurer of the Borrower, in form and substance
satisfactory to the Lender, certifying that (A) all representations and
warranties of the Borrower contained in this Agreement and the other Credit
Documents are true and correct as of the Effective Date, both immediately
before and after giving effect to the consummation of the transactions
contemplated by this Agreement, the making of any Loans hereunder on the
Effective Date
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and the application of the proceeds thereof, (B) no Default or Event of
Default has occurred and is continuing, both immediately before and after
giving effect to the consummation of the transactions contemplated by this
Agreement, the making of any Loans hereunder on the Effective Date and the
application of the proceeds thereof, (C) there are no insurance regulatory
proceedings pending or, to such individual's knowledge, threatened against
any of the Insurance Subsidiaries in any jurisdiction that, if adversely
determined, would be reasonably likely to have a Material Adverse Effect,
and (D) both immediately before and after giving effect to the consummation
of the transactions contemplated by this Agreement, no Material Adverse
Change has occurred since December 31, 1998, and there exists no event,
condition or state of facts that could reasonably be expected to result in
a Material Adverse Change;
(v) a certificate of the secretary or an assistant secretary of the
Borrower, in form and substance satisfactory to the Lender, certifying (A)
to the effect that attached thereto is a true and complete copy of the
Borrower's certificate of incorporation, certified as of a recent date by
the Secretary of State of Delaware, and that the same has not been amended
since the date of such certification, and attaching such copy, (B) to the
effect that attached thereto is a true and complete copy of the Borrower's
bylaws, as then in effect and as in effect at all times from the date on
which the resolutions referred to in clause (C) below were adopted to and
including the date of such certificate, and attaching such copy), and (C)
that attached thereto is a true and complete copy of resolutions adopted by
the Borrower's board of directors authorizing the execution, delivery and
performance of this Agreement and the other Credit Documents to which it is
a party, and attaching such copy; and
(vi) a favorable opinion of an attorney or firm of attorneys duly
licensed to practice law in the jurisdiction the laws of which are
applicable to the legal matters in question and who is not an employee of
the Borrower or an Affiliate of the Borrower and addressed to the Lender,
in substantially the form of Exhibit E and addressing such other matters as
the Lender may reasonably request.
(b) The Borrower shall have purchased a Certificate of Deposit issued by
the Lender in the amount of the Commitment and which matures on the Maturity
Date and pledged it to the Lender pursuant to the Pledge Agreement.
(c) The Lender shall have received (i) a certificate as of a recent date
of the good standing of the Borrower under the laws of the State of Delaware,
from the Secretary of State of Delaware, (ii) a certificate as of a recent date
of the qualification of the Borrower to conduct business as a foreign
corporation, from the Secretary of State of Alabama, and (iii) a certificate as
of a recent date of the good standing of the Borrower, from the Department of
Revenue of the State of Alabama.
(d) All legal matters, documentation and corporate or other proceedings
incident to the transactions contemplated hereby shall be reasonably acceptable
to the Lender; all approvals, permits and consents of any Governmental
Authorities (including, without limitation, all relevant Insurance Regulatory
Authorities) or other Persons required in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby shall have been obtained (without the imposition of conditions that are
not reasonably acceptable to the Lender), and all related filings, if any, shall
have
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been made, and all such approvals, permits, consents and filings shall be in
full force and effect and the Lender shall have received such copies thereof as
it shall have reasonably requested; all applicable waiting periods shall have
expired without any adverse action being taken by any Governmental Authority
having jurisdiction; and no action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before, and no
order, injunction or decree shall have been entered by, any court or other
Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain
substantial damages in respect of, or that is otherwise related to or arises out
of, this Agreement or the consummation of the transactions contemplated hereby,
or that, in the reasonable opinion of the Lender, would otherwise be reasonably
likely to have a Material Adverse Effect.
(e) Since December 31, 1998, both immediately before and after giving
effect to the consummation of the transactions contemplated by this Agreement,
there shall not have occurred any Material Adverse Change or any event,
condition or state of facts that could reasonably be expected to result in a
Material Adverse Change.
(f) The Borrower shall have paid all fees and expenses of the Lender
required hereunder or under any other Credit Document to be paid on or prior to
the Effective Date (including reasonable fees and expenses of the Lender's
counsel) in connection with this Agreement and the transactions contemplated
hereby.
(g) Each of the representations and warranties contained in Article IV
and in the other Credit Documents shall be true and correct on and as of the
Effective Date with the same effect as if made on and as of such date (except to
the extent any such representation or warranty is expressly stated to have been
made as of a specific date, in which case such representation or warranty shall
be true and correct as of such date).
(h) No Default or Event of Default shall have occurred and be
continuing.
(i) The Lender shall have received such other documents, certificates,
opinions and instruments as it shall have reasonably requested.
III.2 Conditions to All Loans. The obligation of the Lender to make any
Loans hereunder is subject to the satisfaction of the following conditions
precedent on the relevant Borrowing Date:
(a) The Lender shall have received a Notice of Borrowing in
accordance with Section 2.2;
(b) Each of the representations and warranties contained in Article
IV and in the other Credit Documents shall be true and correct on and as of
the relevant Borrowing Date with the same effect as if made on and as of
such date, both immediately before and after giving effect to the Loans to
be made on such date (except to the extent any such representation or
warranty is expressly stated to have been made as of a specific date, in
which case such representation or warranty shall be true and correct as of
such date); and
(c) No Default or Event of Default shall have occurred and be
continuing on such date, both immediately before and after giving effect to
the Loans to be made on such date.
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Each giving of a Notice of Borrowing, and the consummation of each
Borrowing, shall be deemed to constitute a representation by the Borrower that
the statements contained in subsections (b) and (c) above are true, both as of
the date of such notice or request and as of the relevant Borrowing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
To induce the to enter into this Agreement and to induce the Lender to
extend the credit contemplated hereby, the Borrower represents and warrants to
the Lender as follows:
IV.1 Corporate Organization and Power. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii) has the
full corporate power and authority to execute, deliver and perform the Credit
Documents to which it is or will be a party, to own and hold its property and to
engage in its business as presently conducted, and (iii) is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the nature of its business or the ownership of its properties requires it
to be so qualified.
IV.2 Authorization; Enforceability. The Borrower has taken all
necessary corporate action to execute, deliver and perform each of the Credit
Documents to which it is or will be a party, and has, or on the Effective Date
(or any later date of execution and delivery) will have, validly executed and
delivered each of the Credit Documents to which it is or will be a party. This
Agreement constitutes, and each of the other Credit Documents upon execution and
delivery by the Borrower will constitute, the legal, valid and binding
obligation of the Borrower, enforceable against it in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally or by general equitable principles.
IV.3 No Violation. Except as set forth in Schedule 4.3 attached hereto,
the execution, delivery and performance by the Borrower of this Agreement and
each of the other Credit Documents, and compliance by it with the terms hereof
and thereof, do not and will not (i) violate any provision of its certificate of
incorporation or bylaws or contravene any other Requirement of Law applicable to
it, (ii) conflict with, result in a breach of or constitute (with notice, lapse
of time or both) a default under any material indenture, agreement or other
instrument to which it is a party, by which it or any of its properties is bound
or to which it is subject, or (iii) result in or require the creation or
imposition of any Lien upon any of its properties or assets. Except as set
forth on Schedule 4.3 attached hereto, no Subsidiary is subject to any
restriction or encumbrance on its ability to make dividend payments or other
distributions in respect of its capital stock, to make loans or advances to the
Borrower or any other Subsidiary, or to transfer any of its assets or properties
to the Borrower or any other Subsidiary, in each case other than such
restrictions or encumbrances existing under or by reason of the Credit Documents
or applicable Requirements of Law.
IV.4 Governmental Authorization; Permits. (a) Except as set forth on
Schedule 4.4(a) attached hereto, no consent, approval, authorization or other
action by, notice to, or registration or filing with, any Governmental Authority
or other Person is or will be required as a condition to or otherwise in
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connection with the due execution, delivery and performance by the Borrower of
this Agreement or any of the other Credit Documents or the legality, validity or
enforceability hereof or thereof.
(b) Except as set forth in Schedule 4.4(b) attached hereto, each of the
Borrower and its Subsidiaries has, and is in good standing with respect to, all
governmental approvals, licenses, permits and authorizations necessary to
conduct its business as presently conducted (collectively, the "Licenses") and
to own or lease and operate its properties, except for those the failure to
obtain which would not be reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect. To the knowledge of the Borrower, except as
set forth on Schedule 4.4(b), (i) no License is the subject of a proceeding for
suspension, revocation or limitation or any similar proceedings, (ii) there is
no sustainable basis for such a suspension, revocation or limitation, and (iii)
no such suspension, revocation or limitation is threatened by any relevant
Insurance Regulatory Authority, that, in each instance under (i), (ii) and (iii)
above, would be reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect.
(c) Upon written request, Borrower will provide with respect to each
Insurance Subsidiary a list of all of the jurisdictions in which such Insurance
Subsidiary holds licenses (including, without limitation, licenses or
certificates of authority from relevant Insurance Regulatory Authorities),
permits or authorizations to transact insurance and reinsurance business
(collectively, the "Licenses"), indicating the line or lines of insurance in
which each such Insurance Subsidiary is permitted to be engaged with respect to
each License therein listed, and attaching copies of all Licenses in the States
of Alabama, Hawaii, Indiana, Ohio and Texas.
IV.5 Litigation. Except as set forth on Schedule 4.5, there are no
actions, investigations, suits or proceedings pending or, to the knowledge of
the Borrower, threatened, at law, in equity or in arbitration, before any court,
other Governmental Authority or other Person, (i) against or affecting the
Borrower, any of its Subsidiaries or any of their respective properties that
would, if adversely determined, be reasonably likely to have a Material Adverse
Effect, or (ii) with respect to this Agreement or any of the other Credit
Documents.
IV.6 Taxes. Except as set forth in Schedule 4.6 attached hereto, each
of the Borrower and its Subsidiaries has timely filed all federal, state and
local tax returns and reports required to be filed by it and has paid all taxes,
assessments, fees and other charges levied upon it or upon its properties that
are shown thereon as due and payable, other than those that are being contested
in good faith and by proper proceedings and for which adequate reserves have
been established in accordance with Generally Accepted Accounting Principles.
Such returns accurately reflect in all material respects all liability for taxes
of the Borrower and its Subsidiaries for the periods covered thereby. Except as
set forth in Schedule 4.6 attached hereto, there is no ongoing material audit or
examination or, to the knowledge of the Borrower, other investigation by any
Governmental Authority of the tax liability of the Borrower or any of its
Subsidiaries, and there is no unresolved claim by any Governmental Authority
concerning or any material tax liability of the Borrower or any of its
Subsidiaries for any period for which tax returns have been or were required to
have been filed, other than claims for which adequate reserves have been
established in accordance with Generally Accepted Accounting Principles. Except
as set forth in Schedule 4.6 attached hereto, neither the Borrower nor any of
its Subsidiaries has waived or extended or has been requested to waive or
extend the statute of limitations relating to the payment of any material taxes.
IV.7 Subsidiaries. Schedule 4.7 sets forth a list, as of the Effective
Date, of all of the Subsidiaries of the Borrower and, as to each such
Subsidiary, the percentage ownership (direct and
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indirect) of the Borrower in each class of its capital stock and each direct
owner thereof. All of the issued and outstanding shares of capital stock of VFIC
are directly owned and held by the Borrower.
IV.8 Full Disclosure. All factual information heretofore or
contemporaneously furnished to the Lender in writing by or on behalf of the
Borrower or any of its Subsidiaries for purposes of or in connection with this
Agreement and the transactions contemplated hereby is, and all other such
factual information hereafter furnished to the Lender in writing by or on behalf
of the Borrower or any of its Subsidiaries will be, true and accurate in all
material respects on the date as of which such information is dated or certified
(or, if such information has been amended or supplemented, on the date as of
which any such amendment or supplement is dated or certified) and not made
materially incomplete by omitting to state a material fact necessary to make the
statements contained therein, in light of the circumstances under which such
information was provided, not materially misleading.
IV.9 Margin Regulations. Neither the Borrower nor any of its
Subsidiaries is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
Margin Stock. No proceeds of the Loans will be used, directly or indirectly, to
purchase or carry any Margin Stock (except for purchases by the Borrower of
outstanding shares of its capital stock made in compliance with the applicable
provisions of Regulations G, T, U and X), to extend credit for such purpose or
for any other purpose that would violate or be inconsistent with Regulations G,
T, U or X or any provision of the Exchange Act.
IV.10 No Material Adverse Change. Except as set forth in the Borrower's
filings with the Securities and Exchange Commission prior to the date of this
Agreement, there has been no Material Adverse Change since December 31, 1998,
and there exists no event, condition or state of facts that could reasonably be
expected to result in a Material Adverse Change.
IV.11 Financial Matters. (a) The Borrower has heretofore furnished to
the Lender copies of (i) the audited consolidated balance sheets of the Borrower
and its Subsidiaries as of December 31, 1998, 1997, and 1996, and the related
statements of income, stockholders' equity and cash flows for the fiscal years
then ended, together with the opinion of KPMG Peat Marwick thereon or
PricewaterhouseCoopers, and (ii) the unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as of June 30, 1999, and the related statements of
income, stockholders' equity and cash flows for the nine-month period then
ended. Except as set forth in Schedule 4.11(a) attached hereto, such financial
statements have been prepared in accordance with Generally Accepted Accounting
Principles (subject, with respect to the unaudited financial statements, to the
absence of notes required by Generally Accepted Accounting Principles and to
normal year-end audit adjustments) and present fairly the financial condition of
the Borrower and its Subsidiaries on a consolidated basis as of the respective
dates thereof and the consolidated results of operations of the Borrower and its
Subsidiaries for the respective periods then ended. Except as fully reflected
in the most recent financial statements referred to above and the notes thereto,
there are no material liabilities or obligations with respect to the Borrower or
any of its Subsidiaries of any nature whatsoever (whether absolute, contingent
or otherwise and whether or not due).
(b) The Borrower has heretofore furnished to the Lender copies of the
Annual Statements of each of the Insurance Subsidiaries as of December 31, 1998,
1997, 1996 and 1995, and for the fiscal years then ended, each as filed with the
relevant Insurance Regulatory Authority (collectively, the "Historical Statutory
Statements"). Except as set forth in Schedule 4.11(b) attached hereto, the
Historical Statutory Statements (including, without limitation, the provisions
made therein for investments and the valuation
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thereof, reserves, policy and contract claims and statutory liabilities) have
been prepared in accordance with Statutory Accounting Principles (except as may
be reflected in the notes thereto and subject, with respect to the Quarterly
Statements, to the absence of notes required by Statutory Accounting Principles
and to normal year-end adjustments), were in compliance with applicable
Requirements of Law when filed and present fairly the financial condition of the
respective Insurance Subsidiaries covered thereby as of the respective dates
thereof and the results of operations, changes in capital and surplus and cash
flow of the respective Insurance Subsidiaries covered thereby for the respective
periods then ended. Except for liabilities and obligations disclosed or provided
for in the Historical Statutory Statements (including, without limitation,
reserves, policy and contract claims and statutory liabilities), no Insurance
Subsidiary had, as of the date of its respective Historical Statutory
Statements, any material liabilities or obligations of any nature whatsoever
(whether absolute, contingent or otherwise and whether or not due) that, in
accordance with Statutory Accounting Principles, would have been required to
have been disclosed or provided for in such Historical Statutory Statements. All
books of account of each Insurance Subsidiary fully and fairly disclose all of
its material transactions, properties, assets, investments, liabilities and
obligations, are in its possession and are true, correct and complete in all
material respects.
(c) Each of the Borrower and its Subsidiaries, after giving effect to
the consummation of the transactions contemplated hereby, (i) will have capital
sufficient to carry on its businesses as conducted and as proposed to be
conducted, (ii) will have assets with a fair saleable value, determined on a
going concern basis, (A) not less than the amount required to pay the probable
liability on its existing debts as they become absolute and matured and (B)
greater than the total amount of its liabilities (including identified
contingent liabilities, valued at the amount that can reasonably be expected to
become absolute and matured), and (iii) will not intend to, and will not believe
that it will, incur debts or liabilities beyond its ability to pay such debts
and liabilities as they mature.
IV.12 Ownership of Properties. Each of the Borrower and its
Subsidiaries (i) has good and marketable title to all real property owned by it,
(ii) holds interests as lessee under valid leases in full force and effect with
respect to all material leased real and personal property used in connection
with its business, and (iii) has good title to all of its other material
properties and assets reflected in the most recent financial statements referred
to in Section 4.11(a) (except as sold or otherwise disposed of since the date
thereof in the ordinary course of business), in each case under (i), (ii) and
(iii) above free and clear of all Liens other than Permitted Liens.
IV.13 ERISA. Each Plan is and has been administered in compliance in
all material respects with all applicable Requirements of Law, including,
without limitation, the applicable provisions of ERISA and the Internal Revenue
Code. No ERISA Event has occurred and is continuing or, to the knowledge of the
Borrower, is reasonably expected to occur with respect to any Plan, in either
case that would be reasonably likely, individually or in the aggregate, to have
a Material Adverse Effect. No Plan has any Unfunded Pension Liability, and
neither the Borrower nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA, in either instance where
the same would be reasonably likely, individually or in the aggregate, to have a
Material Adverse Effect. Neither the Borrower nor any ERISA Affiliate is
required to contribute to or has, or has at any time had, any liability to a
Multiemployer Plan.
IV.14 Environmental Matters. (a) No Hazardous Substances are or have
been generated, used, located, released, treated, disposed of or stored by the
Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any
other Person or otherwise, in, on or under any portion of any real
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property, leased or owned, of the Borrower or any of its Subsidiaries, except in
material compliance with all applicable Environmental Laws, and no portion of
any such real property or, to the knowledge of the Borrower, any other real
property at any time leased, owned or operated by the Borrower or any of its
Subsidiaries, has been contaminated by any Hazardous Substance; and no portion
of any real property, leased or owned, of the Borrower or any of its
Subsidiaries has been or, to the knowledge of the Borrower, is presently the
subject of an environmental audit, assessment or remedial action.
(b) To the knowledge of the Borrower, (i) no portion of any real
property, leased or owned, of the Borrower or any of its Subsidiaries has been
used as or for a mine, a landfill, a dump or other disposal facility, a gasoline
service station, or (other than for petroleum substances stored in the ordinary
course of business) a petroleum products storage facility, (ii) no portion of
such real property or any other real property at any time leased, owned or
operated by the Borrower or any of its Subsidiaries has, pursuant to any
Environmental Law, been placed on the "National Priorities List" or "CERCLIS
List" (or any similar federal, state or local list) of sites subject to possible
environmental problems, and (iii) there are not and have never been any
underground storage tanks situated on any real property, leased or owned, by the
Borrower or any of its Subsidiaries.
(c) All activities and operations of the Borrower and its Subsidiaries
are in compliance with the requirements of all applicable Environmental Laws,
except to the extent the failure so to comply, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect. Neither the
Borrower nor any of its Subsidiaries is involved in any suit, action or
proceeding, or has received any notice, complaint or other request for
information from any Governmental Authority or other Person, with respect to any
actual or alleged Environmental Claims that, if adversely determined, would be
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect; and, to the knowledge of the Borrower, there are no threatened actions,
suits, proceedings or investigations with respect to any such Environmental
Claims, nor any basis therefor.
IV.15 Compliance With Laws. Except as set forth in Schedule 4.15 attached
hereto, each of the Borrower and its Subsidiaries has timely filed all material
reports, documents and other materials required to be filed by it under all
applicable Requirements of Law with any Governmental Authority, has retained all
material records and documents required to be retained by it under all
applicable Requirements of Law, and is otherwise in compliance with all
applicable Requirements of Law in respect of the conduct of its business and the
ownership and operation of its properties, except for such Requirements of Law
the failure to comply with which, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect.
IV.16 Regulated Industries. Neither the Borrower nor any of its
Subsidiaries is (i) an "investment company," a company" controlled" by an
"investment company," or an "investment advisor," within the meaning of the
Investment Company Act of 1940, as amended, or (ii) a "holding company," a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
IV.17 Insurance. The assets, properties and business of the Borrower
and its Subsidiaries are insured against such hazards and liabilities, under
such coverages and in such amounts, as are customarily maintained by prudent
companies similarly situated and under policies issued by insurers of recognized
responsibility. No notice of any pending or threatened cancellation or material
premium increase has been
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received by the Borrower or any of its Subsidiaries with respect to any such
policies, and the Borrower and each of its Subsidiaries are in substantial
compliance with all conditions contained therein.
ARTICLE V
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
V.1 GAAP Financial Statements. The Borrower will deliver to the Lender:
(a) As soon as available and in any event within sixty (60) days after the
end of each of the first three fiscal quarters of each fiscal year, beginning
with the fiscal quarter ended September 30, 1999, unaudited consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries as of the end
of such fiscal quarter and unaudited consolidated and consolidating statements
of income, stockholders' equity and cash flows for the Borrower and its
Subsidiaries for the fiscal quarter then ended and for that portion of the
fiscal year then ended, in each case setting forth comparative consolidated
figures as of the end of and for the corresponding period in the preceding
fiscal year, all prepared in accordance with Generally Accepted Accounting
Principles (subject to the absence of notes required by Generally Accepted
Accounting Principles and subject to normal year-end audit adjustments) applied
on a basis consistent with that of the preceding quarter or containing
disclosure of the effect on the financial condition or results of operations of
any change in the application of accounting principles and practices during such
quarter; and
(b) As soon as available and in any event within 120 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999, (i) an
audited consolidated balance sheet of the Borrower and its Subsidiaries as of
the end of such fiscal year and audited consolidated statements of income,
stockholders' equity and cash flows for the Borrower and its Subsidiaries for
the fiscal year then ended, including the applicable notes, in each case setting
forth comparative figures as of the end of and for the preceding fiscal year,
certified by the independent certified public accounting firm regularly retained
by the Borrower or another independent certified public accounting firm of
recognized national standing reasonably acceptable to the Lender, together with
(y) a report thereon by such accountants that is not qualified as to going
concern or scope of audit and to the effect that such financial statements
present fairly the consolidated financial condition and results of operations of
the Borrower and its Subsidiaries as of the dates and for the periods indicated
in accordance with generally accepted accounting principles applied on a basis
consistent with that of the preceding year or containing disclosure of the
effect on the financial position or results of operations of any change in the
application of accounting principles and practices during such year, and (z) a
report by such accountants to the effect that, based on and in connection with
their examination of the financial statements of the Borrower and its
Subsidiaries, they obtained no knowledge of the occurrence or existence of any
Default or Event of Default relating to accounting or financial reporting
matters, or a statement specifying the nature and period of existence of any
such Default or Event of Default disclosed by their audit; provided, however,
that such accountants shall not be liable by reason of the failure to obtain
knowledge of any Default or Event of Default that would not be disclosed or
revealed in the course of their audit examination, and (ii) an unaudited
consolidating balance sheet of the Borrower and its Subsidiaries as of the end
of such fiscal year and
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unaudited consolidating statements of income, stockholders' equity and cash
flows for the Borrower and its Subsidiaries for the fiscal year then ended, all
in reasonable detail.
V.2 Statutory Financial Statements. The Borrower will deliver to the
Lender:
(a) As soon as available and in any event within fifty (50) days after the
end of each of the first three fiscal quarters of each fiscal year, beginning
with the fiscal quarter ending September 30, 1999, a Quarterly Statement of each
Insurance Subsidiary as of the end of such fiscal quarter and for that portion
of the fiscal year then ended, in the form filed with the relevant Insurance
Regulatory Authority, prepared in accordance with Statutory Accounting
Principles applied on a basis consistent with that of the preceding quarter or
containing disclosure of the effect on the financial condition or results of
operations of any change in the application of accounting principles and
practices during such quarter; and
(b) As soon as available and in any event within sixty-five (65) days
after the end of each fiscal year, beginning with the fiscal year ending
December 31, 1999, an Annual Statement of each Insurance Subsidiary as of the
end of such fiscal year and for the fiscal year then ended, in the form filed
with the relevant Insurance Regulatory Authority, prepared in accordance with
Statutory Accounting Principles applied on a basis consistent with that of the
preceding year or containing disclosure of the effect on the financial condition
or results of operations of any change in the application of accounting
principles and practices during such year;
(c) As soon as available and in any event within 135 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999, an
unaudited consolidated balance sheet of the Borrower and its Insurance
Subsidiaries as of the end of such fiscal year and unaudited consolidated
statements of income, stockholders' equity and cash flows for the Borrower and
its Insurance Subsidiaries for the fiscal year then ended, in each case setting
forth comparative consolidated figures as of the end of and for the preceding
fiscal year, all prepared in accordance with Statutory Accounting Principles
applied on a basis consistent with that of the preceding year or containing
disclosure of the effect on the financial condition or results of operations of
any change in the application of accounting principles and practices during such
year; and
(d) As soon as available and in any event within 155 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999 (but
only if and to the extent required by the applicable Insurance Regulatory
Authority with regard to any Insurance Subsidiary), a certification by the
independent certified public accounting firm referred to in Section 5.1(b) as to
the Annual Statement of each such Insurance Subsidiary as of the end of such
fiscal year and for the fiscal year then ended, together with a report thereon
by such accountants that is not qualified as to going concern or scope of audit
and to the effect that such financial statements present fairly the consolidated
financial condition and results of operations of such Insurance Subsidiary as of
the date and for the period indicated in accordance with statutory accounting
principles applied on a basis consistent with that of the preceding year or
containing disclosure of the effect on the financial position or results of
operations of any change in the application of accounting principles and
practices during such year.
V.3 Other Business and Financial Information. The Borrower will deliver
to the Lender:
(a) Concurrently with each delivery of the financial statements described
in Sections 5.1 and 5.2, a Compliance Certificate in the form of Exhibit D-1 (in
the case of the financial statements described
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<PAGE>
in Section 5.1) or Exhibit D-2 (in the case of the financial statements
described in Section 5.2) with respect to the period covered by the financial
statements then being delivered, executed by the chief financial officer, vice
president--finance or treasurer of the Borrower, together, in the case of the
financial statements described in Section 5.1, with a Covenant Compliance
Worksheet reflecting the computation of the financial covenants set forth in
Sections 6.1, 6.2 and 6.3 as of the last day of the period covered by such
financial statements, and in the case of the financial statements described in
Section 5.2, with a Covenant Compliance Worksheet reflecting the computation of
the financial covenants set forth in Section 6.4 as of the last day of the
period covered by such financial statements;
(b) Promptly upon filing with the relevant Insurance Regulatory Authority
and in any event within ninety (90) days after the end of each fiscal year,
beginning with the fiscal year ended December 31, 1999, a copy of each Insurance
Subsidiary's "Statement of Actuarial Opinion" (or equivalent information should
the relevant Insurance Regulatory Authority not require such a statement) as to
the adequacy of such Insurance Subsidiary's loss reserves for such fiscal year,
together with a copy of its management discussion and analysis in connection
therewith, each in the format prescribed by the applicable insurance laws of
such Insurance Subsidiary's jurisdiction of domicile;
(c) Promptly upon the sending, filing or receipt thereof, copies of (i)
all financial statements, reports, notices and proxy statements that the
Borrower or any of its Subsidiaries shall send or make available generally to
its shareholders, (ii) all reports (other than earnings press releases) on Form
10-Q, Form 10-K or Form 8-K (or their successor forms) or registration
statements and prospectuses (other than on Form S-8 or its successor form) that
the Borrower or any of its Subsidiaries shall render to or file with the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc. or any national securities exchange, (iii) all reports on Form A
or Form B (or their successor forms) that any Insurance Subsidiary shall file
with any Insurance Regulatory Authority, (iv) all significant reports on
examination or similar significant reports, financial examination reports or
market conduct examination reports by the NAIC or any Insurance Regulatory
Authority or other Governmental Authority with respect to any Insurance
Subsidiary's insurance business, and (v) all significant filings made under
applicable state insurance holding company acts by the Borrower or any of its
Subsidiaries, including, without limitation, filings seeking approval of
transactions with Affiliates;
(d) Promptly upon (and in any event within five (5) Business Days after)
obtaining knowledge thereof, written notice of any of the following:
(i) the occurrence of any Default or Event of Default,
together with a written statement of the chief executive officer,
chief financial officer or vice president--finance of the
Borrower specifying the nature of such Default or Event of
Default, the period of existence thereof and the action that the
Borrower has taken and proposes to take with respect thereto,
(ii) the institution or written threatened institution of
any action, suit, investigation or proceeding against or
affecting the Borrower or any of its Subsidiaries, including any
such investigation or proceeding by any Insurance Regulatory
Authority or other Governmental Authority (other than routine
periodic inquiries, investigations or reviews), that would, if
adversely determined, be reasonably likely, individually or in
the aggregate, to have a Material Adverse Effect, and any
material development in any
25
<PAGE>
litigation or other proceeding previously reported pursuant to
Section 4.5 or this Section 5.3(d)(ii);
(iii) the receipt by the Borrower or any of its
Subsidiaries from any Insurance Regulatory Authority or other
Governmental Authority of (i) any written notice asserting any
failure by the Borrower or any of its Subsidiaries to be in
compliance with applicable Requirements of Law or that threatens
the taking of any action against the Borrower or such Subsidiary
or sets forth circumstances that, if taken or adversely
determined, would be reasonably likely to have a Material Adverse
Effect, or (ii) any notice of any actual or threatened
suspension, limitation or revocation of, failure to renew, or
imposition of any restraining order, escrow or impoundment of
funds in connection with, any license, permit, accreditation or
authorization of the Borrower or any of its Subsidiaries, where
such action would be reasonably likely to have a Material Adverse
Effect;
(iv) the occurrence of any ERISA Event, together with (i)
a written statement of the chief executive officer, chief
financial officer or vice president--finance of the Borrower
specifying the details of such ERISA Event and the action that
the Borrower has taken and proposes to take with respect thereto,
(ii) a copy of any notice with respect to such ERISA Event that
may be required to be filed with the PBGC and (iii) a copy of any
notice delivered by the PBGC to the Borrower or such ERISA
Affiliate with respect to such ERISA Event;
(v) the occurrence of any decrease in (y) the rating
given by either Standard & Poor's or Moody's with respect to the
Borrower's senior publicly traded Indebtedness or (z) the rating
given to any Insurance Subsidiary by A.M. Best & Company; and
(vi) any other matter or event that has, or would be
reasonably likely to have, a Material Adverse Effect, together
with a written statement of the chief executive officer, chief
financial officer or vice president--finance of the Borrower
setting forth the nature and period of existence thereof and the
action that the Borrower has taken and proposes to take with
respect thereto,
(e Within five (5) Business Days after request therefor by the Lender, if
theretofore prepared and delivered to the Borrower, or within ninety (90) days
after request therefor by the Lender from time to time (but not more than once
per year), if not theretofore prepared and delivered to the Borrower, in either
case at the Borrower's expense, an actuarial review and valuation statement of,
and opinion as to the adequacy of, each Insurance Subsidiary's loss and loss
adjustment expense reserve positions as of the end of such year with respect to
the insurance business then in force, and covering such other subjects as are
customary in actuarial reviews, prepared by PricewaterhouseCoopers or another
independent actuarial firm reasonably acceptable to the Lender, together with a
favorable review letter thereon by the Borrower's regularly retained independent
certified public accountants, all in form and substance satisfactory to the
Lender; and
(f As promptly as reasonably possible, such other information about the
business, condition (financial or otherwise), operations or properties of the
Borrower or any of its Subsidiaries as the Lender may from time to time
reasonably request.
26
<PAGE>
V.4 Corporate Existence; Franchises; Maintenance of Properties. The
Borrower will, and will cause each of its Subsidiaries to, (i) maintain and
preserve in full force and effect its corporate existence, except as expressly
permitted otherwise by Section 7.1, (ii) obtain, maintain and preserve in full
force and effect all other rights, franchises, licenses, permits,
certifications, approvals and authorizations required by Governmental
Authorities and necessary to the ownership, occupation or use of its properties
or the conduct of its business, except to the extent the failure to do so would
not be reasonably likely to have a Material Adverse Effect, and (iii) keep all
material properties in good working order and condition (normal wear and tear
excepted) and from time to time make all necessary repairs to and renewals and
replacements of such properties, except to the extent that any of such
properties are obsolete or are being replaced.
V.5 Compliance with Laws. The Borrower will, and will cause each of its
Subsidiaries to, comply in all respects with all Requirements of Law applicable
in respect of the conduct of its business and the ownership and operation of its
properties, except to the extent the failure so to comply would not be
reasonably likely to have a Material Adverse Effect.
V.6 Payment of Obligations. The Borrower will, and will cause each of
its Subsidiaries to, (i) pay all liabilities and obligations as and when due
(subject to any applicable subordination provisions), except to the extent
failure to do so would not be reasonably likely to have a Material Adverse
Effect, and (ii) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it, upon its income or profits or upon any of its
properties, prior to the date on which penalties would attach thereto, and all
lawful claims that, if unpaid, might become a Lien upon any of the properties of
the Borrower or any of its Subsidiaries; provided, however, that neither the
Borrower nor any of its Subsidiaries shall be required to pay any such tax,
assessment, charge, levy or claim that is being contested in good faith and by
proper proceedings and as to which the Borrower or such Subsidiary is
maintaining adequate reserves with respect thereto in accordance with Generally
Accepted Accounting Principles.
V.7 Insurance. The Borrower will, and will cause each of its Subsidiaries
to, maintain with financially sound and reputable insurance companies insurance
with respect to its assets, properties and business, against such hazards and
liabilities, of such types and in such amounts, as is customarily maintained by
companies in the same or similar businesses similarly situated; provided that
the Borrower and its Subsidiaries may self-insure against risks consistent with
customary industry practices for companies in the same or similar businesses, of
similar size and with similar risk parameters.
V.8 Maintenance of Books and Records; Inspection. The Borrower will, and
will cause each of its Subsidiaries to, (i) maintain adequate books, accounts
and records, in which full, true and correct entries shall be made of all
financial transactions in relation to its business and properties, and prepare
all financial statements required under this Agreement, in each case in
accordance with Generally Accepted Accounting Principles or Statutory Accounting
Principles, as applicable, and in compliance with the requirements of any
Governmental Authority having jurisdiction over it, and (ii) permit employees or
agents of the Lender to inspect its properties and examine or audit its books,
records, working papers and accounts and make copies and memoranda of them, and
to discuss its affairs, finances and accounts with its officers and employees
and, upon notice to the Borrower, the independent public accountants of the
Borrower and its Subsidiaries (and by this provision the Borrower authorizes
such accountants to discuss the finances and affairs of the Borrower and its
Subsidiaries), all at such times and from time to time, upon reasonable notice
and during business hours, as may be reasonably requested.
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<PAGE>
V.9 Subsidiary Dividends. The Borrower will take all action necessary
to cause its Subsidiaries to make such dividends, distributions or other
payments to the Borrower as shall be necessary for the Borrower to make payments
of the principal of and interest on the Loans in accordance with the terms of
this Agreement. In the event the approval of any Governmental Authority or
other Person is required in order for any such Subsidiary to make any such
dividends, distributions or other payments to the Borrower, or for the Borrower
to make any such principal or interest payments, the Borrower will forthwith
exercise its best efforts and take all reasonable actions permitted by law and
necessary to obtain such approval.
V.10 Further Assurances. The Borrower will, and will cause each of its
Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments,
modifications or supplements hereto and restatements hereof and any other
agreements, instruments or documents, and take any and all such other actions,
as may from time to time be reasonably requested by the Lender to effect,
confirm or further assure or protect and preserve the interests, rights and
remedies of the Lender under this Agreement and the other Credit Documents.
ARTICLE VI
FINANCIAL COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
VI.1 Statutory Consolidated Net Income. The Borrower will not permit
cumulative Statutory Consolidated Net Income for any fiscal quarter then ending
to be less than the following amounts for the cumulative period corresponding
thereto, with dollars expressed in millions (calculated cumulatively for the
period commencing on September 30, 1999, and ending June 30, 2000, and for each
four fiscal quarter period ending thereafter):
<TABLE>
<CAPTION>
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999 $ N/A $ N/A $ N/A $ 4.0
2000 11.0 18.0 25.0 28.0
2001 26.5 25.0 23.5 N/A
</TABLE>
VI.2 Consolidated Net Income. The Borrower will not permit cumulative
Consolidated Net Income for any fiscal quarter then ending to be less than the
following amounts for the cumulative period corresponding thereto, with dollars
expressed in millions (calculated cumulatively for the period commencing on
September 30, 1999, and ending on June 30, 2000, and for each four fiscal
quarter period ending thereafter):
28
<PAGE>
<TABLE>
<CAPTION>
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999 $ N/A $ N/A $ N/A $ 1.0
2000 3.7 6.4 9.1 10.8
2001 10.6 10.3 10.1 N/A
</TABLE>
VI.3 Statutory Surplus. The Borrower will not permit Consolidated
Statutory Surplus for any fiscal quarter then ending to be less than the
following amounts for the period corresponding thereto, with dollars expressed
in millions (it being understood that any adjustments to Consolidated Statutory
Surplus required to be made by any Department of Insurance in an aggregate
amount not in excess of $25,000,000 shall not be taken into account in
-----
determining the Borrower's compliance with this section and that the amount by
which any such adjustments for such fiscal year exceed $25,000,000 shall be so
taken into account):
<TABLE>
<CAPTION>
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
1999 $ N/A $ N/A $ N/A $ 239
2000 246 253 260 267
2001 272 278 283 N/A
</TABLE>
VI.4 Risk-Based Capital. The Borrower will not permit "total adjusted
capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the NAIC as of the date hereof (the "Model Act")) of VFIC at any
time from and after the Effective Date to be less than 150% of the applicable
"Company Action Level RBC" (within the meaning of the Model Act) for VFIC at
such time.
ARTICLE VII
NEGATIVE COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
VII.1 Merger; Consolidation. The Borrower will not, and will not permit
or cause any of its Significant Subsidiaries to, liquidate, wind up or dissolve,
or enter into any consolidation, merger or other combination, or agree to do any
of the foregoing; provided, however, that the Borrower or any Significant
Subsidiary may merge into or consolidate with any other Person so long as (i)
the surviving corporation is the Borrower or a Wholly Owned Subsidiary (and in
any event, if the Borrower is a party to such merger or consolidation, the
surviving corporation shall be the Borrower) and (ii) immediately after giving
effect thereto, no Default or Event of Default would exist.
VII.2 Indebtedness. The Borrower will not create, incur, assume or
suffer to exist, and will not permit or cause any of its Subsidiaries to create,
incur, or knowingly assume or suffer to exist, any Indebt-
29
<PAGE>
edness that ranks senior in any respect to the Indebtedness under this Agreement
(or any portion thereof) as to payment or performance or as to dividends or
distributions upon bankruptcy, insolvency, liquidation or winding-up.
VII.3 Liens. The Borrower will not, and will not permit or cause any of
its Subsidiaries to, directly or indirectly, make, create, incur, assume or
suffer to exist, or enter into or suffer to exist any agreement or restriction
that prohibits or conditions the creation, incurrence or assumption of, any Lien
upon or with respect to any part of its property or assets, whether now owned or
hereafter acquired, or agree to do any of the foregoing, other than the
following (collectively, "Permitted Liens"):
(i) Liens in favor of the Lender;
(ii) Liens arising in connection with the $5,000,000
Credit Agreement;
(iii) Liens in existence on the Effective Date and set
forth on Schedule 7.3;
(iv) Liens imposed by law, such as Liens of carriers,
warehousemen, mechanics, materialmen and landlords, and other
similar Liens incurred in the ordinary course of business for
sums not constituting borrowed money that are not overdue for a
period of more than thirty (30) days or that are being contested
in good faith by appropriate proceedings and for which adequate
reserves have been established in accordance with Generally
Accepted Accounting Principles;
(v) Liens (other than any Lien imposed by ERISA, the
creation or incurrence of which would result in an Event of
Default under Section 8.1(i)) incurred in the ordinary course of
business in connection with worker's compensation, unemployment
insurance or other forms of governmental insurance or benefits,
or to secure the performance of letters of credit, bids, tenders,
statutory obligations, surety and appeal bonds, leases,
government contracts and other similar obligations (other than
obligations for borrowed money) entered into in the ordinary
course of business;
(vi) Liens for taxes, assessments or other governmental
charges or statutory obligations that are not delinquent or
remain payable without any penalty or that are being contested in
good faith by appropriate proceedings and for which adequate
reserves have been established in accordance with Generally
Accepted Accounting Principles;
(vii) Liens in connection with pledges and deposits made
pursuant to statutory and regulatory requirements of Insurance
Regulatory Authorities by an Insurance Subsidiary in the ordinary
course of its business, for the purpose of securing regulatory
capital or satisfying other financial responsibility
requirements;
(viii) Liens upon cash and United States government and
agency securities of the Borrower and its Subsidiaries, securing
obligations incurred in connection with reverse repurchase
transactions and other similar investment management transactions
of such types and in such amounts as are customary for companies
similar to the Borrower in size and lines of business and that
are entered into by the Borrower and its Subsidiaries in the
ordinary course of business;
30
<PAGE>
(ix) Purchase money Liens upon real or personal property
used by the Borrower or any of its Subsidiaries in the ordinary
course of its business, securing Indebtedness incurred solely to
pay all or a portion of the purchase price thereof (including in
connection with capital leases, and including mortgages or deeds
of trust upon real property and improvements thereon), provided
that the aggregate principal amount at any time outstanding of
all Indebtedness secured by such Liens does not exceed an amount
equal to 5% of the value of the total assets of the Borrower and
its Subsidiaries at such time, determined on a consolidated basis
in accordance with Generally Accepted Accounting Principles as of
the date of the financial statements of the Borrower and its
Subsidiaries most recently delivered under Section 5.1 prior to
such time (or, with regard to determinations at any time prior to
the initial delivery of financial statements under Section 5.1,
as of the date of the most recent financial statements referred
to in Section 4.11(a)), and provided further that any such Lien
(i) shall attach to such property concurrently with or within ten
(10) days after the acquisition thereof by the Borrower or such
Subsidiary, (ii) shall not exceed the lesser of (y) the fair
market value of such property or (z) the cost thereof to the
Borrower or such Subsidiary and (iii) shall not encumber any
other property of the Borrower or any of its Subsidiaries;
(x) Liens on Borrower Margin Stock, to the extent the
fair market value thereof exceeds 25% of the fair market value of
the assets of the Borrower and its Subsidiaries (including
Borrower Margin Stock);
(xi) Any attachment or judgment Lien not constituting an
Event of Default under Section 8.1(h) that is being contested in
good faith by appropriate proceedings and for which adequate
reserves have been established in accordance with Generally
Accepted Accounting Principles;
(xii) With respect to any real property occupied by the
Borrower or any of its Subsidiaries, all easements, rights of
way, licenses and similar encumbrances on title that do not
materially impair the use of such property for its intended
purposes; and
(xiii) Liens in favor of the trustee or agent under any
agreement or indenture relating to Indebtedness of the Borrower
and its Subsidiaries permitted under this Agreement, covering
sums required to be deposited with such trustee or agent
thereunder.
VII.4 Disposition of Assets. The Borrower will not, and will not permit
or cause any of its Subsidiaries to, sell, assign, lease, convey, transfer or
otherwise dispose of (whether in one or a series of transactions) all or any
portion of its assets, business or properties, or enter into any arrangement
with any Person providing for the lease by the Borrower or any Subsidiary as
lessee of any asset that has been sold or transferred by the Borrower or such
Subsidiary to such Person, or agree to do any of the foregoing, except for:
(i) sales of Investments by the Insurance Subsidiaries
in the ordinary course of business;
(ii) the sale or exchange of used or obsolete equipment
to the extent (A) the proceeds of such sale are applied towards,
or such equipment is exchanged for, similar
31
<PAGE>
replacement equipment or (B) such equipment is no longer necessary
for the operations of the Borrower or its applicable Subsidiary in
the ordinary course of business;
(iii) the sale, lease or other disposition of assets by a
Subsidiary of the Borrower to the Borrower or to another Wholly
Owned Subsidiary, to the extent permitted by applicable
Requirements of Law and each relevant Insurance Regulatory
Authority, provided that (A) immediately after giving effect
thereto, no Default or Event of Default would exist, (B) in no
event shall the Borrower contribute, sell or otherwise transfer, or
permit VFIC to issue or sell, any of the capital stock of VFIC to
any other Subsidiary, and (C) such sale or disposition would not
adversely affect the ability of any Insurance Subsidiary party
thereto to pay dividends or otherwise make distributions to its
parent;
(iv) the sale or other disposition of any Borrower Margin
Stock to the extent the fair market value thereof exceeds 25% of
the fair market value of the assets of the Borrower and its
Subsidiaries (including Borrower Margin Stock), provided that fair
value is received in exchange therefor; and
(v) the sale or disposition of assets outside the
ordinary course of business, provided that (A) the net proceeds
from any such sale or disposition do not exceed an amount equal to
the least of the following: (1) 10% of the total assets of the
Borrower and its Subsidiaries on a consolidated basis, (2) 10% of
the total revenues of the Borrower and its Subsidiaries on a
consolidated basis, and (3) 10% of the total net earnings of the
Borrower and its Subsidiaries on a consolidated basis, in each case
as determined as of the date of the financial statements of the
Borrower and its Subsidiaries most recently delivered under Section
5.1 prior to such time (or, with regard to determinations at any
time prior to the initial delivery of financial statements under
Section 5.1, as of the date of the most recent financial statements
referred to in Section 4.11(a)), (B) immediately after giving
effect thereto, the Borrower would be in compliance with the
provisions of Section 6.2, such compliance determined on a pro
forma basis in accordance with Generally Accepted Accounting
Principles as if such sale or disposition had been consummated on
the last day of the then most recently ended fiscal quarter, (C)
immediately after giving effect thereto, no Default or Event of
Default would exist, and (D) in no event shall the Borrower or any
of its Subsidiaries sell or otherwise dispose of any of the capital
stock or other ownership interests of VFIC or any other Significant
Subsidiary.
VII.5 Transactions with Affiliates. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, enter into any transaction with any
officer, director, stockholder or other Affiliate of the Borrower or any
Subsidiary, except in the ordinary course of its business and upon fair and
reasonable terms that are no less favorable to it than would obtain in a
comparable arm's length transaction with a Person other than an Affiliate of the
Borrower or such Subsidiary; provided, however, that nothing contained in this
Section shall prohibit:
(i) transactions between and among the Borrower and its
Wholly Owned Subsidiaries;
32
<PAGE>
(ii) transactions under incentive compensation plans,
stock option plans and other employee benefit plans, and loans and
advances from the Borrower or any of its Subsidiaries to its
officers, in each case that have been approved by the board of
directors of the Borrower or any of its Subsidiaries; and
(iii) the payment by the Borrower of reasonable and
customary fees to members of its board of directors.
VII.6 Lines of Business. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, engage to any substantial degree in any
business other than the lines of property and casualty insurance business and
other businesses engaged in by the Borrower and its Subsidiaries on the date
hereof or a business reasonably related thereto.
VII.7 Fiscal Year. The Borrower will not, and will not permit or cause
any of its Subsidiaries to, change the ending date of its fiscal year to a date
other than December 31 unless (i) the Borrower shall have given the Lender
written notice of its intention to change such ending date at least sixty (60)
days prior to the effective date thereof and (ii) prior to such effective date
this Agreement shall have been amended to make any changes in the financial
covenants and other terms and conditions to the extent necessary, in the
reasonable determination of the Lender, to reflect the new fiscal year ending
date.
VII.8 Accounting Changes. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, make or permit any material change in its
accounting policies or reporting practices, except as may be required or
permitted by Generally Accepted Accounting Principles or Statutory Accounting
Principles, as applicable.
VII.9 Dividends. The Borrower will not pay any dividends on account of
its equity securities while a Default or an Event of Default has occurred and is
continuing both immediately before and after giving effect to the payment of
such dividends.
ARTICLE VIII
EVENTS OF DEFAULT
VIII.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a The Borrower shall fail to pay (i) any principal payable under the
terms of the Note, or (ii) not later than five Business Days of the date when
due any interest or any fee or any other Obligation due under the Note or this
Agreement;
(b An "Event of Default" (as defined therein) shall occur under the
$5,000,000 Credit Agreement;
(c The Borrower shall fail to observe, perform or comply with any
condition, covenant or agreement contained in any of Sections 2.11, 5.3(d)(i) or
5.4(i), Article VI, or Sections 7.1 through 7.4, inclusive, or Section 7.9;
33
<PAGE>
(d The Borrower or any of its Subsidiaries shall fail to observe,
perform or comply with any condition, covenant or agreement contained in this
Agreement or any of the other Credit Documents other than those enumerated in
subsections (a) and (b) above, and such failure shall continue unremedied for
any grace period specifically applicable thereto or, if no such grace period is
applicable, for a period of thirty (30) days after the Borrower acquires
knowledge thereof;
(e Any material representation or warranty made or deemed made by or
on behalf of the Borrower or any of its Subsidiaries in this Agreement, any of
the other Credit Documents or in any certificate, instrument, report or other
document furnished in connection herewith or therewith or in connection with the
transactions contemplated hereby or thereby shall prove to have been false or
misleading in any material respect as of the time made, deemed made or
furnished;
(f The Borrower or any of its Subsidiaries shall (i) fail to pay when
due (whether by scheduled maturity, acceleration or otherwise and after giving
effect to any applicable grace period) any principal of or interest on any
Indebtedness (other than the Indebtedness incurred pursuant to this Agreement)
having an aggregate principal amount of at least $500,000; or (ii) fail to
observe, perform or comply with any condition, covenant or agreement contained
in any agreement or instrument evidencing or relating to any such Indebtedness,
or any other event shall occur or condition exist in respect thereof, and the
effect of such failure, event or condition is to cause, or permit the holder or
holders of such Indebtedness (or a trustee or agent on its or their behalf) to
cause (with the giving of notice, lapse of time, or both), such Indebtedness to
become due, or to be prepaid, redeemed, purchased or defeased, prior to its
stated maturity;
(g The Borrower or any of its Significant Subsidiaries shall (i) file
a voluntary petition or commence a voluntary case seeking liquidation, winding-
up, reorganization, dissolution, arrangement, readjustment of debts or any other
relief under the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, (ii) consent to the
institution of, or fail to controvert in a timely and appropriate manner, any
petition or case of the type described in subsection (g) below, (iii) apply for
or consent to the appointment of or taking possession by a custodian, trustee,
receiver or similar official for or of itself or all or a substantial part of
its properties or assets, (iv) fail generally, or admit in writing its
inability, to pay its debts generally as they become due, (v) make a general
assignment for the benefit of creditors or (vi) take any corporate action to
authorize or approve any of the foregoing;
(h Any involuntary petition or case shall be filed or commenced
against the Borrower or any of its Significant Subsidiaries seeking liquidation,
winding-up, reorganization, dissolution, arrangement, readjustment of debts, the
appointment of a custodian, trustee, receiver or similar official for it or all
or a substantial part of its properties or any other relief under the Bankruptcy
Code or under any other applicable bankruptcy, insolvency or similar law now or
hereafter in effect, and such petition or case shall continue undismissed and
unstayed for a period of sixty (60) days; or an order, judgment or decree
approving or ordering any of the foregoing shall be entered in any such
proceeding;
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(i Any one or more money judgments, writs or warrants of attachment,
executions or similar processes involving an aggregate amount (exclusive of
amounts fully bonded or covered by insurance as to which the surety or insurer,
as the case may be, has acknowledged its liability in writing) in excess of
$1,000,000 shall be entered or filed against the Borrower or any of its
Subsidiaries or any of their respective properties, and (i) the same is not
dismissed, stayed or discharged within sixty (60) days or is not otherwise being
appropriately contested in good faith and in a manner reasonably satisfactory to
the Lender, or (ii) the same is not dismissed, stayed or discharged within five
(5) days prior to any proposed sale of assets of the Borrower or any Subsidiary
pursuant thereto, or (iii) any action shall be legally taken by a judgment
creditor to levy upon assets of the Borrower or any Subsidiary to enforce the
same;
(j Any ERISA Event shall occur or exist with respect to any Plan or
Multiemployer Plan and, as a result thereof, together with all other ERISA
Events then existing, there shall exist a reasonable likelihood of liability to
any one or more Plans or Multiemployer Plans or to the PBGC (or to any
combination thereof) in excess of $500,000 with respect to the Borrower or any
ERISA Affiliate;
(k Any Insurance Regulatory Authority or other Governmental Authority
having jurisdiction shall issue any order of conservation, supervision,
rehabilitation or liquidation or any other order of similar effect in respect of
any Insurance Subsidiary, and such action, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect;
(l Any one or more licenses, permits, accreditations or authorizations
of the Borrower or any of its Subsidiaries shall be suspended, limited or
terminated or shall not be renewed, or any other action shall be taken, by any
Governmental Authority in response to any alleged failure by the Borrower or any
of its Subsidiaries to be in compliance with applicable Requirements of Law, and
such action, individually or in the aggregate, would be reasonably likely to
have a Material Adverse Effect; or
(m Any of the following shall occur: (i) any Person or group of
Persons acting in concert as a partnership or other group (other than the
Birmingham Investment Group) shall, as a result of a tender or exchange offer,
open market purchases, privately negotiated purchases or otherwise, have become,
after the date hereof, the "beneficial owner" (within the meaning of such term
under Rule 13d-3 under the Exchange Act) of securities of the Borrower
representing 30% or more of the combined voting power of the then outstanding
securities of the Borrower ordinarily (and apart from rights accruing under
special circumstances) having the right to vote on matters, other than the
election of directors, submitted to holders of the Borrower's common stock; (ii)
the Board of Directors of the Borrower shall cease to consist of a majority of
the individuals who constituted the Board of Directors of the Borrower as of the
date hereof or who shall have become a member thereof subsequent to the date
hereof after having been nominated, or otherwise approved in writing, by at
least a majority of individuals who constituted the Board of Directors of the
Borrower as of the date hereof (or their replacements approved as herein
required); or (iii) the Borrower shall cease to own directly 100% of the issued
and outstanding capital stock of VFIC or its successor by merger or
consolidation as permitted hereunder (including, without limitation, as a result
of the contribution, sale or transfer by the Borrower, or the issuance or sale
by VFIC, of any capital stock of VFIC to any one or more other Subsidiaries of
the Borrower).
VIII.2 Remedies; Termination of Commitment, Acceleration, etc. Upon and
at any time after the occurrence and during the continuance of any Event of
Default, the Lender may take any or all of the following actions at the same or
different times:
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(a Declare the Commitment to be terminated, whereupon the
same shall terminate provided that, upon the occurrence of an Event
of Default pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(g) or
Section 8.1(h), the Commitment shall automatically be terminated);
(b Declare all or any part of the outstanding principal
amount of the Loans to be immediately due and payable, whereupon
the principal amount so declared to be immediately due and payable,
together with all interest accrued thereon and all other amounts
payable under this Agreement, the Notes and the other Credit
Documents, shall become immediately due and payable without
presentment, demand, protest, notice of intent to accelerate or
other notice or legal process of any kind, all of which are hereby
knowingly and expressly waived by the Borrower provided that, upon
the occurrence of an Event of Default pursuant to Section 8.1(c),
8.1(g) or Section 8.1(h), all of the outstanding principal amount
of the Loans and all other amounts described in this subsection (b)
shall automatically become immediately due and payable without
presentment, demand, protest, notice of intent to accelerate or
other notice or legal process of any kind, all of which are hereby
knowingly and expressly waived by the Borrower); and
(c Exercise all rights and remedies available to it under
this Agreement, the other Credit Documents and applicable law.
VIII.3 Remedies; Set-Off. In addition to all other rights and remedies
available under the Credit Documents or applicable law or otherwise, upon and at
any time after the occurrence and during the continuance of any Event of
Default, the Lender may, and is hereby authorized by the Borrower, at any such
time and from time to time, to the fullest extent permitted by applicable law,
without presentment, demand, protest or other notice of any kind, all of which
are hereby knowingly and expressly waived by the Borrower, to set off and to
apply any and all deposits (general or special, time or demand, provisional or
final) and any other property at any time held (including at any branches or
agencies, wherever located), and any other indebtedness at any time owing, by
the Lender to or for the credit or the account of the Borrower against any or
all of the Obligations to the Lender now or hereafter existing, whether or not
such Obligations may be contingent or unmatured, the Borrower hereby granting to
each Lender a continuing security interest in and Lien upon all such deposits
and other property as security for such Obligations. The Lender agrees to
notify the Borrower promptly after any such set-off and application; provided,
however, that the failure to give such notice shall not affect the validity of
such set-off and application.
ARTICLE IX
MISCELLANEOUS
IX.1 Fees and Expenses. The Borrower agrees (i) whether or not the
transactions contemplated by this Agreement shall be consummated, to pay upon
demand all reasonable out-of-pocket costs and expenses of the Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Lender)
in connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Credit Documents, and any amendment, modification or
waiver hereof or thereof or consent with respect hereto or thereto, (ii) to pay
upon demand all reasonable out-of-pocket costs and expenses of the
36
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Lender (including, without limitation, the reasonable fees and expenses of
counsel to the Lender) in connection with (A) any refinancing or restructuring
of the credit arrangement provided under this Agreement, whether in the nature
of a "work-out," in any insolvency or bankruptcy proceeding or otherwise and
whether or not consummated, and (B) the enforcement, attempted enforcement or
preservation of any rights or remedies under this Agreement or any of the other
Credit Documents, whether in any action, suit or proceeding (including any
bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold
harmless the Lender from and against all liability for any intangibles,
documentary, stamp or other similar taxes, fees and excises, if any, including
any interest and penalties, and any finder's or brokerage fees, commissions and
expenses (other than any fees, commissions or expenses of finders or brokers
engaged by the Lender), that may be payable in connection with the transactions
contemplated by this Agreement and the other Credit Documents.
IX.2 Indemnification. The Borrower agrees, whether or not the
transactions contemplated by this Agreement shall be consummated, to indemnify
and hold harmless the Lender and each of their respective directors, officers,
employees, agents and Affiliates (each, an "Indemnified Person") from and
against any and all claims, losses, damages, obligations, liabilities,
penalties, costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) of any kind or nature whatsoever, whether direct,
indirect or consequential (collectively, "Indemnified Costs"), that may at any
time be imposed on, incurred by or asserted against any such Indemnified Person
as a result of, arising from or in any way relating to the preparation,
execution, performance or enforcement of this Agreement or any of the other
Credit Documents, any of the transactions contemplated herein or therein or any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of any Loans, or any action, suit or proceeding
(including any inquiry or investigation) by any Person, whether threatened or
initiated, related to any of the foregoing, and in any case whether or not such
Indemnified Person is a party to any such action, proceeding or suit or a
subject of any such inquiry or investigation; provided, however, that no
Indemnified Person shall have the right to be indemnified hereunder for any
Indemnified Costs to the extent resulting from the gross negligence or willful
misconduct of such Indemnified Person. All of the foregoing Indemnified Costs of
any Indemnified Person shall be paid or reimbursed by the Borrower, as and when
incurred and upon demand.
IX.3 Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE
OTHER CREDIT DOCUMENTS HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL
BE DEEMED TO HAVE BEEN MADE IN, ALABAMA AND SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA (WITHOUT REGARD
TO THE CONFLICTS OF LAW PROVISIONS THEREOF). THE BORROWER HEREBY CONSENTS TO
THE NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN JEFFERSON COUNTY,
ALABAMA OR ANY FEDERAL COURT LOCATED WITHIN THE NORTHERN DISTRICT OF THE STATE
OF ALABAMA FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER
CREDIT DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY
OF THE OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH THE LENDER OR THE
BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN
CONNECTION WITH, ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER
ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER. THE BORROWER
IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY ANY
JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY OBJECTION
THAT IT MAY HAVE BASED ON LACK OF JURISDICTION
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OR IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY SUCH PROCEEDING.
NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT OF ANY PARTY TO BRING ANY ACTION
OR PROCEEDING AGAINST ANY OTHER PARTY IN THE COURTS OF ANY OTHER JURISDICTION.
IX.4 Arbitration; Preservation and Limitation of Remedies. (a) Upon
demand of any party hereto, whether made before or after institution of any
judicial proceeding, any dispute, claim or controversy arising out of, connected
with or relating to this Agreement or any other Credit Document ("Disputes")
between the Borrower and the Lender, shall be resolved by binding arbitration as
provided herein. Institution of a judicial proceeding by a party does not waive
the right of that party to demand arbitration hereunder. Disputes may include,
without limitation, tort claims, counterclaims, claims brought as class actions,
claims arising from documents executed in the future, or claims arising out of
or connected with the transactions contemplated by this Agreement and the other
Credit Documents. Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American Arbitration Association (the "AAA"), as in effect from time to time,
and Title 9 of the U.S. Code, as amended. All arbitration hearings shall be
conducted in Birmingham, Alabama. The expedited procedures set forth in Rule 51
et seq. of the Arbitration Rules shall be applicable to claims of less than
$1,000,000. All applicable statutes of limitation shall apply to any Dispute.
A judgment upon the award may be entered in any court having jurisdiction. The
panel from which all arbitrators are selected shall include only licensed
attorneys. The single arbitrator selected for expedited procedure shall be a
retired judge from the highest court of general jurisdiction, state or federal,
of the state where the hearing will be conducted.
(b) Notwithstanding the preceding binding arbitration provisions, the
parties hereto agree to preserve, without diminution, certain remedies that any
party hereto may employ or exercise freely, either alone, in conjunction with or
during a Dispute. Any party hereto shall have the right to proceed in any court
of proper jurisdiction or by self-help to exercise or prosecute the following
remedies, as applicable: (i) all rights of self-help, including peaceful
occupation of real property and collection of rents, set-off, and peaceful
possession of personal property; (ii) obtaining provisional or ancillary
remedies, including injunctive relief, sequestration, garnishment, attachment,
appointment of a receiver and filing an involuntary bankruptcy proceeding; and
(iii) when applicable, a judgment by confession of judgment. Preservation of
these remedies does not limit the power of an arbitrator to grant similar
remedies that may be requested by a party in a Dispute. The parties hereto
agree that no party shall have a remedy of punitive or exemplary damages against
any other party in any Dispute, and each party hereby waives any right or claim
to punitive or exemplary damages that it has now or that may arise in the future
in connection with any Dispute, whether such Dispute is resolved by arbitration
or judicially.
IX.5 Notices. All notices and other communications provided for
hereunder shall be in writing (including telegraphic, telex, facsimile
transmission or cable communication) and mailed, telegraphed, telexed,
telecopied, cabled or delivered to the party to be notified at the following
addresses:
(a if to the Borrower, to Vesta Insurance Group, Inc.,
3760 River Run Drive, Birmingham, Alabama 35243, Attention: Norman
W. Gayle, III, Telecopy No. (205) 970-7007, with a copy to Vesta
Insurance Group, Inc., 3760 River Run Drive, Birmingham, Alabama
35243, Attention: Donald W. Thornton, Telecopy No. (205) 970-7007;
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(b if to The Bank, 17 North 20th Street, Birmingham,
Alabama 35203-4003, Attention: James A. Taylor, Jr., Telecopy No.
(205) 327-3479; and
or in each case, to such other address as any party may designate for itself by
like notice to all other parties hereto. All such notices and communications
shall be deemed to have been given (i) if mailed as provided above by any method
other than overnight delivery service, on the third Business Day after deposit
in the mails, (ii) if mailed by overnight delivery service, telegraphed,
telexed, telecopied or cabled, when delivered for overnight delivery, delivered
to the telegraph company, confirmed by telex answerback, transmitted by
telecopier or delivered to the cable company, respectively, or (iii) if
delivered by hand, upon delivery; provided that notices and communications to
the Lender shall not be effective until received by the Lender.
IX.6 Amendments, Waivers, etc. No amendment, modification, waiver or
discharge of termination of, or consent to any departure by the Borrower from,
any provision of this Agreement or any other Credit Document, shall be effective
unless in a writing signed by the Lender and then the same shall be effective
only in the specific instance and for the specific purpose for which given.
IX.7 Participations.
(a) The Lender may, without the consent of the Borrower, sell to one or
more other Persons with its principal place of business in the United States
(each, a "Participant") participations in any portion comprising less than all
of its rights and obligations under this Agreement (including, without
limitation, a portion of its Commitment, the outstanding Loans made by it and
the Note or Notes held by it); provided, however, that (i) the Lender's
obligations under this Agreement shall remain unchanged and the Lender shall
remain solely responsible for the performance of such obligations, (ii) any such
participation shall be in an amount of not less than $1,000,000, but the Lender
shall not sell any participation that, when taken together with all other
participations, if any, sold by the Lender, covers all of the Lender's rights
and obligations under this Agreement, (iii) the Borrower shall continue to deal
solely and directly with the Lender in connection with the Lender's rights and
obligations under this Agreement, and the Lender shall not permit any
Participant to have any voting rights or any right to control the vote of the
Lender with respect to any amendment, modification, waiver, consent or other
action hereunder or under any other Credit Document (except as to actions that
would (A) reduce or forgive the principal amount of, or rate of interest on, any
Loan, or reduce or forgive any fees or other Obligations, (B) extend any date
(including the Maturity Date) fixed for the payment of any principal of or
interest on any Loan, any fees or any other Obligations, or (C) increase any
Commitment of the Lender), and (iv) no Participant shall have any rights under
this Agreement or any of the other Credit Documents, each Participant's rights
against the granting the Lender in respect of any participation to be those set
forth in the participation agreement, and all amounts payable by the Borrower
hereunder shall be determined as if the Lender had not granted such
participation.
(b) Nothing in this Agreement shall be construed to prohibit the Lender
from pledging or assigning all or any portion of its rights and interest
hereunder or under any Note to any Federal Reserve Bank as security for
borrowings therefrom; provided, however, that no such pledge or assignment shall
release the Lender from any of its obligations hereunder.
(c) The Lender may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section, disclose to
the Participant or proposed Participant any
39
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information relating to the Borrower and its Subsidiaries furnished to it by or
on behalf of any other party hereto, provided that such Participant or proposed
Participant agrees in writing to keep such information confidential to the same
extent required of the Lender under Section 9.13.
IX.8 No Waiver. The rights and remedies of the Lender expressly set
forth in this Agreement and the other Credit Documents are cumulative and in
addition to, and not exclusive of, all other rights and remedies available at
law, in equity or otherwise. No failure or delay on the part of the Lender in
exercising any right, power or privilege shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or privilege
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege or be construed to be a waiver of any Default or Event
of Default. No course of dealing between any of the Borrower and the Lender or
its agents or employees shall be effective to amend, modify or discharge any
provision of this Agreement or any other Credit Document or to constitute a
waiver of any Default or Event of Default. No notice to or demand upon the
Borrower in any case shall entitle the Borrower to any other or further notice
or demand in similar or other circumstances or constitute a waiver of the right
of the Lender to exercise any right or remedy or take any other or further
action in any circumstances without notice or demand.
IX.9 Successors and Assigns. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, and all references herein to any party shall be deemed to
include its successors and assigns; provided, however, that the Borrower shall
not sell, assign or transfer any of its rights, interests, duties or obligations
under this Agreement or any other Credit Document without the prior written
consent of the Lender.
IX.10 Survival. All representations, warranties and agreements made by
or on behalf of the Borrower or any of its Subsidiaries in this Agreement and in
the other Credit Documents shall survive the execution and delivery hereof or
thereof and the making and repayment of the Loans. In addition, notwithstanding
anything herein or under applicable law to the contrary, the provisions of this
Agreement and the other Credit Documents relating to indemnification or payment
of fees, costs and expenses shall survive the payment in full of the Loans, the
termination of the Commitment and any termination of this Agreement or any of
the other Credit Documents.
IX.11 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in such jurisdiction, without prohibiting or invalidating
such provision in any other jurisdiction or the remaining provisions of this
Agreement in any jurisdiction.
IX.12 Construction. The headings of the various articles, sections and
subsections of this Agreement have been inserted for convenience only and shall
not in any way affect the meaning or construction of any of the provisions
hereof. Except as otherwise expressly provided herein and in the other Credit
Documents, in the event of any inconsistency or conflict between any provision
of this Agreement and any provision of any of the other Credit Documents, the
provision of this Agreement shall control.
IX.13 Confidentiality. The Lender agrees to keep confidential, pursuant
to its customary procedures for handling confidential information of a similar
nature and in accordance with safe and sound banking practices, all nonpublic
information provided to it by or on behalf of the Borrower or any of its
Subsidiaries in connection with this Agreement or any other Credit Document;
provided, however, that the Lender may disclose such information (i) to its
directors, employees and agents and to its auditors,
40
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counsel and other professional advisors, (ii) at the demand or request of any
bank regulatory authority, court or other Governmental Authority having or
asserting jurisdiction over the Lender, as may be required pursuant to subpoena
or other legal process, or otherwise in order to comply with any applicable
Requirement of Law, (iii) in connection with any proceeding to enforce its
rights hereunder or under any other Credit Document or any other litigation or
proceeding related hereto or to which it is a party, (v) to the extent the same
has become publicly available other than as a result of a breach of this
Agreement and (vi) pursuant to and in accordance with the provisions of Section
9.7.
IX.14 Reliance by Lender. The Lender shall be entitled to rely, and
shall be fully protected in relying, upon any notice, statement, consent or
other communication (including, without limitation, any thereof by telephone,
telecopy, telex, telegram or cable) believed by it in good faith to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons.
IX.15 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. This Agreement shall
become effective upon the execution of a counterpart hereof by each of the
parties hereto and receipt by the Lender and the Borrower of written or
telephonic notification of such execution and authorization of delivery thereof.
IX.16 Entire Agreement. THIS AGREEMENT AND THE OTHER DOCUMENTS AND
INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND THERETO RELATING TO
THE SUBJECT MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN, RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF, INCLUDING, WITHOUT LIMITATION, THE COMMITMENT
LETTER FROM THE LENDER TO THE BORROWER, DATED JUNE 27, 1999, AND (C) MAY NOT BE
AMENDED, SUPPLEMENTED, CONTRADICTED OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
VESTA INSURANCE GROUP, INC.
By /s/ James E. Tait
-------------------------------------
Its Executive Vice President and CFO
---------------------------------
THE BANK
By /s/ Robert McKean
-------------------------------------
Its President and CEO
---------------------------------
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================================================================================
CREDIT AGREEMENT
between
VESTA INSURANCE GROUP, INC.
and
THE BANC CORPORATION
$5,000,000 Revolving Credit Facility
Dated as of September 30, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I -- DEFINITIONS................................................................... 1
1.1 Defined Terms................................................................. 1
1.2 Accounting Terms.............................................................. 10
1.3 Other Terms; Construction..................................................... 11
ARTICLE II -- AMOUNT AND TERMS OF THE LOANS................................................. 11
2.1 Commitment; Loans............................................................. 11
2.2 Borrowings.................................................................... 11
2.3 Note.......................................................................... 12
2.4 Security...................................................................... 12
2.5 Termination and Reduction of Commitment....................................... 12
2.6 Mandatory and Voluntary Payments and Prepayments.............................. 13
2.7 Interest...................................................................... 13
2.8 Method of Payments; Computations.............................................. 14
2.9 Recovery of Payments.......................................................... 14
2.10 Use of Proceeds............................................................... 14
2.11 Increased Costs; Change in Circumstances; Illegality; etc..................... 14
2.12 Taxes......................................................................... 15
ARTICLE III -- CONDITIONS OF BORROWING....................................................... 16
3.1 Conditions to Effectiveness of this Agreement................................. 16
3.2 Conditions to All Loans....................................................... 18
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES................................................ 19
4.1 Corporate Organization and Power.............................................. 19
4.2 Authorization; Enforceability................................................. 19
4.3 No Violation.................................................................. 19
4.4 Governmental Authorization; Permits........................................... 19
4.5 Litigation.................................................................... 20
4.6 Taxes......................................................................... 20
4.7 Subsidiaries.................................................................. 20
4.8 Full Disclosure............................................................... 21
4.9 Margin Regulations............................................................ 21
4.10 No Material Adverse Change.................................................... 21
4.11 Financial Matters............................................................. 21
4.12 Ownership of Properties....................................................... 22
4.13 ERISA......................................................................... 22
4.14 Environmental Matters......................................................... 23
4.15 Compliance With Laws.......................................................... 23
4.16 Regulated Industries.......................................................... 23
4.17 Insurance..................................................................... 24
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE V -- AFFIRMATIVE COVENANTS................................................ 24
5.1 GAAP Financial Statements............................................ 24
5.2 Statutory Financial Statements....................................... 25
5.3 Other Business and Financial Information............................. 26
5.4 Corporate Existence; Franchises; Maintenance of Properties........... 28
5.5 Compliance with Laws................................................. 28
5.6 Payment of Obligations............................................... 28
5.7 Insurance............................................................ 28
5.8 Maintenance of Books and Records; Inspection......................... 29
5.9 Subsidiary Dividends................................................. 29
5.10 Further Assurances................................................... 29
ARTICLE VI -- FINANCIAL COVENANTS.................................................. 29
6.1 Statutory Consolidated Net Income.................................... 29
6.2 Consolidated Net Income.............................................. 30
6.3 Statutory Surplus.................................................... 30
6.4 Risk-Based Capital................................................... 30
ARTICLE VII -- NEGATIVE COVENANTS................................................... 31
7.1 Merger; Consolidation................................................ 31
7.2 Indebtedness......................................................... 31
7.3 Liens................................................................ 31
7.4 Disposition of Assets................................................ 33
7.5 Transactions with Affiliates......................................... 34
7.6 Lines of Business.................................................... 34
7.7 Fiscal Year.......................................................... 34
7.8 Accounting Changes................................................... 35
7.9 Dividends............................................................ 35
ARTICLE VIII -- EVENTS OF DEFAULT.................................................... 35
8.1 Events of Default.................................................... 35
8.2 Remedies; Termination of Commitment, Acceleration, etc............... 37
8.3 Remedies; Set-Off.................................................... 38
ARTICLE IX -- MISCELLANEOUS........................................................ 38
9.1 Fees and Expenses.................................................... 38
9.2 Indemnification...................................................... 38
9.3 Governing Law; Consent to Jurisdiction............................... 39
9.4 Arbitration; Preservation and Limitation of Remedies................. 39
9.5 Notices.............................................................. 40
9.6 Amendments, Waivers, etc............................................. 41
9.7 Participations....................................................... 41
9.8 No Waiver............................................................ 41
9.9 Successors and Assigns............................................... 42
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
9.10 Survival............................................................. 42
9.11 Severability......................................................... 42
9.12 Construction......................................................... 42
9.13 Confidentiality...................................................... 42
9.14 Reliance by Lender................................................... 43
9.15 Counterparts......................................................... 43
9.16 Entire Agreement..................................................... 43
</TABLE>
iii
<PAGE>
EXHIBITS
Exhibit A Form of Note
Exhibit B-1 Form of Assignment
Exhibit B-2 Form of Assignment of Dividends
Exhibit C Form of Notice of Borrowing
Exhibit D-1 Form of Compliance Certificate (for Section 5.1)
Exhibit D-2 Form of Compliance Certificate (for Section 5.2)
Exhibit E Form of Opinion
SCHEDULES
Schedule 4.3 Subsidiaries Subject to Restrictions or Encumbrance
Schedule 4.4(a) Approval or Consent for Credit Agreement
Schedule 4.4(b) Governmental Approvals, Etc.
Schedule 4.5 Litigation Against Borrower
Schedule 4.6 Taxes
Schedule 4.7 Subsidiaries
Schedule 4.11(a) Financial Statements Exceptions
Schedule 4.11(b) Exceptions Regarding Historical Statutory Statements
Section 4.15 Compliance with Law Exceptions
Schedule 7.3 Existing Liens
[others]
iv
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of the 30th day of September, 1999 (this
"Agreement"), is made between VESTA INSURANCE GROUP, INC., a Delaware
corporation with its principal offices in Birmingham, Alabama (the "Borrower")
and THE BANC CORPORATION, a Delaware corporation (the "Lender").
R E C I T A L S
The Borrower and certain banks and other financial institutions are parties
to an Amended and Restated Credit Agreement that was amended and restated as of
April 8, 1997, as further amended on April 14, 1999 (the "Existing Facility"),
providing for the availability to the Borrower of a revolving credit facility in
the aggregate principal amount of $200,000,000 on the terms and subject to the
conditions set forth therein. The Borrower has requested that the Lender provide
to the Borrower a revolving credit facility of $5,000,000 for the purpose of
refinancing the Existing Facility and providing a source of ongoing working
capital for the Borrower, all on the terms and subject to the conditions
hereinafter set forth.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual provisions, covenants and
agreements herein contained, the parties DO HEREBY AGREE as follows:
ARTICLE I
DEFINITIONS
I.1 Defined Terms. For purposes of this Agreement, in addition to the
terms defined elsewhere herein, the following terms shall have the meanings set
forth below (such meanings to be equally applicable to the singular and plural
forms thereof):
"Account Designation Letter" shall mean a letter from the Borrower to the
Lender, duly completed and signed by an Authorized Officer of the Borrower and
in form and substance satisfactory to the Lender, listing any one or more
accounts to which the Borrower may from time to time request the Lender to
forward the proceeds of any Loans made hereunder.
"Affiliate" shall mean, as to any Person, each other Person that directly,
or indirectly through one or more intermediaries, owns or controls, is
controlled by or under common control with, such Person or is a director or
officer of such Person. For purposes of this definition, with respect to any
Person
1
<PAGE>
"control" shall mean (i) the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise, or
(ii) the beneficial ownership of securities or other ownership interests of such
Person having 25% or more of the combined voting power of the then outstanding
securities or other ownership interests of such Person ordinarily (and apart
from rights accruing under special circumstances) having the right to vote in
the election of directors or other governing body of such Person.
"Agreement" shall mean this Credit Agreement, as amended, modified or
supplemented from time to time.
"Annual Statement" shall mean, with respect to any Insurance Subsidiary for
any fiscal year, the annual financial statements of such Insurance Subsidiary as
required to be filed with the Insurance Regulatory Authority of its jurisdiction
of domicile and in accordance with the laws of such jurisdiction, together with
all exhibits, schedules, certificates and actuarial opinions required to be
filed or delivered therewith.
"Assignment" shall mean the Accommodation Collateral Assignment of Certain
Contract Proceeds in the form attached hereto and marked Exhibit B-1, as amended
-----------
and supplemented from time to time, to be executed by J. Gordon Gaines, Inc.
"Assignment of Dividends" shall mean the Assignment of Dividends received
from J. Gordon Gaines, Inc., in the form attached hereto as Exhibit B-2, as
-----------
amended and supplemented from time to time, to be executed by the Borrower.
"Authorized Officer" shall mean any officer of the Borrower authorized by
resolution of the board of directors of the Borrower to take the action
specified herein with respect to such officer and whose signature and incumbency
shall have been certified to the Lender by the secretary or an assistant
secretary of the Borrower.
"Bankruptcy Code" shall mean 11 U.S.C. (S)(S) 101 et seq., as amended from
time to time, and any successor statute.
"Base Rate" shall mean the rate announced from time to time by The Bank as
its prime or base rate (which may not necessarily be its best lending rate).
"Birmingham Investment Group" shall mean that certain limited liability
company organized under the laws of Delaware under the name "Birmingham
Investment Group, L.L.C."
"Borrower Margin Stock" shall mean shares of capital stock of the Borrower
that are held by the Borrower or any of its Subsidiaries and that constitute
Margin Stock.
"Borrowing" shall mean the incurrence by the Borrower on a single date of a
Loan.
"Borrowing Date" shall mean, with respect to any Borrowing, the date upon
which such Borrowing is made.
2
<PAGE>
"Business Day" shall mean any day other than a Saturday or Sunday, a legal
holiday or a day on which commercial banks in Birmingham, Alabama, are required
by law to be closed.
"Commitment" shall have the meaning given to such term in Section 2.1.
"Compliance Certificate" shall mean a fully completed and duly executed
certificate in the form of Exhibit D-1 or D-2 in such form and detail as will
demonstrate compliance with the provisions of Article VI.
"Consolidated Group" shall have the meaning given to such term in the
Consolidated Tax Allocation Agreement.
"Consolidated Net Income" shall mean, for any period, net income (or loss)
for the Borrower and its Subsidiaries for such period, determined on a
consolidated basis in accordance with Generally Accepted Accounting Principles.
"Consolidated Tax Allocation Agreement" shall mean that certain
Consolidated Tax Allocation Agreement dated June 28, 1995, among the Borrower
and the Subsidiaries listed on Exhibit A thereto, without giving effect to any
amendments thereto after the date thereof.
"Contingent Obligation" shall mean, with respect to any Person, any direct
or indirect liability of such Person with respect to any Indebtedness, liability
or other obligation (the "primary obligation") of another Person (the "primary
obligor"), whether or not contingent, (i) to purchase, repurchase or otherwise
acquire such primary obligation or any property constituting direct or indirect
security therefor, (ii) to advance or provide funds (A) for the payment or
discharge of any such primary obligation or (B) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency or any balance sheet item, level of income or financial condition of
the primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor in respect thereof to make payment of such
primary obligation or (iv) otherwise to assure or hold harmless the owner of any
such primary obligation against loss or failure or inability to perform in
respect thereof, provided, however, that, with respect to the Borrower and its
Subsidiaries, the term Contingent Obligation shall not include (y) endorsements
for collection or deposit in the ordinary course of business or (z) obligations
entered into by an Insurance Subsidiary in the ordinary course of its business
under insurance policies or contracts issued by it or to which it is a party,
including reinsurance agreements (and security posted by any such Insurance
Subsidiary in the ordinary course of its business to secure obligations
thereunder).
"Contract" shall mean that certain Amended and Restated Management
Agreement, effective as of January 1, 1999, by and among J. Gordon Gaines, Inc.
and Vesta Fire Insurance Corporation, Sheffield Insurance Corporation, and Vesta
Insurance Corporation (Alabama corporations), Vesta Lloyds Insurance Company, a
Texas Lloyds Company, The Hawaiian Insurance and Guaranty Company, Limited (a
Hawaiian corporation), The Shelby Insurance Company, Affirmative Insurance
Company, Insura Property and Casualty Insurance Company (Ohio corporations), and
Shelby Casualty Insurance Company (an Indiana corporation).
3
<PAGE>
"Covenant Compliance Worksheet" shall mean a fully completed worksheet in
the form of Attachment A to Exhibit D-1 or Exhibit D-2, as applicable, in such
form and detail as will demonstrate compliance with the provisions of Article
VI.
"Credit Documents" shall mean this Agreement, the Note, the Assignment, the
Assignment of Dividends and all other agreements, instruments, documents and
certificates now or hereafter executed and delivered to the Lender by or on
behalf of the Borrower or any of its Subsidiaries with respect to this Agreement
and the transactions contemplated hereby, in each case as amended, modified,
supplemented or restated from time to time.
"Default" shall mean any event or condition that, with the passage of time
or giving of notice, or both, would constitute an Event of Default.
"Dollars" or "$" shall mean dollars of the United States of America.
"Effective Date" shall mean the date and year first above written.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"ERISA Affiliate" shall mean any Person (including any trade or business,
whether or not incorporated) that would be deemed to be under "common control"
with, or a member of the same "controlled group" as, the Borrower or any of its
Subsidiaries, within the meaning of Sections 414(b), (c), (m) or (o) of the
Internal Revenue Code or Section 4001 of ERISA.
"ERISA Event" shall mean any of the following with respect to a Plan or
Multiemployer Plan, as applicable: (i) a Reportable Event with respect to a
Plan or a Multiemployer Plan, (ii) a complete or partial withdrawal by the
Borrower or any ERISA Affiliate from a Multiemployer Plan that results in
liability under Section 4201 or 4204 of ERISA, or the receipt by the Borrower or
any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that
it intends to terminate or has terminated under Section 4041A of ERISA, (iii)
the distribution by the Borrower or any ERISA Affiliate under Section 4041 or
4041A of ERISA of a notice of intent to terminate any Plan or the taking of any
action to terminate any Plan, (iv) the commencement of proceedings by the PBGC
under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Plan, or the receipt by the Borrower or any ERISA
Affiliate of a notice from any Multiemployer Plan that such action has been
taken by the PBGC with respect to such Multiemployer Plan, (v) the institution
of a proceeding by any fiduciary of any Multiemployer Plan against the Borrower
or any ERISA Affiliate to enforce Section 515 of ERISA, which is not dismissed
within thirty (30) days, (vi) the imposition upon the Borrower or any ERISA
Affiliate of any liability under Title IV of ERISA, other than for PBGC premiums
due but not delinquent under Section 4007 of ERISA, or the imposition or
threatened imposition of any Lien upon any assets of the Borrower or any ERISA
Affiliate as a result of any alleged failure to comply with the Internal Revenue
Code or ERISA in respect of any Plan, (vii) the engaging in or otherwise
becoming liable for a nonexempt Prohibited Transaction by the Borrower or any
ERISA
4
<PAGE>
Affiliate, (viii) a violation of the applicable requirements of Section 404 or
405 of ERISA or the exclusive benefit rule under Section 401(a) of the Internal
Revenue Code by any fiduciary of any Plan for which the Borrower or any of its
ERISA Affiliates may be directly or indirectly liable or (ix) the adoption of an
amendment to any Plan that, pursuant to Section 401 (a)(29) of the Internal
Revenue Code or Section 307 of ERISA, would result in the loss of tax-exempt
status of the trust of which such Plan is a part if the Borrower or an ERISA
Affiliate fails to timely provide security to such Plan in accordance with the
provisions of such sections.
"Environmental Claims" shall mean any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations (other than internal reports prepared
by any Person in the ordinary course of its business and not in response to any
third party action or request of any kind) or proceedings relating in any way to
any Environmental Law or any permit issued, or any approval given, under any
such Environmental Law (collectively, "Claims"), including, without limitation,
(i) any and all Claims by Governmental Authorities for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from Hazardous Substances or arising from alleged
injury or threat of injury to human health or the environment.
"Environmental Laws" shall mean any and all federal, state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations, rules of common law and orders of courts or Governmental
Authorities, relating to the protection of human health or occupational safety
or the environment, now or hereafter in effect and in each case as amended from
time to time, including, without limitation, requirements pertaining to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transportation, handling, reporting, licensing, permitting, investigation or
remediation of Hazardous Substances.
"Event of Default" shall have the meaning given to such term in Section
8.1.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time, and any successor statute, and all rules and regulations from
time to time promulgated thereunder.
"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System or any successor thereto.
"$15,000,000 Credit Agreement" shall mean the Credit Agreement of even
date herewith between the Borrower and The Bank.
"Generally Accepted Accounting Principles" shall mean generally accepted
accounting principles, as set forth in the statements, opinions and
pronouncements of the Accounting Principles Board, the American Institute of
Certified Public Accountants and the Financial Accounting Standards Board (or,
to the extent not so set forth in such statements, opinions and pronouncements,
as generally followed by entities similar in size to the Borrower and engaged in
generally similar lines of business), consistently applied and maintained and in
conformity with those used in the preparation of the most recent financial
statements of the Borrower referred to in Section 4.11(a).
5
<PAGE>
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof and any central bank thereof, any municipal,
local, city or county government, and any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Hazardous Substances" shall mean any substances or materials (i) that are
or become defined as hazardous wastes, hazardous substances, pollutants,
contaminants or toxic substances under any Environmental Law, (ii) that are
defined by any Environmental Law as toxic, explosive, corrosive, ignitable,
infectious, radioactive, mutagenic or otherwise hazardous, (iii) the presence of
which require investigation or response under any Environmental Law, (iv) that
constitute a nuisance, trespass or health or safety hazard to Persons or
neighboring properties, (v) that consist of underground or aboveground storage
tanks, whether empty, filled or partially filled with any hazardous substance or
(vi) that contain, without limitation, asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or wastes, crude oil, nuclear fuel, natural gas or synthetic gas.
"Historical Statutory Statements" shall have the meaning given to such term
in Section 4.11(b).
"Income Tax Benefits" shall mean an amount equal to 100% of the portion of
the federal or state income tax benefits received on a quarterly basis by the
Borrower that, pursuant to the Consolidated Tax Allocation Agreement, may be
retained by the Borrower and not paid over to any other member of the
Consolidated Group.
"Indebtedness" shall mean, with respect to any Person (without
duplication), (i) all indebtedness of such Person for borrowed money or in
respect of loans or advances, (ii) all obligations of such Person evidenced by
notes, bonds, debentures or similar instruments, (iii) all reimbursement
obligations of such Person with respect to surety bonds, letters of credit and
bankers' acceptances (in each case, whether or not drawn or matured and in the
stated amount thereof), (iv) all obligations of such Person to pay the deferred
purchase price of property or services, (v) all indebtedness created or arising
under any conditional sale or other title retention agreement with respect to
property acquired by such Person, (vi) all obligations of such Person as lessee
under leases that are or should be, in accordance with Generally Accepted
Accounting Principles, recorded as capital leases, to the extent such
obligations are required to be so recorded, (vii) all obligations of such Person
to purchase, redeem, retire, defease or otherwise make any payment in respect of
any capital stock or other equity securities that, by their stated terms (or by
the terms of any equity securities issuable upon conversion thereof or in
exchange therefor), or upon the occurrence of any event, mature or are
mandatorily redeemable, or are redeemable at the option of the holder thereof,
in whole or in part, at any time prior to the Maturity Date, (viii) all
Contingent Obligations of such Person and (ix) all indebtedness referred to in
clauses (i) through (viii) above secured by any Lien on any property or asset
owned or held by such Person regardless of whether the indebtedness secured
thereby shall have been assumed by such Person or is nonrecourse to the credit
of such Person, and with respect to the Borrower and its Subsidiaries shall
include, without limitation (but without duplication), the Junior Subordinated
Debentures, the beneficial interests of the Trust in the Junior Subordinated
and the Borrower's guarantee to the holders of the Trust securities of all of
the Trust's obligations under the Trust Securities.
6
<PAGE>
"Insurance Regulatory Authority" shall mean, with respect to any Insurance
Subsidiary, the insurance department or similar Governmental Authority charged
with regulating insurance companies or insurance holding companies, in its state
of domicile and, to the extent that it has regulatory authority over such
Insurance Subsidiary, in each other jurisdiction in which such Insurance
Subsidiary conducts business or is licensed to conduct business.
"Insurance Subsidiary" shall mean any Subsidiary of the Borrower the
ability of which to pay dividends is regulated by an Insurance Regulatory
Authority or that is otherwise required to be regulated thereby in accordance
with the applicable Requirements of Law of its state of domicile.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any successor statute, and all rules and
regulations from time to time promulgated thereunder.
"Junior Subordinated Debentures" shall mean the Borrower's 8.525% Junior
Subordinated Deferrable Interest Debentures due January 15, 2027, issued
pursuant to the Indenture, dated as of January 31, 1997, between the Borrower
and The National Bank of North Carolina, as Debenture Trustee, as amended,
modified or supplemented from time to time.
"Lender" shall mean The Banc Corporation and its successors and assigns.
"Licenses" shall have the meaning given to such term in Section 4.4(c).
"Lien" shall mean any mortgage, pledge, hypothecation, assignment, security
interest, lien (statutory or otherwise), preference, priority, charge or other
encumbrance of any nature, whether voluntary or involuntary, including, without
limitation, the interest of any vendor or lessor under any conditional sale
agreement, title retention agreement, capital lease or any other lease or
arrangement having substantially the same effect as any of the foregoing.
"Loans" shall have the meaning given to such term in Section 2.1.
"Margin Stock" shall have the meaning given to such term in Regulation U.
"Material Adverse Change" shall mean a material adverse change in the
condition (financial or otherwise), operations, business, properties or
financial prospects of the Borrower or the Borrower and its Subsidiaries, taken
as a whole.
"Material Adverse Effect" shall mean a material adverse effect upon (i) the
condition (financial or otherwise), operations, business, properties or
financial prospects of the Borrower or the Borrower and its Subsidiaries, taken
as a whole, (ii) the ability of the Borrower to perform its obligations under
this Agreement or any of the other Credit Documents or (iii) the legality,
validity or enforceability of this Agreement or any of the other Credit
Documents or the rights and remedies of the Lender hereunder and thereunder.
"Maturity Date" shall mean September 29, 2001.
7
<PAGE>
"Moody's" shall mean Moody's Investors Service, Inc., its successors and
assigns.
"Multiemployer Plan" shall mean any "multiemployer plan" within the meaning
of Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate
makes, is making or is obligated to make contributions or has made or been
obligated to make contributions.
"NAIC" shall mean the National Association of Insurance Commissioners and
any successor thereto.
"Note" shall mean the promissory note of the Borrower in substantially the
form of Exhibit A, together with any amendments, modifications and supplements
thereto, substitutions therefore and restatements thereof.
"Notice of Borrowing" shall have the meaning given to such term in Section
2.2(a).
"Obligations" shall mean all principal of and interest (including, to the
greatest extent permitted by law, post-petition interest) on the Loans and all
fees, expenses, indemnities and other obligations owing, due or payable at any
time by the Borrower to the Lender or any other Person entitled thereto, under
this Agreement or any of the other Credit Documents.
"PBGC" shall mean the Pension Benefit Guaranty Corporation and any
successor thereto.
"Participant" shall have the meaning given to such term in Section 9.7(a).
"Permitted Liens" shall have the meaning given to such term in Section 7.3.
"Person" shall mean any corporation, association, joint venture,
partnership, limited liability company, organization, business, individual,
trust, government or agency or political subdivision thereof or any other legal
entity.
"Plan" shall mean any "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA that is subject to the provisions of Title IV of ERISA
(other than a Multiemployer Plan) and to which the Borrower or any ERISA
Affiliate may have any liability.
"Prohibited Transaction" shall mean any transaction described in (i)
Section 406 of ERISA that is not exempt by reason of Section 408 of ERISA or by
reason of a Department of Labor prohibited transaction individual or class
exemption or (ii) Section 4975(c) of the Internal Revenue Code that is not
exempt by reason of Section 4975(c)(2) or 4975(d) of the Internal Revenue Code.
"Quarterly Statement" shall mean, with respect to any Insurance Subsidiary
for any fiscal quarter, the quarterly financial statements of such Insurance
Subsidiary as required to be filed with the Insurance Regulatory Authority of
its jurisdiction of domicile, together with all exhibits, schedules,
certificates and actuarial opinions required to be filed or delivered therewith.
8
<PAGE>
"Regulations D, G, T, U and X" shall mean Regulations D, G, T, U and X,
respectively, of the Federal Reserve Board, and any successor regulations.
"Reportable Event" shall mean (i) any "reportable event" within the meaning
of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of
ERISA has not been waived by the PBGC (including any failure to meet the minimum
funding standard of, or timely make any required installment under, Section 412
of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance
of any waivers in accordance with Section 412(d) of the Internal Revenue Code),
(ii) any such "reportable event" subject to advance notice to the PBGC under
Section 4043(b)(3) of ERISA, (iii) any application for a funding waiver or an
extension of any amortization period pursuant to Section 412 of the Internal
Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of
ERISA.
"Requirement of Law" shall mean, with respect to any Person, the charter,
articles or certificate of organization or incorporation and bylaws or other
organizational or governing documents of such Person, and any statute, law,
treaty, rule, regulation, order, decree, writ, injunction or determination of
any arbitrator or court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject or otherwise pertaining to any or all of the
transactions contemplated by this Agreement and the other Credit Documents.
"Significant Subsidiary" shall mean, at the relevant time of determination,
any Subsidiary of the Borrower having (after the elimination of intercompany
accounts) (i) assets constituting at least 10% of the total assets of the
Borrower and its Subsidiaries on a consolidated basis, (ii) revenues
constituting at least 10% of the total revenues of the Borrower and its
Subsidiaries on a consolidated basis, or (iii) net earnings constituting at
least 10% of the total net earnings of the Borrower and its Subsidiaries on a
consolidated basis, in each case as determined as of the date of the financial
statements of the Borrower and its Subsidiaries most recently delivered under
Section 5.1 prior to such time (or, with regard to determinations at any time
prior to the initial delivery of financial statements under Section 5.1, as of
the date of the most recent financial statements referred to in Section
4.11(a)).
"Standard & Poor's" shall mean Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, its successors and assigns.
"Statutory Accounting Principles" shall mean, with respect to any Insurance
Subsidiary, the statutory accounting practices prescribed or permitted by the
relevant Insurance Regulatory Authority of its state of domicile, consistently
applied and maintained and in conformity with those used in the preparation of
the most recent Historical Financial Statements.
"Statutory Consolidated Net Income" shall mean, for any period, net income
(or loss) for the VFIC and the other Insurance Subsidiaries for such period,
determined on a consolidated basis in accordance with Statutory Accounting
Principles.
"Statutory Surplus" shall mean the total amount reported on line 27, page
3, column 1 of the Annual Statement, or an amount determined in a consistent
manner in accordance with Statutory Accounting Principles for any date other
than one as of which an Annual Statement is prepared.
9
<PAGE>
Notwithstanding the foregoing, if the format of the Annual Statement is changed
in future years so that different information is contained in such line or such
line no longer exists, it is understood that the foregoing shall refer to
information consistent with that reported on the referenced line in the 1998
Annual Statement.
"Subsidiary" shall mean, with respect to any Person, any corporation or
other Person of which more than fifty percent (50%) of the outstanding capital
stock having ordinary voting power to elect a majority of the board of
directors, in the case of a corporation, or of the ownership or beneficial
interests, in the case of a Person not a corporation, is at the time, directly
or indirectly, owned or controlled by such Person and one or more of its other
Subsidiaries or a combination thereof (irrespective of whether, at the time,
securities of any other class or classes of any such corporation or other Person
shall or might have voting power by reason of the happening of any contingency).
When used without reference to a parent entity, the term "Subsidiary" shall be
deemed to refer to a Subsidiary of the Borrower.
"Termination Date" shall mean the Maturity Date or such earlier date of
termination of the Commitment pursuant to Section 2.5 or Section 8.2.
"Transaction Expenses" shall mean all costs and expenses of, and fees
payable to, the Lender that are required to be reimbursed or paid by the
Borrower pursuant to Section 9.1 of the Credit Agreement.
"Trust" shall mean Vesta Capital Trust I, a Delaware statutory business
trust.
"Trust Securities" shall mean the 8.525% Capital Securities issued by the
Trust and representing preferred beneficial interests in the Trust.
"Unfunded Pension Liability" shall mean, with respect to any Plan or
Multiemployer Plan, the excess of its benefit liabilities under Section
4001(a)(16) of ERISA over the current value of its assets, determined in
accordance with the applicable assumptions used for funding under Section 412 of
the Code for the applicable plan year.
"Unutilized Commitment" shall mean, at any time, (i) the Commitment at such
time less (ii) the aggregate principal amount of Loans outstanding at such time.
"VFIC" shall mean Vesta Fire Insurance Corporation, an Alabama corporation.
"Wholly Owned" shall mean, with respect to any Subsidiary of any Person,
that 100% of the outstanding capital stock or other ownership interests of such
Subsidiary is owned, directly or indirectly, by such Person.
I.2 Accounting Terms. Except as specifically provided otherwise in this
Agreement, all accounting terms used herein that are not specifically defined
shall have the meanings customarily given them, and all financial computations
hereunder shall be made, in accordance with Generally Accepted Accounting
Principles (or, to the extent that such terms apply solely to any Insurance
Subsidiary or if otherwise expressly required, Statutory Accounting Principles).
Notwithstanding the foregoing, in the event that any changes in Generally
Accepted Accounting Principles or Statutory Accounting Principles after the date
hereof are required to be applied to the transactions described herein and would
affect the
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computation of the financial covenants contained in Sections 6.1 through 6.4, as
applicable, such changes shall be followed only from and after the date this
Agreement shall have been amended to take into account any such changes.
References to amounts on particular exhibits, schedules, lines, pages and
columns of an Annual Statement or Quarterly Statement are based on the format
promulgated by the NAIC for the 1995 Annual Statements and Quarterly Statements.
In the event such format is changed in future years so that different
information is contained in such items or they no longer exist, or if the Annual
Statement or Quarterly Statement is replaced by the NAIC or by any Insurance
Regulatory Authority after the date hereof such that different forms of
financial statements are required to be furnished by the Insurance Subsidiaries
in lieu thereof, such references shall be to information consistent with that
reported in the referenced item in the 1995 Annual Statements or Quarterly
Statements, as the case may be.
I.3 Other Terms; Construction. Unless otherwise specified or unless the
context otherwise requires, all references herein to sections, annexes,
schedules and exhibits are references to sections, annexes, schedules and
exhibits in and to this Agreement, and all terms defined in this Agreement shall
have the defined meanings when used in any other Credit Document or any
certificate or other document made or delivered pursuant hereto.
ARTICLE II
AMOUNT AND TERMS OF THE LOANS
II.1 Commitment; Loans. The Lender agrees, subject to and on the terms and
conditions of this Agreement, to make loans (each, a "Loan," and collectively,
the "Loans") to the Borrower, from time to time on any Business Day during the
period from and including the Effective Date to but not including the
Termination Date, in an aggregate principal amount at any time outstanding not
exceeding $5,000,000 (as such amount may be permanently reduced in accordance
with Section 2.5(b) the "Commitment"), provided that no Borrowing of Loans shall
be made if, immediately after giving effect thereto, the aggregate principal
amount of Loans outstanding at such time would exceed the Commitment. Subject to
and on the terms and conditions of this Agreement, the Borrower may borrow,
repay and reborrow Loans.
II.2 Borrowings. (a) In order to make a Borrowing, the Borrower will give
the Lender written notice not later than 10:00 a.m., Birmingham time, one (1)
Business Day prior to each Borrowing; provided, however, that a request for a
Borrowing to be made on the Effective Date may, at the discretion of the Lender,
be given later than the time specified therefor as set forth hereinabove. Each
such notice (each, a "Notice of Borrowing") shall be irrevocable, shall be given
in the form of Exhibit C and shall specify (i) the aggregate principal amount of
the Loans to be made pursuant to such Borrowing, and (ii) the requested
Borrowing Date, which shall be a Business Day. Notwithstanding anything to the
contrary contained herein, the aggregate principal amount of each Borrowing
shall not be less than $1,000,000 or, if greater, an integral multiple of
$500,000 in excess thereof (or, if less, in the amount of the Unutilized
Commitment).
(b) Not later than noon, Birmingham time, on the requested Borrowing
Date, the Lender will make the requested amount available to the Borrower
subject to the provisions of subsection (a) hereof and Section 2.1.
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(c) The Borrower hereby authorizes the Lender to disburse the proceeds of
each Borrowing in accordance with the terms of any written instructions from any
of the Authorized Officers, provided that the Lender shall not be obligated
under any circumstances to forward amounts to any account not listed in an
Account Designation Letter. The Borrower may at any time deliver to the Lender
an Account Designation Letter listing any additional accounts or deleting any
accounts listed in a previous Account Designation Letter.
II.3 Note. (a) The Loan shall be evidenced by a Note appropriately
completed in substantially the form of Exhibit A.
(b) The Note shall (i) be executed by the Borrower, (ii) be payable to
the order of the Lender, (iii) be dated as of the Effective Date, (iv) be in a
stated principal amount equal to the Commitment, (v) bear interest in accordance
with the provisions of Section 2.7, as the same may be applicable to the Loans
made by the Lender from time to time, and (vi) be entitled to all of the
benefits of this Agreement and the other Credit Documents and subject to the
provisions hereof and thereof.
(c) The Lender will record on its internal records the amount of each
Loan made by it and each payment received by it in respect thereof and will, in
the event of any transfer of the Note, either endorse on the reverse side
thereof or on a schedule attached thereto (or any continuation thereof) the
outstanding principal amount of the Loans evidenced thereby as of the date of
transfer or provide such information on a schedule to the documents relating to
such transfer; provided, however, that the failure of the Lender to make any
such recordation or provide any such information, or any error therein, shall
not affect the Borrower's obligations under this Agreement or the Notes.
II.4 Security. The Loans shall be secured by an assignment of the proceeds
under the Contract and the assignment of dividends and other payments paid by J.
Gordon Gaines, Inc. to the Borrower with respect to proceeds under the Contract.
II.5 Termination and Reduction of Commitment. (a) The Commitment shall be
automatically and permanently terminated on the Maturity Date unless sooner
terminated pursuant to subsection (b) below or Section 8.2.
(b) At any time and from time to time after the date hereof, upon not
less than five (5) Business Days' prior written notice to the Lender, the
Borrower, without premium or penalty, may terminate in whole or reduce in part
the Unutilized Commitment, provided that any such partial reduction shall be in
an aggregate amount of not less than $1,000,000 or, if greater, an integral
multiple thereof. The amount of any termination or reduction made under this
subsection (b) may not thereafter be reinstated.
II.6 Mandatory and Voluntary Payments and Prepayments. (a) Except to the
extent due or made sooner pursuant to the provisions of this Agreement, the
Borrower will repay the aggregate outstanding principal amount of the Loans in
full on the Maturity Date.
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(b) In the event that, at any time, the aggregate principal amount of
Loans outstanding at such time shall exceed the Commitment at such time (after
giving effect to any concurrent termination or reduction thereof), the Borrower
will immediately prepay the outstanding principal amount of the Loans in the
amount of such excess.
(c) At any time and from time to time, the Borrower shall have the right
to prepay the Loans, in whole or in part, without premium or penalty, upon
written notice to the Lender given not later than noon, Birmingham time, one (1)
Business Day prior to each intended prepayment of Loans, provided that each
partial prepayment shall be in an aggregate principal amount of not less than
$1,000,000 or, if greater, an integral multiple of $500,000 in excess thereof.
Each such notice shall specify the proposed date of such prepayment and the
aggregate principal amount of the Loan to be prepaid and shall be irrevocable
and shall bind the Borrower to make such prepayment on the terms specified
therein. Amounts prepaid pursuant to this subsection (c) may be reborrowed,
subject to the terms and conditions of this Agreement.
II.7 Interest. (a) The Borrower will pay interest in respect of the unpaid
principal amount of each Loan, from the date of Borrowing thereof until such
principal amount shall be paid in full, at the Base Rate.
(b) Any principal amounts of the Loans not paid when due and, to the
greatest extent permitted by law, all interest accrued on the Loans and all
other fees and amounts hereunder not paid when due (whether at maturity,
pursuant to acceleration or otherwise), shall bear interest at a rate per annum
equal to the Base Rate plus 3% per annum and such default interest shall be
payable on demand. To the greatest extent permitted by law, interest shall
continue to accrue after the filing by or against the Borrower of any petition
seeking any relief in bankruptcy or under any law pertaining to insolvency or
debtor relief.
(c) Accrued (and theretofore unpaid) interest shall be payable as
follows:
(i) in arrears on the last Business Day of each calendar month;
provided, that in the event the Loan is repaid or prepaid in full and the
Commitment has been terminated, then accrued interest in respect of the
Loan shall be payable together with such repayment or prepayment on the
date thereof, and
(ii) at maturity (whether pursuant to acceleration or otherwise) and,
after maturity, on demand.
(d) Nothing contained in this Agreement or in any other Credit Document
shall be deemed to establish or require the payment of interest to the Lender at
a rate in excess of the maximum rate permitted by applicable law. If the amount
of interest payable on any interest payment date would exceed the maximum amount
permitted by applicable law to be charged by the Lender, the amount of interest
payable on such interest payment date shall be automatically reduced to such
maximum permissible amount. In the event of any such reduction affecting the
Lender, if from time to time thereafter the amount of interest payable for the
account of the Lender on any interest payment date would be less than the
maximum amount permitted by applicable law to be charged by the Lender, then the
amount of interest payable for its account on such subsequent interest payment
date shall be automatically increased to such maximum permissible amount,
provided that at no time shall the aggregate amount by which interest paid for
the
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account of the Lender has been increased pursuant to this sentence exceed the
aggregate amount by which interest paid for its account has theretofore been
reduced pursuant to the previous sentence.
II.8 Method of Payments; Computations. (a) All payments by the Borrower
hereunder shall be made without setoff, counterclaim or other defense, in
Dollars and in immediately available funds to the Lender at its office referred
to in Section 9.5, prior to 11:00 a.m., Birmingham time, on the date payment is
due. Any payment made as required hereinabove, but after 11:00 a.m., Birmingham
time, shall be deemed to have been made on the next succeeding Business Day. If
any payment falls due on a day that is not a Business Day, then such due date
shall be extended to the next succeeding Business Day, and such extension of
time shall then be included in the computation of payment of interest, fees or
other applicable amounts.
(b) The Lender may, but shall not be obligated to, debit the amount of
any such payment not made as and when required hereunder to any ordinary deposit
account of the Borrower with the Lender (with prompt notice to the Lender and
the Borrower); provided, however, that the failure to give such notice shall not
affect the validity of such debit by the Lender.
(c) All computations of interest and fees hereunder shall be made on the
basis of a year consisting of 360 days and the actual number of days (including
the first day, but excluding the last day) elapsed.
II.9 Recovery of Payments. The Borrower agrees that to the extent the
Borrower makes a payment or payments to or for the account of the Lender, which
payment or payments or any part thereof are subsequently invalidated, declared
to be fraudulent or preferential, set aside or required to be repaid to a
trustee, receiver or any other party under any bankruptcy, insolvency or similar
state or federal law, common law or equitable cause, then, to the extent of such
payment or repayment, the Obligation intended to be satisfied shall be revived
and continued in full force and effect as if such payment had not been received.
II.10 Use of Proceeds. The proceeds of the Loans shall be used first to
repay the Borrower's Obligations under the Existing Facility and then to provide
a source of ongoing working capital for the Borrower.
II.11 Increased Costs; Change in Circumstances; Illegality; etc. (a) If, at
any time after the date hereof and from time to time, the introduction of or any
change in any applicable law, rule or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof, or compliance by the Lender with any
guideline or request from any such Governmental Authority (whether or not having
the force of law), shall (i) subject the Lender to any tax or other charge, or
change the basis of taxation of payments to the Lender, (ii) impose, modify or
deem applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by, the
Lender, or (iii) impose on the Lender any other condition affecting its Loans,
and the result of any of the foregoing shall be to increase the cost to the
Lender of making or maintaining any Loans or to reduce the amount of any sum
received or receivable by the Lender hereunder, the Borrower will, promptly upon
demand therefor by the Lender, pay to the
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Lender such additional amounts, excluding amounts in respect of income,
franchise and excise taxes as shall compensate the Lender for such increase in
costs or reduction in return.
(b) If, at any time after the date hereof and from time to time, the
Lender shall have reasonably determined that the introduction of or any change
in any applicable law, rule or regulation regarding capital adequacy or in the
interpretation or administration thereof by any Governmental Authority charged
with the interpretation or administration thereof, or compliance by the Lender
with any guideline or request from any such Governmental Authority (whether or
not having the force of law), has or would have the effect, as a consequence of
the Lender's Commitment or Loans hereunder, of reducing the rate of return on
the capital of the Lender or any Person controlling the Lender to a level below
that which the Lender or controlling Person could have achieved but for such
introduction, change or compliance (taking into account the Lender's or
controlling Person's policies with respect to capital adequacy), the Borrower
will, promptly upon demand therefor by the Lender therefor, pay to the Lender
such additional amounts, excluding amounts in respect of income, franchise and
excise taxes, as will compensate the Lender or controlling Person for such
reduction in return.
(c) Determinations by the Lender for purposes of this Section 2.11 of any
increased costs, reduction in return, market contingencies, illegality or any
other matter shall, absent manifest error, be conclusive, provided that such
determinations are made in good faith. No failure by the Lender at any time to
demand payment of any amounts payable under this Section 2.11 shall constitute a
waiver of its right to demand payment of any additional amounts arising at any
subsequent time. Nothing in this Section 2.11 shall require or be construed to
require the Borrower to pay any interest, fees, costs or other amounts in excess
of that permitted by applicable law.
II.12 Taxes. (a) Any and all payments by the Borrower hereunder or under
any Note shall be made, in accordance with the terms hereof and thereof, free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities with
respect thereto, other than net income, excise and franchise taxes imposed on
the Lender by the United States or by the jurisdiction under the laws of which
the Lender, as the case may be, is organized or in which its principal office is
located, or any political subdivision or taxing authority thereof (all such
non-excluded taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder or under any Note to the Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section
2.12), the Lender, as the case may be, receives an amount equal to the sum it
would have received had no such deductions been made, (ii) the Borrower will
make such deductions, (iii) the Borrower will pay the full amount deducted to
the relevant taxation authority or other authority in accordance with applicable
law and (iv) the Borrower will deliver to the Lender evidence of such payment.
(b) The Borrower will indemnify the Lender for the full amount of Taxes
(including, without limitation, any Taxes imposed by any jurisdiction on amounts
payable under this Section 2.12) paid by the Lender and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally asserted. This
indemnification shall be made within 30 days from the date the Lender, makes
written demand therefor.
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(c) The Lender agrees that if it subsequently recovers, or receives a
permanent net tax benefit with respect to, any amount of Taxes (i) previously
paid by it and as to which it has been indemnified by or on behalf of the
Borrower or (ii) previously deducted by the Borrower (including, without
limitation, any Taxes deducted from any additional sums payable under clause (i)
of subsection (a) above), the Lender shall reimburse the Borrower to the extent
of the amount of any such recovery or permanent net tax benefit (but only to the
extent of indemnity payments made, or additional amounts paid, by or on behalf
of the Borrower under this Section 2.12 with respect to the Taxes giving rise to
such recovery or tax benefit); provided, however, that the Borrower, upon the
request of the Lender, agrees to repay to the Lender the amount paid over to the
Borrower (together with any penalties, interest or other charges), in the event
the Lender is required to repay such amount to the relevant taxing authority or
other Governmental Authority. The determination by the Lender of the amount of
any such recovery or permanent net tax benefit shall, in the absence of manifest
error, be conclusive and binding.
ARTICLE III
CONDITIONS OF BORROWING
III.1 Conditions to Effectiveness of this Agreement. The effectiveness of
this Agreement is subject to the satisfaction of the following conditions
precedent:
(a) The Lender shall have received the following, each dated the
Effective Date (unless otherwise specified):
(i) the Note in the amount of the Commitment and duly completed and
executed by the Borrower;
(ii) the Assignment executed by J. Gordon Gaines, Inc.;
(iii) the Assignment of Dividends executed by the Borrower;
(iv) payment of a one-time fee of one percent of the Commitment;
(v) a certificate, signed by the chief executive officer, vice
president--finance or treasurer of the Borrower, in form and substance
satisfactory to the Lender, certifying that (A) all representations and
warranties of the Borrower contained in this Agreement and the other Credit
Documents are true and correct as of the Effective Date, both immediately
before and after giving effect to the consummation of the transactions
contemplated by this Agreement, the making of any Loans hereunder on the
Effective Date and the application of the proceeds thereof, (B) no Default
or Event of Default has occurred and is continuing, both immediately before
and after giving effect to the consummation of the transactions
contemplated by this Agreement, the making of any Loans hereunder on the
Effective Date and the application of the proceeds thereof, (C) there are
no insurance regulatory proceedings pending or, to such individual's
knowledge, threatened against any of the Insurance Subsidiaries in any
jurisdiction that, if adversely determined, would be reasonably likely to
have a Material Adverse Effect, and (D) both
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immediately before and after giving effect to the consummation of the
transactions contemplated by this Agreement, no Material Adverse Change has
occurred since December 31, 1998, and there exists no event, condition or
state of facts that could reasonably be expected to result in a Material
Adverse Change;
(vi) a certificate of the secretary or an assistant secretary of the
Borrower, in form and substance satisfactory to the Lender, certifying (A)
to the effect that attached thereto is a true and complete copy of the
Borrower's certificate of incorporation, certified as of a recent date by
the Secretary of State of Delaware, and that the same has not been amended
since the date of such certification, and attaching such copy, (B) to the
effect that attached thereto is a true and complete copy of the Borrower's
bylaws, as then in effect and as in effect at all times from the date on
which the resolutions referred to in clause (C) below were adopted to and
including the date of such certificate, and attaching such copy), and (C)
that attached thereto is a true and complete copy of resolutions adopted by
the Borrower's board of directors authorizing the execution, delivery and
performance of this Agreement and the other Credit Documents to which it is
a party, and attaching such copy; and
(vii) a favorable opinion of an attorney or firm of attorneys duly
licensed to practice law in the jurisdiction the laws of which are
applicable to the legal matters in question and who is not an employee of
the Borrower or an Affiliate of the Borrower and addressed to the Lender,
in substantially the form of Exhibit E and addressing such other matters as
the Lender may reasonably request.
(b) The Lender shall have received (i) a certificate as of a recent date
of the good standing of the Borrower under the laws of the State of Delaware,
from the Secretary of State of Delaware, (ii) a certificate as of a recent date
of the qualification of the Borrower to conduct business as a foreign
corporation, from the Secretary of State of Alabama, and (iii) a certificate as
of a recent date of the good standing of the Borrower, from the Department of
Revenue of the State of Alabama.
(c) All legal matters, documentation and corporate or other proceedings
incident to the transactions contemplated hereby shall be reasonably acceptable
to the Lender; all approvals, permits and consents of any Governmental
Authorities (including, without limitation, all relevant Insurance Regulatory
Authorities) or other Persons required in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby shall have been obtained (without the imposition of conditions that are
not reasonably acceptable to the Lender), and all related filings, if any, shall
have been made, and all such approvals, permits, consents and filings shall be
in full force and effect and the Lender shall have received such copies thereof
as it shall have reasonably requested; all applicable waiting periods shall have
expired without any adverse action being taken by any Governmental Authority
having jurisdiction; and no action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before, and no
order, injunction or decree shall have been entered by, any court or other
Governmental Authority, in each case to enjoin, restrain or prohibit, to obtain
substantial damages in respect of, or that is otherwise related to or arises out
of, this Agreement or the consummation of the transactions contemplated hereby,
or that, in the reasonable opinion of the Lender, would otherwise be reasonably
likely to have a Material Adverse Effect.
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(d) Since December 31, 1998, both immediately before and after giving
effect to the consummation of the transactions contemplated by this Agreement,
there shall not have occurred any Material Adverse Change or any event,
condition or state of facts that could reasonably be expected to result in a
Material Adverse Change.
(e) The Borrower shall have paid all fees and expenses of the Lender
required hereunder or under any other Credit Document to be paid on or prior to
the Effective Date (including reasonable fees and expenses of the Lender's
counsel) in connection with this Agreement and the transactions contemplated
hereby.
(f) Each of the representations and warranties contained in Article IV
and in the other Credit Documents shall be true and correct on and as of the
Effective Date with the same effect as if made on and as of such date (except to
the extent any such representation or warranty is expressly stated to have been
made as of a specific date, in which case such representation or warranty shall
be true and correct as of such date).
(g) No Default or Event of Default shall have occurred and be continuing.
(h) The Lender shall have received such other documents, certificates,
opinions and instruments as it shall have reasonably requested.
III.2 Conditions to All Loans. The obligation of the Lender to make any
Loans hereunder is subject to the satisfaction of the following conditions
precedent on the relevant Borrowing Date:
(a) The Lender shall have received a Notice of Borrowing in
accordance with Section 2.2;
(b) Each of the representations and warranties contained in Article
IV and in the other Credit Documents shall be true and correct on and as of
the relevant Borrowing Date with the same effect as if made on and as of
such date, both immediately before and after giving effect to the Loans to
be made on such date (except to the extent any such representation or
warranty is expressly stated to have been made as of a specific date, in
which case such representation or warranty shall be true and correct as of
such date); and
(c) No Default or Event of Default shall have occurred and be
continuing on such date, both immediately before and after giving effect to
the Loans to be made on such date.
Each giving of a Notice of Borrowing, and the consummation of each
Borrowing, shall be deemed to constitute a representation by the Borrower that
the statements contained in subsections (b) and (c) above are true, both as of
the date of such notice or request and as of the relevant Borrowing Date.
ARTICLE IV
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REPRESENTATIONS AND WARRANTIES
To induce the to enter into this Agreement and to induce the Lender to
extend the credit contemplated hereby, the Borrower represents and warrants to
the Lender as follows:
IV.1 Corporate Organization and Power. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (ii) has the
full corporate power and authority to execute, deliver and perform the Credit
Documents to which it is or will be a party, to own and hold its property and to
engage in its business as presently conducted, and (iii) is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
where the nature of its business or the ownership of its properties requires it
to be so qualified.
IV.2 Authorization; Enforceability. The Borrower has taken all necessary
corporate action to execute, deliver and perform each of the Credit Documents to
which it is or will be a party, and has, or on the Effective Date (or any later
date of execution and delivery) will have, validly executed and delivered each
of the Credit Documents to which it is or will be a party. This Agreement
constitutes, and each of the other Credit Documents upon execution and delivery
by the Borrower will constitute, the legal, valid and binding obligation of the
Borrower, enforceable against it in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally or by
general equitable principles.
IV.3 No Violation. Except as set forth in Schedule 4.3 attached hereto,
the execution, delivery and performance by the Borrower of this Agreement and
each of the other Credit Documents, and compliance by it with the terms hereof
and thereof, do not and will not (i) violate any provision of its certificate of
incorporation or bylaws or contravene any other Requirement of Law applicable to
it, (ii) conflict with, result in a breach of or constitute (with notice, lapse
of time or both) a default under any material indenture, agreement or other
instrument to which it is a party, by which it or any of its properties is bound
or to which it is subject, or (iii) result in or require the creation or
imposition of any Lien upon any of its properties or assets. Except as set forth
on Schedule 4.3 attached hereto, no Subsidiary is subject to any restriction or
encumbrance on its ability to make dividend payments or other distributions in
respect of its capital stock, to make loans or advances to the Borrower or any
other Subsidiary, or to transfer any of its assets or properties to the Borrower
or any other Subsidiary, in each case other than such restrictions or
encumbrances existing under or by reason of the Credit Documents or applicable
Requirements of Law.
IV.4 Governmental Authorization; Permits. (a) Except as set forth on
Schedule 4.4(a) attached hereto, no consent, approval, authorization or other
action by, notice to, or registration or filing with, any Governmental Authority
or other Person is or will be required as a condition to or otherwise in
connection with the due execution, delivery and performance by the Borrower of
this Agreement or any of the other Credit Documents or the legality, validity or
enforceability hereof or thereof.
(b) Except as set forth in Schedule 4.4(b) attached hereto, each of the
Borrower and its Subsidiaries has, and is in good standing with respect to, all
governmental approvals, licenses, permits and authorizations necessary to
conduct its business as presently conducted (collectively, the "Licenses") and
to own or lease and operate its properties, except for those the failure to
obtain which would not be reasonably likely, individually or in the aggregate,
to have a Material Adverse Effect. To the knowledge
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of the Borrower, except as set forth on Schedule 4.4(b), (i) no License is the
subject of a proceeding for suspension, revocation or limitation or any similar
proceedings, (ii) there is no sustainable basis for such a suspension,
revocation or limitation, and (iii) no such suspension, revocation or limitation
is threatened by any relevant Insurance Regulatory Authority, that, in each
instance under (i), (ii) and (iii) above, would be reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect.
(c) Upon written request, Borrower will provide with respect to each
Insurance Subsidiary a list of all of the jurisdictions in which such Insurance
Subsidiary holds licenses (including, without limitation, licenses or
certificates of authority from relevant Insurance Regulatory Authorities),
permits or authorizations to transact insurance and reinsurance business
(collectively, the "Licenses"), indicating the line or lines of insurance in
which each such Insurance Subsidiary is permitted to be engaged with respect to
each License therein listed, and attaching copies of all Licenses in the States
of Alabama, Hawaii, Indiana, Ohio and Texas.
IV.5 Litigation. Except as set forth on Schedule 4.5, there are no
actions, investigations, suits or proceedings pending or, to the knowledge of
the Borrower, threatened, at law, in equity or in arbitration, before any court,
other Governmental Authority or other Person, (i) against or affecting the
Borrower, any of its Subsidiaries or any of their respective properties that
would, if adversely determined, be reasonably likely to have a Material Adverse
Effect, or (ii) with respect to this Agreement or any of the other Credit
Documents.
IV.6 Taxes. Except as set forth in Schedule 4.6 attached hereto, each of
the Borrower and its Subsidiaries has timely filed all federal, state and local
tax returns and reports required to be filed by it and has paid all taxes,
assessments, fees and other charges levied upon it or upon its properties that
are shown thereon as due and payable, other than those that are being contested
in good faith and by proper proceedings and for which adequate reserves have
been established in accordance with Generally Accepted Accounting Principles.
Such returns accurately reflect in all material respects all liability for taxes
of the Borrower and its Subsidiaries for the periods covered thereby. Except as
set forth in Schedule 4.6 attached hereto, there is no ongoing material audit or
examination or, to the knowledge of the Borrower, other investigation by any
Governmental Authority of the tax liability of the Borrower or any of its
Subsidiaries, and there is no unresolved claim by any Governmental Authority
concerning or any material tax liability of the Borrower or any of its
Subsidiaries for any period for which tax returns have been or were required to
have been filed, other than claims for which adequate reserves have been
established in accordance with Generally Accepted Accounting Principles. Except
as set forth in Schedule 4.6 attached hereto, neither the Borrower nor any of
its Subsidiaries has waived or extended or. has been requested to waive or
extend the statute of limitations relating to the payment of any material taxes.
IV.7 Subsidiaries. Schedule 4.7 sets forth a list, as of the Effective
Date, of all of the Subsidiaries of the Borrower and, as to each such
Subsidiary, the percentage ownership (direct and indirect) of the Borrower in
each class of its capital stock and each direct owner thereof. All of the issued
and outstanding shares of capital stock of VFIC are directly owned and held by
the Borrower.
IV.8 Full Disclosure. All factual information heretofore or
contemporaneously furnished to the Lender in writing by or on behalf of the
Borrower or any of its Subsidiaries for purposes of or in connection with this
Agreement and the transactions contemplated hereby is, and all other such
factual
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information hereafter furnished to the Lender in writing by or on behalf of the
Borrower or any of its Subsidiaries will be, true and accurate in all material
respects on the date as of which such information is dated or certified (or, if
such information has been amended or supplemented, on the date as of which any
such amendment or supplement is dated or certified) and not made materially
incomplete by omitting to state a material fact necessary to make the statements
contained therein, in light of the circumstances under which such information
was provided, not materially misleading.
IV.9 Margin Regulations. Neither the Borrower nor any of its Subsidiaries
is engaged principally, or as one of its important activities, in the business
of extending credit for the purpose of purchasing or carrying Margin Stock. No
proceeds of the Loans will be used, directly or indirectly, to purchase or carry
any Margin Stock (except for purchases by the Borrower of outstanding shares of
its capital stock made in compliance with the applicable provisions of
Regulations G, T, U and X), to extend credit for such purpose or for any other
purpose that would violate or be inconsistent with Regulations G, T, U or X or
any provision of the Exchange Act.
IV.10 No Material Adverse Change. Except as set forth in the Borrower's
filings with the Securities and Exchange Commission prior to the date of this
Agreement, there has been no Material Adverse Change since December 31, 1998,
and there exists no event, condition or state of facts that could reasonably be
expected to result in a Material Adverse Change.
IV.11 Financial Matters. (a) The Borrower has heretofore furnished to the
Lender copies of (i) the audited consolidated balance sheets of the Borrower and
its Subsidiaries as of December 31, 1998, 1997, and 1996, and the related
statements of income, stockholders' equity and cash flows for the fiscal years
then ended, together with the opinion of KPMG Peat Marwick thereon or
PricewaterhouseCoopers, and (ii) the unaudited consolidated balance sheet of the
Borrower and its Subsidiaries as of June 30, 1999, and the related statements of
income, stockholders' equity and cash flows for the nine-month period then
ended. Except as set forth in Schedule 4.11(a) attached hereto, such financial
statements have been prepared in accordance with Generally Accepted Accounting
Principles (subject, with respect to the unaudited financial statements, to the
absence of notes required by Generally Accepted Accounting Principles and to
normal year-end audit adjustments) and present fairly the financial condition of
the Borrower and its Subsidiaries on a consolidated basis as of the respective
dates thereof and the consolidated results of operations of the Borrower and its
Subsidiaries for the respective periods then ended. Except as fully reflected in
the most recent financial statements referred to above and the notes thereto,
there are no material liabilities or obligations with respect to the Borrower or
any of its Subsidiaries of any nature whatsoever (whether absolute, contingent
or otherwise and whether or not due).
(b) The Borrower has heretofore furnished to the Lender copies of the
Annual Statements of each of the Insurance Subsidiaries as of December 31, 1998,
1997, 1996 and 1995, and for the fiscal years then ended, each as filed with the
relevant Insurance Regulatory Authority (collectively, the "Historical Statutory
Statements"). Except as set forth in Schedule 4.11(b) attached hereto, the
Historical Statutory Statements (including, without limitation, the provisions
made therein for investments and the valuation thereof, reserves, policy and
contract claims and statutory liabilities) have been prepared in accordance with
Statutory Accounting Principles (except as may be reflected in the notes thereto
and subject, with respect to the Quarterly Statements, to the absence of notes
required by Statutory Accounting Principles and to normal year-end adjustments),
were in compliance with applicable Requirements of Law when filed
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and present fairly the financial condition of the respective Insurance
Subsidiaries covered thereby as of the respective dates thereof and the results
of operations, changes in capital and surplus and cash flow of the respective
Insurance Subsidiaries covered thereby for the respective periods then ended.
Except for liabilities and obligations disclosed or provided for in the
Historical Statutory Statements (including, without limitation, reserves, policy
and contract claims and statutory liabilities), no Insurance Subsidiary had, as
of the date of its respective Historical Statutory Statements, any material
liabilities or obligations of any nature whatsoever (whether absolute,
contingent or otherwise and whether or not due) that, in accordance with
Statutory Accounting Principles, would have been required to have been disclosed
or provided for in such Historical Statutory Statements. All books of account of
each Insurance Subsidiary fully and fairly disclose all of its material
transactions, properties, assets, investments, liabilities and obligations, are
in its possession and are true, correct and complete in all material respects.
(c) Each of the Borrower and its Subsidiaries, after giving effect to
the consummation of the transactions contemplated hereby, (i) will have capital
sufficient to carry on its businesses as conducted and as proposed to be
conducted, (ii) will have assets with a fair saleable value, determined on a
going concern basis, (A) not less than the amount required to pay the probable
liability on its existing debts as they become absolute and matured and (B)
greater than the total amount of its liabilities (including identified
contingent liabilities, valued at the amount that can reasonably be expected to
become absolute and matured), and (iii) will not intend to, and will not believe
that it will, incur debts or liabilities beyond its ability to pay such debts
and liabilities as they mature.
IV.12 Ownership of Properties. Each of the Borrower and its Subsidiaries
(i) has good and marketable title to all real property owned by it, (ii) holds
interests as lessee under valid leases in full force and effect with respect to
all material leased real and personal property used in connection with its
business, and (iii) has good title to all of its other material properties and
assets reflected in the most recent financial statements referred to in Section
4.11(a) (except as sold or otherwise disposed of since the date thereof in the
ordinary course of business), in each case under (i), (ii) and (iii) above free
and clear of all Liens other than Permitted Liens.
IV.13 ERISA. Each Plan is and has been administered in compliance in all
material respects with all applicable Requirements of Law, including, without
limitation, the applicable provisions of ERISA and the Internal Revenue Code. No
ERISA Event has occurred and is continuing or, to the knowledge of the Borrower,
is reasonably expected to occur with respect to any Plan, in either case that
would be reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect. No Plan has any Unfunded Pension Liability, and neither the
Borrower nor any ERISA Affiliate has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA, in either instance where the same
would be reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect. Neither the Borrower nor any ERISA Affiliate is required to
contribute to or has, or has at any time had, any liability to a Multiemployer
Plan.
IV.14 Environmental Matters. (a) No Hazardous Substances are or have been
generated, used, located, released, treated, disposed of or stored by the
Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any
other Person or otherwise, in, on or under any portion of any real property,
leased or owned, of the Borrower or any of its Subsidiaries, except in material
compliance with all applicable Environmental Laws, and no portion of any such
real property or, to the knowledge of the
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Borrower, any other real property at any time leased, owned or operated by the
Borrower or any of its Subsidiaries, has been contaminated by any Hazardous
Substance; and no portion of any real property, leased or owned, of the Borrower
or any of its Subsidiaries has been or, to the knowledge of the Borrower, is
presently the subject of an environmental audit, assessment or remedial action.
(b) To the knowledge of the Borrower, (i) no portion of any real
property, leased or owned, of the Borrower or any of its Subsidiaries has been
used as or for a mine, a landfill, a dump or other disposal facility, a gasoline
service station, or (other than for petroleum substances stored in the ordinary
course of business) a petroleum products storage facility, (ii) no portion of
such real property or any other real property at any time leased, owned or
operated by the Borrower or any of its Subsidiaries has, pursuant to any
Environmental Law, been placed on the "National Priorities List" or "CERCLIS
List" (or any similar federal, state or local list) of sites subject to possible
environmental problems, and (iii) there are not and have never been any
underground storage tanks situated on any real property, leased or owned, by the
Borrower or any of its Subsidiaries.
(c) All activities and operations of the Borrower and its Subsidiaries
are in compliance with the requirements of all applicable Environmental Laws,
except to the extent the failure so to comply, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect. Neither the
Borrower nor any of its Subsidiaries is involved in any suit, action or
proceeding, or has received any notice, complaint or other request for
information from any Governmental Authority or other Person, with respect to any
actual or alleged Environmental Claims that, if adversely determined, would be
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect; and, to the knowledge of the Borrower, there are no threatened actions,
suits, proceedings or investigations with respect to any such Environmental
Claims, nor any basis therefor.
IV.15 Compliance With Laws. Except as set forth in Schedule 4.15 attached
hereto, each of the Borrower and its Subsidiaries has timely filed all material
reports, documents and other materials required to be filed by it under all
applicable Requirements of Law with any Governmental Authority, has retained all
material records and documents required to be retained by it under all
applicable Requirements of Law, and is otherwise in compliance with all
applicable Requirements of Law in respect of the conduct of its business and the
ownership and operation of its properties, except for such Requirements of Law
the failure to comply with which, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect.
IV.16 Regulated Industries. Neither the Borrower nor any of its
Subsidiaries is (i) an "investment company," a company" controlled" by an
"investment company," or an "investment advisor," within the meaning of the
Investment Company Act of 1940, as amended, or (ii) a "holding company," a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended.
IV.17 Insurance. The assets, properties and business of the Borrower and
its Subsidiaries are insured against such hazards and liabilities, under such
coverages and in such amounts, as are customarily maintained by prudent
companies similarly situated and under policies issued by insurers of recognized
responsibility. No notice of any pending or threatened cancellation or material
premium increase has been
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received by the Borrower or any of its Subsidiaries with respect to any such
policies, and the Borrower and each of its Subsidiaries are in substantial
compliance with all conditions contained therein.
ARTICLE V
AFFIRMATIVE COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
V.1 GAAP Financial Statements. The Borrower will deliver to the Lender:
(a) As soon as available and in any event within sixty (60) days after the
end of each of the first three fiscal quarters of each fiscal year, beginning
with the fiscal quarter ended September 30, 1999, unaudited consolidated and
consolidating balance sheets of the Borrower and its Subsidiaries as of the end
of such fiscal quarter and unaudited consolidated and consolidating statements
of income, stockholders' equity and cash flows for the Borrower and its
Subsidiaries for the fiscal quarter then ended and for that portion of the
fiscal year then ended, in each case setting forth comparative consolidated
figures as of the end of and for the corresponding period in the preceding
fiscal year, all prepared in accordance with Generally Accepted Accounting
Principles (subject to the absence of notes required by Generally Accepted
Accounting Principles and subject to normal year-end audit adjustments) applied
on a basis consistent with that of the preceding quarter or containing
disclosure of the effect on the financial condition or results of operations of
any change in the application of accounting principles and practices during such
quarter; and
(b) As soon as available and in any event within 120 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999, (i) an
audited consolidated balance sheet of the Borrower and its Subsidiaries as of
the end of such fiscal year and audited consolidated statements of income,
stockholders' equity and cash flows for the Borrower and its Subsidiaries for
the fiscal year then ended, including the applicable notes, in each case setting
forth comparative figures as of the end of and for the preceding fiscal year,
certified by the independent certified public accounting firm regularly retained
by the Borrower or another independent certified public accounting firm of
recognized national standing reasonably acceptable to the Lender, together with
(y) a report thereon by such accountants that is not qualified as to going
concern or scope of audit and to the effect that such financial statements
present fairly the consolidated financial condition and results of operations of
the Borrower and its Subsidiaries as of the dates and for the periods indicated
in accordance with generally accepted accounting principles applied on a basis
consistent with that of the preceding year or containing disclosure of the
effect on the financial position or results of operations of any change in the
application of accounting principles and practices during such year, and (z) a
report by such accountants to the effect that, based on and in connection with
their examination of the financial statements of the Borrower and its
Subsidiaries, they obtained no knowledge of the occurrence or existence of any
Default or Event of Default relating to accounting or financial reporting
matters, or a statement specifying the nature and period of existence of any
such Default or Event of Default disclosed by their audit; provided, however,
that such accountants shall not be liable by reason of the failure to obtain
knowledge of any Default or Event of Default that would not be disclosed or
revealed in the course of their audit examination, and (ii) an unaudited
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consolidating balance sheet of the Borrower and its Subsidiaries as of the end
of such fiscal year and unaudited consolidating statements of income,
stockholders' equity and cash flows for the Borrower and its Subsidiaries for
the fiscal year then ended, all in reasonable detail.
V.2 Statutory Financial Statements. The Borrower will deliver to the
Lender:
(a) As soon as available and in any event within fifty (50) days after the
end of each of the first three fiscal quarters of each fiscal year, beginning
with the fiscal quarter ending September 30, 1999, a Quarterly Statement of each
Insurance Subsidiary as of the end of such fiscal quarter and for that portion
of the fiscal year then ended, in the form filed with the relevant Insurance
Regulatory Authority, prepared in accordance with Statutory Accounting
Principles applied on a basis consistent with that of the preceding quarter or
containing disclosure of the effect on the financial condition or results of
operations of any change in the application of accounting principles and
practices during such quarter; and
(b) As soon as available and in any event within sixty-five (65) days
after the end of each fiscal year, beginning with the fiscal year ending
December 31, 1999, an Annual Statement of each Insurance Subsidiary as of the
end of such fiscal year and for the fiscal year then ended, in the form filed
with the relevant Insurance Regulatory Authority, prepared in accordance with
Statutory Accounting Principles applied on a basis consistent with that of the
preceding year or containing disclosure of the effect on the financial condition
or results of operations of any change in the application of accounting
principles and practices during such year;
(c) As soon as available and in any event within 135 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999, an
unaudited consolidated balance sheet of the Borrower and its Insurance
Subsidiaries as of the end of such fiscal year and unaudited consolidated
statements of income, stockholders' equity and cash flows for the Borrower and
its Insurance Subsidiaries for the fiscal year then ended, in each case setting
forth comparative consolidated figures as of the end of and for the preceding
fiscal year, all prepared in accordance with Statutory Accounting Principles
applied on a basis consistent with that of the preceding year or containing
disclosure of the effect on the financial condition or results of operations of
any change in the application of accounting principles and practices during such
year; and
(d) As soon as available and in any event within 155 days after the end of
each fiscal year, beginning with the fiscal year ended December 31, 1999 (but
only if and to the extent required by the applicable Insurance Regulatory
Authority with regard to any Insurance Subsidiary), a certification by the
independent certified public accounting firm referred to in Section 5.1(b) as to
the Annual Statement of each such Insurance Subsidiary as of the end of such
fiscal year and for the fiscal year then ended, together with a report thereon
by such accountants that is not qualified as to going concern or scope of audit
and to the effect that such financial statements present fairly the consolidated
financial condition and results of operations of such Insurance Subsidiary as of
the date and for the period indicated in accordance with statutory accounting
principles applied on a basis consistent with that of the preceding year or
containing disclosure of the effect on the financial position or results of
operations of any change in the application of accounting principles and
practices during such year.
V.3 Other Business and Financial Information. The Borrower will deliver
to the Lender:
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(a) Concurrently with each delivery of the financial statements described
in Sections 5.1 and 5.2, a Compliance Certificate in the form of Exhibit D-1 (in
the case of the financial statements described in Section 5.1) or Exhibit D-2
(in the case of the financial statements described in Section 5.2) with respect
to the period covered by the financial statements then being delivered, executed
by the chief financial officer, vice president--finance or treasurer of the
Borrower, together, in the case of the financial statements described in Section
5.1, with a Covenant Compliance Worksheet reflecting the computation of the
financial covenants set forth in Sections 6.1, 6.2 and 6.3 as of the last day of
the period covered by such financial statements, and in the case of the
financial statements described in Section 5.2, with a Covenant Compliance
Worksheet reflecting the computation of the financial covenants set forth in
Section 6.4 as of the last day of the period covered by such financial
statements;
(b) Promptly upon filing with the relevant Insurance Regulatory Authority
and in any event within ninety (90) days after the end of each fiscal year,
beginning with the fiscal year ended December 31, 1999, a copy of each Insurance
Subsidiary's "Statement of Actuarial Opinion" (or equivalent information should
the relevant Insurance Regulatory Authority not require such a statement) as to
the adequacy of such Insurance Subsidiary's loss reserves for such fiscal year,
together with a copy of its management discussion and analysis in connection
therewith, each in the format prescribed by the applicable insurance laws of
such Insurance Subsidiary's jurisdiction of domicile;
(c) Promptly upon the sending, filing or receipt thereof, copies of (i)
all financial statements, reports, notices and proxy statements that the
Borrower or any of its Subsidiaries shall send or make available generally to
its shareholders, (ii) all reports (other than earnings press releases) on Form
10-Q, Form 10-K or Form 8-K (or their successor forms) or registration
statements and prospectuses (other than on Form S-8 or its successor form) that
the Borrower or any of its Subsidiaries shall render to or file with the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc. or any national securities exchange, (iii) all reports on Form A
or Form B (or their successor forms) that any Insurance Subsidiary shall file
with any Insurance Regulatory Authority, (iv) all significant reports on
examination or similar significant reports, financial examination reports or
market conduct examination reports by the NAIC or any Insurance Regulatory
Authority or other Governmental Authority with respect to any Insurance
Subsidiary's insurance business, and (v) all significant filings made under
applicable state insurance holding company acts by the Borrower or any of its
Subsidiaries, including, without limitation, filings seeking approval of
transactions with Affiliates;
(d) Promptly upon (and in any event within five (5) Business Days after)
obtaining knowledge thereof, written notice of any of the following:
(i) the occurrence of any Default or Event of Default, together with
a written statement of the chief executive officer, chief financial officer
or vice president--finance of the Borrower specifying the nature of such
Default or Event of Default, the period of existence thereof and the action
that the Borrower has taken and proposes to take with respect thereto,
(ii) the institution or written threatened institution of any action,
suit, investigation or proceeding against or affecting the Borrower or any
of its Subsidiaries,
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including any such investigation or proceeding by any Insurance Regulatory
Authority or other Governmental Authority (other than routine periodic
inquiries, investigations or reviews), that would, if adversely determined,
be reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect, and any material development in any litigation or other
proceeding previously reported pursuant to Section 4.5 or this Section
5.3(d)(ii);
(iii) the receipt by the Borrower or any of its Subsidiaries from any
Insurance Regulatory Authority or other Governmental Authority of (i) any
written notice asserting any failure by the Borrower or any of its
Subsidiaries to be in compliance with applicable Requirements of Law or
that threatens the taking of any action against the Borrower or such
Subsidiary or sets forth circumstances that, if taken or adversely
determined, would be reasonably likely to have a Material Adverse Effect,
or (ii) any notice of any actual or threatened suspension, limitation or
revocation of, failure to renew, or imposition of any restraining order,
escrow or impoundment of funds in connection with, any license, permit,
accreditation or authorization of the Borrower or any of its Subsidiaries,
where such action would be reasonably likely to have a Material Adverse
Effect;
(iv) the occurrence of any ERISA Event, together with (i) a written
statement of the chief executive officer, chief financial officer or vice
president--finance of the Borrower specifying the details of such ERISA
Event and the action that the Borrower has taken and proposes to take with
respect thereto, (ii) a copy of any notice with respect to such ERISA Event
that may be required to be filed with the PBGC and (iii) a copy of any
notice delivered by the PBGC to the Borrower or such ERISA Affiliate with
respect to such ERISA Event;
(v) the occurrence of any decrease in (y) the rating given by
either Standard & Poor's or Moody's with respect to the Borrower's senior
publicly traded Indebtedness or (z) the rating given to any Insurance
Subsidiary by A.M. Best & Company; and
(vi) any other matter or event that has, or would be reasonably
likely to have, a Material Adverse Effect, together with a written
statement of the chief executive officer, chief financial officer or vice
presidentCfinance of the Borrower setting forth the nature and period of
existence thereof and the action that the Borrower has taken and proposes
to take with respect thereto,
(e) Within five (5) Business Days after request therefor by the Lender, if
theretofore prepared and delivered to the Borrower, or within ninety (90) days
after request therefor by the Lender from time to time (but not more than once
per year), if not theretofore prepared and delivered to the Borrower, in either
case at the Borrower's expense, an actuarial review and valuation statement of,
and opinion as to the adequacy of, each Insurance Subsidiary's loss and loss
adjustment expense reserve positions as of the end of such year with respect to
the insurance business then in force, and covering such other subjects as are
customary in actuarial reviews, prepared by PricewaterhouseCoopers or another
independent actuarial firm reasonably acceptable to the Lender, together with a
favorable review letter thereon by the Borrower's
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regularly retained independent certified public accountants, all in form and
substance satisfactory to the Lender; and
(f) As promptly as reasonably possible, such other information about the
business, condition (financial or otherwise), operations or properties of the
Borrower or any of its Subsidiaries as the Lender may from time to time
reasonably request.
V.4 Corporate Existence; Franchises; Maintenance of Properties. The
Borrower will, and will cause each of its Subsidiaries to, (i) maintain and
preserve in full force and effect its corporate existence, except as expressly
permitted otherwise by Section 7.1, (ii) obtain, maintain and preserve in full
force and effect all other rights, franchises, licenses, permits,
certifications, approvals and authorizations required by Governmental
Authorities and necessary to the ownership, occupation or use of its properties
or the conduct of its business, except to the extent the failure to do so would
not be reasonably likely to have a Material Adverse Effect, and (iii) keep all
material properties in good working order and condition (normal wear and tear
excepted) and from time to time make all necessary repairs to and renewals and
replacements of such properties, except to the extent that any of such
properties are obsolete or are being replaced.
V.5 Compliance with Laws. The Borrower will, and will cause each of its
Subsidiaries to, comply in all respects with all Requirements of Law applicable
in respect of the conduct of its business and the ownership and operation of its
properties, except to the extent the failure so to comply would not be
reasonably likely to have a Material Adverse Effect.
V.6 Payment of Obligations. The Borrower will, and will cause each of its
Subsidiaries to, (i) pay all liabilities and obligations as and when due
(subject to any applicable subordination provisions), except to the extent
failure to do so would not be reasonably likely to have a Material Adverse
Effect, and (ii) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon it, upon its income or profits or upon any of its
properties, prior to the date on which penalties would attach thereto, and all
lawful claims that, if unpaid, might become a Lien upon any of the properties of
the Borrower or any of its Subsidiaries; provided, however, that neither the
Borrower nor any of its Subsidiaries shall be required to pay any such tax,
assessment, charge, levy or claim that is being contested in good faith and by
proper proceedings and as to which the Borrower or such Subsidiary is
maintaining adequate reserves with respect thereto in accordance with Generally
Accepted Accounting Principles.
V.7 Insurance. The Borrower will, and will cause each of its Subsidiaries
to, maintain with financially sound and reputable insurance companies insurance
with respect to its assets, properties and business, against such hazards and
liabilities, of such types and in such amounts, as is customarily maintained by
companies in the same or similar businesses similarly situated; provided that
the Borrower and its Subsidiaries may self-insure against risks consistent with
customary industry practices for companies in the same or similar businesses, of
similar size and with similar risk parameters.
V.8 Maintenance of Books and Records; Inspection. The Borrower will, and
will cause each of its Subsidiaries to, (i) maintain adequate books, accounts
and records, in which full, true and correct entries shall be made of all
financial transactions in relation to its business and properties, and prepare
all financial statements required under this Agreement, in each case in
accordance with Generally Accepted
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Accounting Principles or Statutory Accounting Principles, as applicable, and in
compliance with the requirements of any Governmental Authority having
jurisdiction over it, and (ii) permit employees or agents of the Lender to
inspect its properties and examine or audit its books, records, working papers
and accounts and make copies and memoranda of them, and to discuss its affairs,
finances and accounts with its officers and employees and, upon notice to the
Borrower, the independent public accountants of the Borrower and its
Subsidiaries (and by this provision the Borrower authorizes such accountants to
discuss the finances and affairs of the Borrower and its Subsidiaries), all at
such times and from time to time, upon reasonable notice and during business
hours, as may be reasonably requested.
V.9 Subsidiary Dividends. The Borrower will take all action necessary to
cause its Subsidiaries to make such dividends, distributions or other payments
to the Borrower as shall be necessary for the Borrower to make payments of the
principal of and interest on the Loans in accordance with the terms of this
Agreement. In the event the approval of any Governmental Authority or other
Person is required in order for any such Subsidiary to make any such dividends,
distributions or other payments to the Borrower, or for the Borrower to make any
such principal or interest payments, the Borrower will forthwith exercise its
best efforts and take all reasonable actions permitted by law and necessary to
obtain such approval.
V.10 Further Assurances. The Borrower will, and will cause each of its
Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments,
modifications or supplements hereto and restatements hereof and any other
agreements, instruments or documents, and take any and all such other actions,
as may from time to time be reasonably requested by the Lender to effect,
confirm or further assure or protect and preserve the interests, rights and
remedies of the Lender under this Agreement and the other Credit Documents.
ARTICLE VI
FINANCIAL COVENANTS
The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
VI.1 Statutory Consolidated Net Income. The Borrower will not permit
cumulative Statutory Consolidated Net Income for any fiscal quarter then ending
to be less than the following amounts for the cumulative period corresponding
thereto, with dollars expressed in millions (calculated cumulatively for the
period commencing on September 30, 1999, and ending June 30, 2000, and for each
four fiscal quarter period ending thereafter):
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Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
1999 $ N/A $ N/A $ N/A $ 4.0
2000 11.0 18.0 25.0 28.0
2001 26.5 25.0 23.5 N/A
VI.2 Consolidated Net Income. The Borrower will not permit cumulative
Consolidated Net Income for any fiscal quarter then ending to be less than the
following amounts for the cumulative period corresponding thereto, with dollars
expressed in millions (calculated cumulatively for the period commencing on
September 30, 1999, and ending on June 30, 2000, and for each four fiscal
quarter period ending thereafter):
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
1999 $ N/A $ N/A $ N/A $ 1.0
2000 3.7 6.4 9.1 10.8
2001 10.6 10.3 10.1 N/A
VI.3 Statutory Surplus. The Borrower will not permit Consolidated Statutory
Surplus for any fiscal quarter then ending to be less than the following amounts
for the period corresponding thereto, with dollars expressed in millions (it
being understood that any adjustments to Consolidated Statutory Surplus required
to be made by any Department of Insurance in an aggregate amount not in excess
of $25,000,000 shall not be taken into account in determining the Borrower's
-----
compliance with this section and that the amount by which any such adjustments
for such fiscal year exceed $25,000,000 shall be so taken into account):
Fiscal First Second Third Fourth
Year Quarter Quarter Quarter Quarter
------ ------- ------- ------- -------
1999 $ N/A $ N/A $ N/A $ 239
2000 246 253 260 267
2001 272 278 283 N/A
VI.4 Risk-Based Capital. The Borrower will not permit "total adjusted
capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the NAIC as of the date hereof (the "Model Act")) of VFIC at any
time from and after the Effective Date to be less than 150% of the applicable
"Company Action Level RBC" (within the meaning of the Model Act) for VFIC at
such time.
ARTICLE VII
NEGATIVE COVENANTS
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The Borrower covenants and agrees that, until the termination of the
Commitment and the payment in full of all principal and interest with respect to
the Loans together with all other amounts then due and owing hereunder:
VII.1 Merger; Consolidation. The Borrower will not, and will not permit or
cause any of its Significant Subsidiaries to, liquidate, wind up or dissolve, or
enter into any consolidation, merger or other combination, or agree to do any of
the foregoing; provided, however, that the Borrower or any Significant
Subsidiary may merge into or consolidate with any other Person so long as (i)
the surviving corporation is the Borrower or a Wholly Owned Subsidiary (and in
any event, if the Borrower is a party to such merger or consolidation, the
surviving corporation shall be the Borrower) and (ii) immediately after giving
effect thereto, no Default or Event of Default would exist.
VII.2 Indebtedness. The Borrower will not create, incur, assume or suffer
to exist, and will not permit or cause any of its Subsidiaries to create, incur,
or knowingly assume or suffer to exist, any Indebtedness that ranks senior in
any respect to the Indebtedness under this Agreement (or any portion thereof) as
to payment or performance or as to dividends or distributions upon bankruptcy,
insolvency, liquidation or winding-up.
VII.3 Liens. The Borrower will not, and will not permit or cause any of its
Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer
to exist, or enter into or suffer to exist any agreement or restriction that
prohibits or conditions the creation, incurrence or assumption of, any Lien upon
or with respect to any part of its property or assets, whether now owned or
hereafter acquired, or agree to do any of the foregoing, other than the
following (collectively, "Permitted Liens"):
(i) Liens in favor of the Lender;
(ii) Liens arising in connection with the $15,000,000 Credit
Agreement;
(iii) Liens in existence on the Effective Date and set forth on
Schedule 7.3;
(iv) Liens imposed by law, such as Liens of carriers, warehousemen,
mechanics, materialmen and landlords, and other similar Liens incurred in
the ordinary course of business for sums not constituting borrowed money
that are not overdue for a period of more than thirty (30) days or that are
being contested in good faith by appropriate proceedings and for which
adequate reserves have been established in accordance with Generally
Accepted Accounting Principles;
(v) Liens (other than any Lien imposed by ERISA, the creation or
incurrence of which would result in an Event of Default under Section
8.1(i)) incurred in the ordinary course of business in connection with
worker's compensation, unemployment insurance or other forms of
governmental insurance or benefits, or to secure the performance of letters
of credit, bids, tenders, statutory obligations, surety and appeal bonds,
leases, government contracts and other similar obligations (other than
obligations for borrowed money) entered into in the ordinary course of
business;
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(vi) Liens for taxes, assessments or other governmental charges or
statutory obligations that are not delinquent or remain payable without any
penalty or that are being contested in good faith by appropriate
proceedings and for which adequate reserves have been established in
accordance with Generally Accepted Accounting Principles;
(vii) Liens in connection with pledges and deposits made pursuant to
statutory and regulatory requirements of Insurance Regulatory Authorities
by an Insurance Subsidiary in the ordinary course of its business, for the
purpose of securing regulatory capital or satisfying other financial
responsibility requirements;
(viii) Liens upon cash and United States government and agency
securities of the Borrower and its Subsidiaries, securing obligations
incurred in connection with reverse repurchase transactions and other
similar investment management transactions of such types and in such
amounts as are customary for companies similar to the Borrower in size and
lines of business and that are entered into by the Borrower and its
Subsidiaries in the ordinary course of business;
(ix) Purchase money Liens upon real or personal property used by the
Borrower or any of its Subsidiaries in the ordinary course of its business,
securing Indebtedness incurred solely to pay all or a portion of the
purchase price thereof (including in connection with capital leases, and
including mortgages or deeds of trust upon real property and improvements
thereon), provided that the aggregate principal amount at any time
outstanding of all Indebtedness secured by such Liens does not exceed an
amount equal to 5% of the value of the total assets of the Borrower and its
Subsidiaries at such time, determined on a consolidated basis in accordance
with Generally Accepted Accounting Principles as of the date of the
financial statements of the Borrower and its Subsidiaries most recently
delivered under Section 5.1 prior to such time (or, with regard to
determinations at any time prior to the initial delivery of financial
statements under Section 5.1, as of the date of the most recent financial
statements referred to in Section 4.11(a)), and provided further that any
such Lien (i) shall attach to such property concurrently with or within ten
(10) days after the acquisition thereof by the Borrower or such Subsidiary,
(ii) shall not exceed the lesser of (y) the fair market value of such
property or (z) the cost thereof to the Borrower or such Subsidiary and
(iii) shall not encumber any other property of the Borrower or any of its
Subsidiaries;
(x) Liens on Borrower Margin Stock, to the extent the fair market
value thereof exceeds 25% of the fair market value of the assets of the
Borrower and its Subsidiaries (including Borrower Margin Stock);
(xi) Any attachment or judgment Lien not constituting an Event of
Default under Section 8.1(h) that is being contested in good faith by
appropriate proceedings and for which adequate reserves have been
established in accordance with Generally Accepted Accounting Principles;
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(xii) With respect to any real property occupied by the Borrower or
any of its Subsidiaries, all easements, rights of way, licenses and similar
encumbrances on title that do not materially impair the use of such
property for its intended purposes; and
(xiii) Liens in favor of the trustee or agent under any agreement or
indenture relating to Indebtedness of the Borrower and its Subsidiaries
permitted under this Agreement, covering sums required to be deposited with
such trustee or agent thereunder.
VII.4 Disposition of Assets. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, sell, assign, lease, convey, transfer or
otherwise dispose of (whether in one or a series of transactions) all or any
portion of its assets, business or properties, or enter into any arrangement
with any Person providing for the lease by the Borrower or any Subsidiary as
lessee of any asset that has been sold or transferred by the Borrower or such
Subsidiary to such Person, or agree to do any of the foregoing, except for:
(i) sales of Investments by the Insurance Subsidiaries in the
ordinary course of business;
(ii) the sale or exchange of used or obsolete equipment to the
extent (A) the proceeds of such sale are applied towards, or such equipment
is exchanged for, similar replacement equipment or (B) such equipment is no
longer necessary for the operations of the Borrower or its applicable
Subsidiary in the ordinary course of business;
(iii) the sale, lease or other disposition of assets by a Subsidiary
of the Borrower to the Borrower or to another Wholly Owned Subsidiary, to
the extent permitted by applicable Requirements of Law and each relevant
Insurance Regulatory Authority, provided that (A) immediately after giving
effect thereto, no Default or Event of Default would exist, (B) in no event
shall the Borrower contribute, sell or otherwise transfer, or permit VFIC
to issue or sell, any of the capital stock of VFIC to any other Subsidiary,
and (C) such sale or disposition would not adversely affect the ability of
any Insurance Subsidiary party thereto to pay dividends or otherwise make
distributions to its parent;
(iv) the sale or other disposition of any Borrower Margin Stock to
the extent the fair market value thereof exceeds 25% of the fair market
value of the assets of the Borrower and its Subsidiaries (including
Borrower Margin Stock), provided that fair value is received in exchange
therefor; and
(v) the sale or disposition of assets outside the ordinary course
of business, provided that (A) the net proceeds from any such sale or
disposition do not exceed an amount equal to the least of the following:
(1) 10% of the total assets of the Borrower and its Subsidiaries on a
consolidated basis, (2) 10% of the total revenues of the Borrower and its
Subsidiaries on a consolidated basis, and (3) 10% of the total net earnings
of the Borrower and its Subsidiaries on a consolidated basis, in each case
as determined as of the date of the financial statements of the Borrower
and its Subsidiaries most recently delivered under Section 5.1 prior to
such time (or, with regard to determinations at any
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<PAGE>
time prior to the initial delivery of financial statements under Section
5.1, as of the date of the most recent financial statements referred to in
Section 4.11(a)), (B) immediately after giving effect thereto, the Borrower
would be in compliance with the provisions of Section 6.2, such compliance
determined on a pro forma basis in accordance with Generally Accepted
Accounting Principles as if such sale or disposition had been consummated
on the last day of the then most recently ended fiscal quarter, (C)
immediately after giving effect thereto, no Default or Event of Default
would exist, and (D) in no event shall the Borrower or any of its
Subsidiaries sell or otherwise dispose of any of the capital stock or other
ownership interests of VFIC or any other Significant Subsidiary.
VII.5 Transactions with Affiliates. The Borrower will not, and will not
permit or cause any of its Subsidiaries to, enter into any transaction with any
officer, director, stockholder or other Affiliate of the Borrower or any
Subsidiary, except in the ordinary course of its business and upon fair and
reasonable terms that are no less favorable to it than would obtain in a
comparable arm's length transaction with a Person other than an Affiliate of the
Borrower or such Subsidiary; provided, however, that nothing contained in this
Section shall prohibit:
(i) transactions between and among the Borrower and its Wholly
Owned Subsidiaries;
(ii) transactions under incentive compensation plans, stock option
plans and other employee benefit plans, and loans and advances from the
Borrower or any of its Subsidiaries to its officers, in each case that have
been approved by the board of directors of the Borrower or any of its
Subsidiaries; and
(iii) the payment by the Borrower of reasonable and customary fees to
members of its board of directors.
VII.6 Lines of Business. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, engage to any substantial degree in any
business other than the lines of property and casualty insurance business and
other businesses engaged in by the Borrower and its Subsidiaries on the date
hereof or a business reasonably related thereto.
VII.7 Fiscal Year. The Borrower will not, and will not permit or cause any
of its Subsidiaries to, change the ending date of its fiscal year to a date
other than December 31 unless (i) the Borrower shall have given the Lender
written notice of its intention to change such ending date at least sixty (60)
days prior to the effective date thereof and (ii) prior to such effective date
this Agreement shall have been amended to make any changes in the financial
covenants and other terms and conditions to the extent necessary, in the
reasonable determination of the Lender, to reflect the new fiscal year ending
date.
VII.8 Accounting Changes. The Borrower will not, and will not permit or
cause any of its Subsidiaries to, make or permit any material change in its
accounting policies or reporting practices, except as may be required or
permitted by Generally Accepted Accounting Principles or Statutory Accounting
Principles, as applicable.
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VII.9 Dividends. The Borrower will not pay any dividends on account of its
equity securities while a Default or an Event of Default has occurred and is
continuing both immediately before and after giving effect to the payment of
such dividends.
ARTICLE VIII
EVENTS OF DEFAULT
VIII.1 Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default":
(a) The Borrower shall fail to pay (i) any principal payable under the
terms of the Note, or(ii) not later than five Business Days of the date when due
any interest or any fee or any other Obligation due under the Note or this
Agreement;
(b) An "Event of Default" (as defined therein) shall occur under the
$15,000,000 Credit Agreement;
(c) The Borrower shall fail to observe, perform or comply with any
condition, covenant or agreement contained in any of Sections 2.11, 5.3(d)(i) or
5.4(i), Article VI, or Sections 7.1 through 7.4, inclusive, or Section 7.9;
(d) The Borrower or any of its Subsidiaries shall fail to observe,
perform or comply with any condition, covenant or agreement contained in this
Agreement or any of the other Credit Documents other than those enumerated in
subsections (a) and (b) above, and such failure shall continue unremedied for
any grace period specifically applicable thereto or, if no such grace period is
applicable, for a period of thirty (30) days after the Borrower acquires
knowledge thereof;
(e) Any material representation or warranty made or deemed made by or on
behalf of the Borrower or any of its Subsidiaries in this Agreement, any of the
other Credit Documents or in any certificate, instrument, report or other
document furnished in connection herewith or therewith or in connection with the
transactions contemplated hereby or thereby shall prove to have been false or
misleading in any material respect as of the time made, deemed made or
furnished;
(f) The Borrower or any of its Subsidiaries shall (i) fail to pay when
due (whether by scheduled maturity, acceleration or otherwise and after giving
effect to any applicable grace period) any principal of or interest on any
Indebtedness (other than the Indebtedness incurred pursuant to this Agreement)
having an aggregate principal amount of at least $500,000; or (ii) fail to
observe, perform or comply with any condition, covenant or agreement contained
in any agreement or instrument evidencing or relating to any such Indebtedness,
or any other event shall occur or condition exist in respect thereof, and the
effect of such failure, event or condition is to cause, or permit the holder or
holders of such Indebtedness (or a trustee or agent on its or their behalf) to
cause (with the giving of notice, lapse of time, or both), such Indebtedness to
become due, or to be prepaid, redeemed, purchased or defeased, prior to its
stated maturity;
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(g) The Borrower or any of its Significant Subsidiaries shall (i) file a
voluntary petition or commence a voluntary case seeking liquidation, winding-up,
reorganization, dissolution, arrangement, readjustment of debts or any other
relief under the Bankruptcy Code or under any other applicable bankruptcy,
insolvency or similar law now or hereafter in effect, (ii) consent to the
institution of, or fail to controvert in a timely and appropriate manner, any
petition or case of the type described in subsection (g) below, (iii) apply for
or consent to the appointment of or taking possession by a custodian, trustee,
receiver or similar official for or of itself or all or a substantial part of
its properties or assets, (iv) fail generally, or admit in writing its
inability, to pay its debts generally as they become due, (v) make a general
assignment for the benefit of creditors or (vi) take any corporate action to
authorize or approve any of the foregoing;
(h) Any involuntary petition or case shall be filed or commenced against
the Borrower or any of its Significant Subsidiaries seeking liquidation,
winding-up, reorganization, dissolution, arrangement, readjustment of debts, the
appointment of a custodian, trustee, receiver or similar official for it or all
or a substantial part of its properties or any other relief under the Bankruptcy
Code or under any other applicable bankruptcy, insolvency or similar law now or
hereafter in effect, and such petition or case shall continue undismissed and
unstayed for a period of sixty (60) days; or an order, judgment or decree
approving or ordering any of the foregoing shall be entered in any such
proceeding;
(i) Any one or more money judgments, writs or warrants of attachment,
executions or similar processes involving an aggregate amount (exclusive of
amounts fully bonded or covered by insurance as to which the surety or insurer,
as the case may be, has acknowledged its liability in writing) in excess of
$1,000,000 shall be entered or filed against the Borrower or any of its
Subsidiaries or any of their respective properties, and (i) the same is not
dismissed, stayed or discharged within sixty (60) days or is not otherwise being
appropriately contested in good faith and in a manner reasonably satisfactory to
the Lender, or (ii) the same is not dismissed, stayed or discharged within five
(5) days prior to any proposed sale of assets of the Borrower or any Subsidiary
pursuant thereto, or (iii) any action shall be legally taken by a judgment
creditor to levy upon assets of the Borrower or any Subsidiary to enforce the
same;
(j) Any ERISA Event shall occur or exist with respect to any Plan or
Multiemployer Plan and, as a result thereof, together with all other ERISA
Events then existing, there shall exist a reasonable likelihood of liability to
any one or more Plans or Multiemployer Plans or to the PBGC (or to any
combination thereof) in excess of $500,000 with respect to the Borrower or any
ERISA Affiliate;
(k) Any Insurance Regulatory Authority or other Governmental Authority
having jurisdiction shall issue any order of conservation, supervision,
rehabilitation or liquidation or any other order of similar effect in respect of
any Insurance Subsidiary, and such action, individually or in the aggregate,
would be reasonably likely to have a Material Adverse Effect;
(l) Any one or more licenses, permits, accreditations or authorizations
of the Borrower or any of its Subsidiaries shall be suspended, limited or
terminated or shall not be renewed, or any other action shall be taken, by any
Governmental Authority in response to any alleged failure by the Borrower or any
of its Subsidiaries to be in compliance with applicable Requirements of Law, and
such action, individually or in the aggregate, would be reasonably likely to
have a Material Adverse Effect;
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(m) Any of the following shall occur: (i) any Person or group of Persons
acting in concert as a partnership or other group (other than the Birmingham
Investment Group) shall, as a result of a tender or exchange offer, open market
purchases, privately negotiated purchases or otherwise, have become, after the
date hereof, the "beneficial owner" (within the meaning of such term under Rule
13d-3 under the Exchange Act) of securities of the Borrower representing 30% or
more of the combined voting power of the then outstanding securities of the
Borrower ordinarily (and apart from rights accruing under special circumstances)
having the right to vote on matters, other than the election of directors,
submitted to holders of the Borrower's common stock; (ii) the Board of Directors
of the Borrower shall cease to consist of a majority of the individuals who
constituted the Board of Directors of the Borrower as of the date hereof or who
shall have become a member thereof subsequent to the date hereof after having
been nominated, or otherwise approved in writing, by at least a majority of
individuals who constituted the Board of Directors of the Borrower as of the
date hereof (or their replacements approved as herein required); or (iii) the
Borrower shall cease to own directly 100% of the issued and outstanding capital
stock of VFIC or its successor by merger or consolidation as permitted hereunder
(including, without limitation, as a result of the contribution, sale or
transfer by the Borrower, or the issuance or sale by VFIC, of any capital stock
of VFIC to any one or more other Subsidiaries of the Borrower); or
(n) The Contract shall be terminated for any reason.
VIII.2 Remedies; Termination of Commitment, Acceleration, etc. Upon and at
any time after the occurrence and during the continuance of any Event of
Default, the Lender may take any or all of the following actions at the same or
different times:
(a) Declare the Commitment to be terminated, whereupon the same
shall terminate provided that, upon the occurrence of an Event of Default
pursuant to Section 8.1(a), 8.1(b), 8.1(c), 8.1(g) or Section 8.1(h), the
Commitment shall automatically be terminated);
(b) Declare all or any part of the outstanding principal amount of
the Loans to be immediately due and payable, whereupon the principal amount
so declared to be immediately due and payable, together with all interest
accrued thereon and all other amounts payable under this Agreement, the
Notes and the other Credit Documents, shall become immediately due and
payable without presentment, demand, protest, notice of intent to
accelerate or other notice or legal process of any kind, all of which are
hereby knowingly and expressly waived by the Borrower provided that, upon
the occurrence of an Event of Default pursuant to Section 8.1(c), 8.1(g) or
Section 8.1(h), all of the outstanding principal amount of the Loans and
all other amounts described in this subsection (b) shall automatically
become immediately due and payable without presentment, demand, protest,
notice of intent to accelerate or other notice or legal process of any
kind, all of which are hereby knowingly and expressly waived by the
Borrower); and
(c) Exercise all rights and remedies available to it under this
Agreement, the other Credit Documents and applicable law.
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VIII.3 Remedies; Set-Off. In addition to all other rights and remedies
available under the Credit Documents or applicable law or otherwise, upon and at
any time after the occurrence and during the continuance of any Event of
Default, the Lender may, and is hereby authorized by the Borrower, at any such
time and from time to time, to the fullest extent permitted by applicable law,
without presentment, demand, protest or other notice of any kind, all of which
are hereby knowingly and expressly waived by the Borrower, to set off and to
apply any and all deposits (general or special, time or demand, provisional or
final) and any other property at any time held (including at any branches or
agencies, wherever located), and any other indebtedness at any time owing, by
the Lender to or for the credit or the account of the Borrower against any or
all of the Obligations to the Lender now or hereafter existing, whether or not
such Obligations may be contingent or unmatured, the Borrower hereby granting to
each Lender a continuing security interest in and Lien upon all such deposits
and other property as security for such Obligations. The Lender agrees to notify
the Borrower promptly after any such set-off and application; provided, however,
that the failure to give such notice shall not affect the validity of such set-
off and application.
ARTICLE IX
MISCELLANEOUS
IX.1 Fees and Expenses. The Borrower agrees (i) whether or not the
transactions contemplated by this Agreement shall be consummated, to pay upon
demand all reasonable out-of-pocket costs and expenses of the Lender (including,
without limitation, the reasonable fees and expenses of counsel to the Lender)
in connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Credit Documents, and any amendment, modification or
waiver hereof or thereof or consent with respect hereto or thereto, (ii) to pay
upon demand all reasonable out-of-pocket costs and expenses of the Lender
(including, without limitation, the reasonable fees and expenses of counsel to
the Lender) in connection with (A) any refinancing or restructuring of the
credit arrangement provided under this Agreement, whether in the nature of a
"work-out," in any insolvency or bankruptcy proceeding or otherwise and whether
or not consummated, and (B) the enforcement, attempted enforcement or
preservation of any rights or remedies under this Agreement or any of the other
Credit Documents, whether in any action, suit or proceeding (including any
bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold
harmless the Lender from and against all liability for any intangibles,
documentary, stamp or other similar taxes, fees and excises, if any, including
any interest and penalties, and any finder's or brokerage fees, commissions and
expenses (other than any fees, commissions or expenses of finders or brokers
engaged by the Lender), that may be payable in connection with the transactions
contemplated by this Agreement and the other Credit Documents.
IX.2 Indemnification. The Borrower agrees, whether or not the
transactions contemplated by this Agreement shall be consummated, to indemnify
and hold harmless the Lender and each of their respective directors, officers,
employees, agents and Affiliates (each, an "Indemnified Person") from and
against any and all claims, losses, damages, obligations, liabilities,
penalties, costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses) of any kind or nature whatsoever, whether direct,
indirect or consequential (collectively, "Indemnified Costs"), that may at any
time be imposed on, incurred by or asserted against any such Indemnified Person
as a result of, arising from or in any way
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relating to the preparation, execution, performance or enforcement of this
Agreement or any of the other Credit Documents, any of the transactions
contemplated herein or therein or any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of any Loans, or any
action, suit or proceeding (including any inquiry or investigation) by any
Person, whether threatened or initiated, related to any of the foregoing, and in
any case whether or not such Indemnified Person is a party to any such action,
proceeding or suit or a subject of any such inquiry or investigation; provided,
however, that no Indemnified Person shall have the right to be indemnified
hereunder for any Indemnified Costs to the extent resulting from the gross
negligence or willful misconduct of such Indemnified Person. All of the
foregoing Indemnified Costs of any Indemnified Person shall be paid or
reimbursed by the Borrower, as and when incurred and upon demand.
IX.3 Governing Law; Consent to Jurisdiction. THIS AGREEMENT AND THE OTHER
CREDIT DOCUMENTS HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN, AND SHALL BE
DEEMED TO HAVE BEEN MADE IN, ALABAMA AND SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ALABAMA (WITHOUT REGARD TO
THE CONFLICTS OF LAW PROVISIONS THEREOF). THE BORROWER HEREBY CONSENTS TO THE
NONEXCLUSIVE JURISDICTION OF ANY STATE COURT WITHIN JEFFERSON COUNTY, ALABAMA OR
ANY FEDERAL COURT LOCATED WITHIN THE NORTHERN DISTRICT OF THE STATE OF ALABAMA
FOR ANY PROCEEDING INSTITUTED HEREUNDER OR UNDER ANY OF THE OTHER CREDIT
DOCUMENTS, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE
OTHER CREDIT DOCUMENTS, OR ANY PROCEEDING TO WHICH THE LENDER OR THE BORROWER IS
A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING OUT OF, OR IN CONNECTION
WITH, ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER ORAL OR
WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER. THE BORROWER IRREVOCABLY
AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE RIGHT OF APPEAL) BY ANY JUDGMENT
RENDERED OR RELIEF GRANTED THEREBY AND FURTHER WAIVES ANY OBJECTION THAT IT MAY
HAVE BASED ON LACK OF JURISDICTION OR IMPROPER VENUE OR FORUM NON CONVENIENS TO
THE CONDUCT OF ANY SUCH PROCEEDING. NOTHING IN THIS SECTION SHALL AFFECT THE
RIGHT OF ANY PARTY TO BRING ANY ACTION OR PROCEEDING AGAINST ANY OTHER PARTY IN
THE COURTS OF ANY OTHER JURISDICTION.
IX.4 Arbitration; Preservation and Limitation of Remedies. (a) Upon demand
of any party hereto, whether made before or after institution of any judicial
proceeding, any dispute, claim or controversy arising out of, connected with or
relating to this Agreement or any other Credit Document ("Disputes") between the
Borrower and the Lender, shall be resolved by binding arbitration as provided
herein. Institution of a judicial proceeding by a party does not waive the right
of that party to demand arbitration hereunder. Disputes may include, without
limitation, tort claims, counterclaims, claims brought as class actions, claims
arising from documents executed in the future, or claims arising out of or
connected with the transactions contemplated by this Agreement and the other
Credit Documents. Arbitration shall be conducted under and governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American Arbitration Association (the "AAA"), as in effect from time to time,
and Title 9 of the U.S. Code, as amended. All arbitration hearings shall be
conducted in Birmingham, Alabama. The expedited procedures set forth in Rule 51
et seq. of the Arbitration Rules shall be applicable
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<PAGE>
to claims of less than $1,000,000. All applicable statutes of limitation shall
apply to any Dispute. A judgment upon the award may be entered in any court
having jurisdiction. The panel from which all arbitrators are selected shall
include only licensed attorneys. The single arbitrator selected for expedited
procedure shall be a retired judge from the highest court of general
jurisdiction, state or federal, of the state where the hearing will be
conducted.
(b) Notwithstanding the preceding binding arbitration provisions, the
parties hereto agree to preserve, without diminution, certain remedies that any
party hereto may employ or exercise freely, either alone, in conjunction with or
during a Dispute. Any party hereto shall have the right to proceed in any court
of proper jurisdiction or by self-help to exercise or prosecute the following
remedies, as applicable: (i) all rights of self-help, including peaceful
occupation of real property and collection of rents, set-off, and peaceful
possession of personal property; (ii) obtaining provisional or ancillary
remedies, including injunctive relief, sequestration, garnishment, attachment,
appointment of a receiver and filing an involuntary bankruptcy proceeding; and
(iii) when applicable, a judgment by confession of judgment. Preservation of
these remedies does not limit the power of an arbitrator to grant similar
remedies that may be requested by a party in a Dispute. The parties hereto agree
that no party shall have a remedy of punitive or exemplary damages against any
other party in any Dispute, and each party hereby waives any right or claim to
punitive or exemplary damages that it has now or that may arise in the future in
connection with any Dispute, whether such Dispute is resolved by arbitration or
judicially.
IX.5 Notices. All notices and other communications provided for hereunder
shall be in writing (including telegraphic, telex, facsimile transmission or
cable communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered to the party to be notified at the following addresses:
(a) if to the Borrower, to Vesta Insurance Group, Inc., 3760 River
Run Drive, Birmingham, Alabama 35243, Attention: Norman W. Gayle, III,
Telecopy No. (205) 970-7007, with a copy to Vesta Insurance Group, Inc.,
3760 River Run Drive, Birmingham, Alabama 35243, Attention: Donald W.
Thornton, Telecopy No. (205) 970-7007;
(b) if to The Banc Corporation, 17 North 20th Street, Birmingham,
Alabama 35203-4003, Attention: James A. Taylor, Jr., Telecopy No. (205)
327-3479; and
or in each case, to such other address as any party may designate for itself by
like notice to all other parties hereto. All such notices and communications
shall be deemed to have been given (i) if mailed as provided above by any method
other than overnight delivery service, on the third Business Day after deposit
in the mails, (ii) if mailed by overnight delivery service, telegraphed,
telexed, telecopied or cabled, when delivered for overnight delivery, delivered
to the telegraph company, confirmed by telex answerback, transmitted by
telecopier or delivered to the cable company, respectively, or (iii) if
delivered by hand, upon delivery; provided that notices and communications to
the Lender shall not be effective until received by the Lender.
IX.6 Amendments, Waivers, etc. No amendment, modification, waiver or
discharge of termination of, or consent to any departure by the Borrower from,
any provision of this Agreement or any other Credit Document, shall be effective
unless in a writing signed by the Lender and then the same shall be effective
only in the specific instance and for the specific purpose for which given.
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IX.7 Participations.
(a) The Lender may, without the consent of the Borrower, sell to one or
more other Persons with its principal place of business in the United States
(each, a "Participant") participations in any portion comprising less than all
of its rights and obligations under this Agreement (including, without
limitation, a portion of its Commitment, the outstanding Loans made by it and
the Note or Notes held by it); provided, however, that (i) the Lender's
obligations under this Agreement shall remain unchanged and the Lender shall
remain solely responsible for the performance of such obligations, (ii) any such
participation shall be in an amount of not less than $1,000,000, but the Lender
shall not sell any participation that, when taken together with all other
participations, if any, sold by the Lender, covers all of the Lender's rights
and obligations under this Agreement, (iii) the Borrower shall continue to deal
solely and directly with the Lender in connection with the Lender's rights and
obligations under this Agreement, and the Lender shall not permit any
Participant to have any voting rights or any right to control the vote of the
Lender with respect to any amendment, modification, waiver, consent or other
action hereunder or under any other Credit Document (except as to actions that
would (A) reduce or forgive the principal amount of, or rate of interest on, any
Loan, or reduce or forgive any fees or other Obligations, (B) extend any date
(including the Maturity Date) fixed for the payment of any principal of or
interest on any Loan, any fees or any other Obligations, or (C) increase any
Commitment of the Lender), and (iv) no Participant shall have any rights under
this Agreement or any of the other Credit Documents, each Participant's rights
against the granting the Lender in respect of any participation to be those set
forth in the participation agreement, and all amounts payable by the Borrower
hereunder shall be determined as if the Lender had not granted such
participation.
(b) Nothing in this Agreement shall be construed to prohibit the Lender
from pledging or assigning all or any portion of its rights and interest
hereunder or under any Note to any Federal Reserve Bank as security for
borrowings therefrom; provided, however, that no such pledge or assignment shall
release the Lender from any of its obligations hereunder.
(c) The Lender may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this Section, disclose to the
Participant or proposed Participant any information relating to the Borrower and
its Subsidiaries furnished to it by or on behalf of any other party hereto,
provided that such Participant or proposed Participant agrees in writing to keep
such information confidential to the same extent required of the Lender under
Section 10.13.
IX.8 No Waiver. The rights and remedies of the Lender expressly set forth
in this Agreement and the other Credit Documents are cumulative and in addition
to, and not exclusive of, all other rights and remedies available at law, in
equity or otherwise. No failure or delay on the part of the Lender in exercising
any right, power or privilege shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or privilege preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege or be construed to be a waiver of any Default or Event of Default. No
course of dealing between any of the Borrower and the Lender or its agents or
employees shall be effective to amend, modify or discharge any provision of this
Agreement or any other Credit Document or to constitute a waiver of any Default
or Event of Default. No notice to or demand upon the Borrower in any case shall
entitle the Borrower to any other or further notice or demand in similar or
other
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<PAGE>
circumstances or constitute a waiver of the right of the Lender to exercise any
right or remedy or take any other or further action in any circumstances without
notice or demand.
IX.9 Successors and Assigns. This Agreement shall be binding upon, inure
to the benefit of and be enforceable by the respective successors and assigns of
the parties hereto, and all references herein to any party shall be deemed to
include its successors and assigns; provided, however, that the Borrower shall
not sell, assign or transfer any of its rights, interests, duties or obligations
under this Agreement or any other Credit Document without the prior written
consent of the Lender.
IX.10 Survival. All representations, warranties and agreements made by or
on behalf of the Borrower or any of its Subsidiaries in this Agreement and in
the other Credit Documents shall survive the execution and delivery hereof or
thereof and the making and repayment of the Loans. In addition, notwithstanding
anything herein or under applicable law to the contrary, the provisions of this
Agreement and the other Credit Documents relating to indemnification or payment
of fees, costs and expenses shall survive the payment in full of the Loans, the
termination of the Commitment and any termination of this Agreement or any of
the other Credit Documents.
IX.11 Severability. To the extent any provision of this Agreement is
prohibited by or invalid under the applicable law of any jurisdiction, such
provision shall be ineffective only to the extent of such prohibition or
invalidity and only in such jurisdiction, without prohibiting or invalidating
such provision in any other jurisdiction or the remaining provisions of this
Agreement in any jurisdiction.
IX.12 Construction. The headings of the various articles, sections and
subsections of this Agreement have been inserted for convenience only and shall
not in any way affect the meaning or construction of any of the provisions
hereof. Except as otherwise expressly provided herein and in the other Credit
Documents, in the event of any inconsistency or conflict between any provision
of this Agreement and any provision of any of the other Credit Documents, the
provision of this Agreement shall control.
IX.13 Confidentiality. The Lender agrees to keep confidential, pursuant to
its customary procedures for handling confidential information of a similar
nature and in accordance with safe and sound banking practices, all nonpublic
information provided to it by or on behalf of the Borrower or any of its
Subsidiaries in connection with this Agreement or any other Credit Document;
provided, however, that the Lender may disclose such information (i) to its
directors, employees and agents and to its auditors, counsel and other
professional advisors, (ii) at the demand or request of any bank regulatory
authority, court or other Governmental Authority having or asserting
jurisdiction over the Lender, as may be required pursuant to subpoena or other
legal process, or otherwise in order to comply with any applicable Requirement
of Law, (iii) in connection with any proceeding to enforce its rights hereunder
or under any other Credit Document or any other litigation or proceeding related
hereto or to which it is a party, (v) to the extent the same has become publicly
available other than as a result of a breach of this Agreement and (vi) pursuant
to and in accordance with the provisions of Section 9.7.
IX.14 Reliance by Lender. The Lender shall be entitled to rely, and shall
be fully protected in relying, upon any notice, statement, consent or other
communication (including, without limitation, any thereof by telephone,
telecopy, telex, telegram or cable) believed by it in good faith to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons.
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IX.15 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. This Agreement shall
become effective upon the execution of a counterpart hereof by each of the
parties hereto and receipt by the Lender and the Borrower of written or
telephonic notification of such execution and authorization of delivery thereof.
IX.16 Entire Agreement. THIS AGREEMENT AND THE OTHER DOCUMENTS AND
INSTRUMENTS EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE
AGREEMENT AND UNDERSTANDING BETWEEN THE PARTIES HERETO AND THERETO RELATING TO
THE SUBJECT MATTER HEREOF AND THEREOF, (B) SUPERSEDE ANY AND ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN, RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF, INCLUDING, WITHOUT LIMITATION, THE COMMITMENT
LETTER FROM THE LENDER TO THE BORROWER, DATED JUNE 27, 1999, AND (C) MAY NOT BE
AMENDED, SUPPLEMENTED, CONTRADICTED OR OTHERWISE MODIFIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
VESTA INSURANCE GROUP, INC.
By /s/ James E. Tait
----------------------------------------------
Its Executive Vice President & CFO
------------------------------------------
THE BANC CORPORATION
By /s/ David R. Carter
----------------------------------------------
Its Executive Vice President & CFO
------------------------------------------
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Exhibit 11. Statement re computation of per share earnings
VESTA INSURANCE GROUP, INC. COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1997 1998
------- ------- ---------
(In thousands except per
share data)
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding......... 18,860 18,600 18,549
Net income......................................... $36,813 $36,860 $(141,184)
Basic earnings per share........................... $ 1.95 $ 1.98 $ (7.61)
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding......... 18,860 18,600 18,549
Net effect of the assumed exercise of stock options
and nonvested restricted stock--based on the trea-
sury stock method using average market price for
the year.......................................... 297 453 --
------- ------- ---------
Total weighted average common shares and common
stock equivalents outstanding..................... 19,157 19,053 18,549
Net income......................................... $36,813 $36,860 $(141,184)
Diluted earnings per share......................... $ 1.92 $ 1.93 $ (7.61)
======= ======= =========
</TABLE>
- --------
<PAGE>
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the
definition of "significant subsidiary" according to Regulation S-X:
<TABLE>
<CAPTION>
Name Under Which
Company State of Incorporation Company Does Business
------- ---------------------- ---------------------
<S> <C> <C>
Vesta Fire Alabama Vesta Fire
Insurance Corporation Insurance Corporation
</TABLE>
<PAGE>
EXHIBIT 23.1
Independent Accountants' Consent
The Board of Directors and Stockholders
Vesta Insurance Group, Inc.
Birmingham, Alabama:
The audits referred to in our report dated March 27, 1998, except as to the
statements of comprehensive income and note B and note O which are as of April
19, 1999, included the related financial statement schedules as of December 31,
1997, and for each of the years in the two-year period ended December 31, 1997,
included in the registration statement. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Birmingham, Alabama
October 29, 1999
/s/ KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 23.2
Consent of Independent Accountants
We hereby consent to the inclusion in the Registration Statement on Form S-1 of
our report dated April 15, 1999, relating to the consolidated financial
statements and financial statement schedules of Vesta Insurance Group, Inc. and
subsidiaries as of and for the year ended December 31, 1998 which appear in
such Registration Statement. We also consent to the reference to our firm under
the caption "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
November 5, 1999
