<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1999 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-1097283
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3760 River Run Drive, Birmingham, AL 35243
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code:
(205) 970-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS CUSIP NUMBER: WHICH REGISTERED:
Common Stock, $.01 Par Value 925391104 Common Stock, $.01 Par Value
Securities registered pursuant to Section 12(g) of the Act:
None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH) AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL
NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF NOVEMBER 24, 2000:
$94,129,160
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF
NOVEMBER 24, 2000 is 18,825,832
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE VESTA INSURANCE GROUP, INC. PROXY STATEMENT FOR ITS 2000 ANNUAL
MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III HEREOF.
<PAGE>
Documents Incorporated by Reference
Parts I, II, III, and IV of the Company's Form 10-K for the year ended December
31, 1999, except as amended herein.
Explanatory Note
The Registrant, in consultation with the Registrant's accountants, has
determined to restate its financial statements for the year ended December 31,
1999. This Amendment includes these restated financial statements, together
with the report thereon of PricewaterhouseCoopers LLP dated March 12, 2000
(except for Note V for which the date is November 28, 2000).
The restatement relates solely to the presentation and calculation of certain
earnings per share amounts and income available to common stockholders to
include a gain on the extinguishment of deferreable capital securities. The
restatement does not effect net income or stockholder's equity as of and for the
year ending December 31, 1999.
The items amended are as follows:
Part II, Item 6 Selected Financial Data
Part II, Item 8 Financial Statements and Supplementary Data
Part IV, Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
2
<PAGE>
Part II
Item 6. Selected Financial Data
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K/A.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Gross Premiums Written............................................. $262,206 $ 634,609 $ 780,146 $607,198 $459,631
Net Premiums Written............................................... 242,862 422,569 492,978 443,255 341,722
Net Premiums Earned................................................ 344,106 441,325 474,785 405,658 266,729
Net Investment Income.............................................. 26,907 28,862 31,960 21,374 15,311
Gain on sale of Assumed reinsurance................................ 15,000 -- -- -- --
Investment Gains (Losses).......................................... 7,956 3,272 3,283 32 276
Other.............................................................. 9,327 5,473 2,094 188 216
-------- ---------- ---------- -------- --------
Total Revenues..................................................... 403,296 478,932 512,122 427,252 282,532
-------- ---------- ---------- -------- --------
Losses and LAE Incurred............................................ 211,701 337,131 274,650 230,636 170,530
Policy Acquisition and Other Underwriting Expenses................. 131,300 225,227 163,831 135,495 83,754
Loss on Asset Impairment........................................... -- 65,496 -- -- --
Amortization of Goodwill........................................... 2,118 5,177 3,065 484 264
Interest Expense................................................... 13,215 14,054 10,859 10,059 5,273
-------- ---------- ---------- -------- --------
Total Losses and Expenses.......................................... 358,334 647,085 452,405 376,674 259,821
-------- ---------- ---------- -------- --------
Income (Loss) From Operations Before Income Tax.................... 44,962 (168,153) 59,717 50,578 22,711
Income Taxes (benefit)............................................. 13,633 (48,555) 21,257 16,428 6,846
Deferrable capital securities interest, net of income tax.......... 5,632 5,449 5,051 -- --
-------- ---------- ---------- -------- --------
Income (loss) from continuing operations........................... $ 25,697 $ (125,047) $ 33,409 $ 34,150 $ 15,865
Income (loss)from discontinued operations.......................... (2,242) (16,137) 3,451 2,663 6,727
Preferred stock dividend........................................... (563) -- -- -- --
Gain on extinguisment of Deferrable Capital Securities............. $ 9,548
Income (loss) available to common stockholders (4)................. $ 32,440 $ (141,184) $ 36,860 $ 36,813 $ 22,592
Basic Earnings per share from continuing operations................ $ 1.37 $ (6.74) $ 1.79 $ 1.81 $ .84
Basic Earnings Per Share available to common
stockholders (2)(4)............................................... $ 1.73 $ (7.61) $ 1.98 $ 1.95 $ 1.20
Shares used in per share calculation (2)........................... 18,699 18,548 18,600 18,860 18,842
Diluted Earnings Per Share from continuing operations (2).......... $ 1.27 $ (6.74) $ 1.75 $ 1.92 $ 1.19
Diluted Earnings Per Share available to common stockholders (4).... 1.63 $ (7.61) $ 1.93 $ 1.92 $ 1.19
Shares used in per share calculation (2)........................... 20,202 18,548 19,053 19,157 18,970
Cash dividends per share........................................... .04 .15 .15 .20 .13
Balance Sheet Data (at end of period)
Total Investments and Cash......................................... $483,997 $ 634,668 $ 656,816 $427,276 $422,516
Total Assets....................................................... 915,809 1,347,702 1,636,859 871,385 735,758
Reserves For Losses and LAE........................................ 354,709 504,911 596,797 173,275 168,502
Long Term Debt..................................................... 141,876 98,302 98,602 98,279 98,163
Total Liabilities.................................................. 674,519 1,089,675 1,239,523 599,466 488,499
Deferrable Capital Securities...................................... 41,225 100,000 100,000 -- --
Stockholders' Equity............................................... 200,065 158,027 297,336 271,919 247,259
Certain Financial Ratios and Other Data
GAAP (3)
Loss and LAE Ratio................................................. 61.6% 76.4% 57.9% 56.9% 64.0%
Underwriting Expense Ratio......................................... 38.2 51.1 34.5 33.4 31.4
-------- ---------- ---------- -------- --------
Combined Ratio..................................................... 99.8% 127.5% 92.4% 90.3% 95.4%
SAP (1)
Loss and LAE Ratio................................................. 66.5% 90.4% 65.6% 57.9% 57.2%
Underwriting Expense Ratio......................................... 31.1 42.1 51.7 31.8 33.4
-------- ---------- ---------- -------- --------
Combined Ratio..................................................... 97.6% 132.5% 117.3% 89.7% 90.6%
-------- ---------- ---------- -------- --------
Net Premiums Written to Surplus Ratio.............................. .89x 2.81x 1.49x 1.53x 1.44x
Surplus............................................................ $271,986 $ 220,210 $ 317,875 $352,695 $318,997
</TABLE>
---------------
* As a result of the Company's decision in 1999 to discontinue its commercial
lines segment, all periods presented have been reclassified to present
operations on a continuing and discontinued basis.
(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) Ratios calculated for continuing operations.
(4) Revised as described in Note V to the Company's 1999 Consolidated Financial
Statements included herein.
3
<PAGE>
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Accountants.............................................................. 5
Independent Auditors' Report................................................................... 6
Consolidated Balance Sheets at December 31, 1999 and 1998...................................... 7
Consolidated Statements of Operations and Comprehensive Income (loss) for each of the
years in the three-year period ended December 31, 1999...................................... 8
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period
ended December 31, 1999..................................................................... 9
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 1999........................................................................... 10
Notes to Consolidated Financial Statements..................................................... 11
</TABLE>
4
<PAGE>
Report of Independent Accountants
To the Stockholders of
Vesta Insurance Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Vesta Insurance Group., Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the index appearing under Item 14(a)(2)
present fairly, in all material aspects, the information set forth therein at
December 31, 1999 and 1998 and the years 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 audits of these
statements in accordance with auditing standards generally accepted in the
United States 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 audits provide a
reasonable basis for the opinion expressed above.
As described in Note V, the Company revised its 1999 calculation of income
available to common stockholders and the related earnings per share
computations.
PricewaterhouseCoopers, LLP
Birmingham, Alabama
March 12, 2000, (except for Note V for
which the date is November 28, 2000)
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Vesta Insurance Group, Inc.
Birmingham, Alabama:
We have audited the consolidated balance sheet (not presented herein) 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 the year then ended. In connection with our audit of
the consolidated financial statements, we also have audited the 1997 financial
statement schedules as listed in the index appearing at Item 14(a)(2). These
financial statements and financial statement schedules are the responsibility of
Vesta's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audit 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 audit provides 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 the year then ended, in conformity
with generally accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG LLP
Birmingham, Alabama
March 27, 1998, except
as to the statements of
comprehensive income
which is as of April 19, 1999
and Note N and Note S
which are as of
March 30, 2000
6
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value (cost: 1999--$348,760;
1998--$446,516)...................................................................... $339,429 $ 457,219
Equity securities--at fair value: (cost: 1999--$2,092; 1998--$18,127)................... 1,865 21,099
Short-term investments.................................................................. 125,026 131,029
-------- ----------
Total investments.................................................................... 466,320 609,347
Cash.................................................................................... 17,677 25,321
Accrued investment income............................................................... 5,460 7,194
Premiums in course of collection (net of allowances for losses of $2,412 in
1999 and $1,712 in 1998)............................................................. 41,206 121,948
Reinsurance balances receivable......................................................... 193,345 265,903
Reinsurance recoverable on paid losses.................................................. 77,925 111,577
Deferred policy acquisition costs....................................................... 40,357 90,855
Property and equipment.................................................................. 15,602 18,442
Income tax receivable................................................................... -- 17,950
Deferred income taxes................................................................... 13,489 19,090
Other assets............................................................................ 19,514 35,681
Goodwill and other intangibles.......................................................... 24,914 24,394
-------- ----------
Total assets......................................................................... $915,809 $1,347,702
======== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses..................................................... 354,709 504,911
Unearned premiums....................................................................... 133,029 309,515
-------- ----------
487,738 814,426
Deferred gain on retroactive reinsurance................................................ 3,275 9,848
Reinsurance balances payable............................................................ 3,439 49,028
Other liabilities....................................................................... 33,191 48,071
Short term debt......................................................................... 5,000 70,000
Long term debt.......................................................................... 141,876 98,302
-------- ----------
Total liabilities.................................................................... 674,519 1,089,675
Commitments and contingencies: See Note I
Deferrable Capital Securities............................................................ 41,225 100,000
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, issued: 1999--
2,950,000 shares, 1998--0............................................................ 30 --
Common stock, $.01 par value, 32,000,000 shares authorized, issued: 1999--
18,964,322 and 1998--18,964,322...................................................... 190 190
Additional paid-in capital.............................................................. 179,046 156,465
Accumulated other comprehensive income, net of tax (benefit) expense of $(3,346)
and $4,786 in 1999 and 1998, respectively............................................ (6,213) 8,889
Retained earnings....................................................................... 41,862 10,120
Treasury stock (283,086 and 310,918 shares at cost at December 31, 1999 and
1998, respectively).................................................................. (13,048) (15,592)
Receivable from issuance of restricted stock............................................ (1,802) (2,045)
-------- ----------
Total stockholders' equity........................................................... 200,065 158,027
-------- ----------
Total liabilities, Deferrable Capital Securities and stockholders' equity............ $915,809 $1,347,702
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Net premiums written........................................................... $242,862 $ 422,569 $492,978
Decrease (increase) in unearned premium........................................ 101,244 18,756 (18,193)
-------- --------- --------
Net premiums earned............................................................ 344,106 441,325 474,785
Net investment income.......................................................... 26,907 28,862 31,960
Gain on sale of assumed reinsurance renewal rights............................. 15,000 -- --
Realized investment gains...................................................... 7,956 3,272 3,283
Other.......................................................................... 9,327 5,473 2,094
-------- --------- --------
Total revenue............................................................... 403,296 478,932 512,122
Expenses:
Losses and loss adjustment expenses incurred................................... 211,701 337,131 274,650
Policy acquisition expenses.................................................... 88,638 149,905 133,220
Operating expenses............................................................. 42,662 75,322 30,611
Interest on debt............................................................... 13,215 14,054 10,859
Loss on asset impairment....................................................... -- 65,496 --
Goodwill and other intangible amortization..................................... 2,118 5,177 3,065
-------- --------- --------
Total expenses.............................................................. 358,334 647,085 452,405
Income (loss)from continuing operations before taxes and deferred
capital securities.......................................................... 44,962 (168,153) 59,717
Income taxes (benefit)......................................................... 13,633 (48,555) 21,257
Deferred capital security interest, net of tax................................. 5,632 5,449 5,051
-------- --------- --------
Income (loss) from continuing operations....................................... 25,697 (125,047) $ 33,409
Income (loss) from discontinued operations, net of tax......................... (2,242) (16,137) 3,451
Net income (loss)........................................................... 23,455 (141,184) 36,860
Preferred stock dividend....................................................... (563) -- --
Gain on extinguishment of deferrable capital securities, net of tax............ 9,548
-------- --------- --------
Income (loss) available to common stockholders (See Note V).................... $ 32,440 $(141,184) $ 36,860
======== ========= ========
Basic net income (loss) from continuing operations per common share............ $ 1.37 $ (6.74) $ 1.79
======== ========= ========
Basic net income (loss) available to common stockholders per common
share....................................................................... $ 1.73 $ (7.61) $ 1.98
======== ========= ========
Diluted net income (loss) from continuing operations per common share.......... $ 1.27 $ (6.74) $ 1.75
======== ========= ========
Diluted net income (loss) available to common stockholders per common
share....................................................................... $ 1.63 $ (7.61) $ 1.93
======== ========= ========
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net income (loss)............................................................... $ 23,455 $(141,184) $ 36,860
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available-for-sale securities net of tax
(benefit) expense of $(5,347), $2,676 and $2,778 in 1999, 1998 and
1997, respectively.......................................................... (9,930) 1,187 7,521
Less realized gains on available-for-sale securities net of tax expense of
$2,784, $1,145 and $1,149 in 1999, 1998 and 1997, respectively.............. 5,172 2,127 2,134
-------- --------- --------
(15,102) (940) 5,387
Gain on extinguishments of Deferrable Capital Securities net of tax
expense of $5,141........................................................... 9,548 -- --
-------- --------- --------
Comprehensive income (loss)..................................................... $ 17,901 $(142,124) $ 42,247
======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated Receivable
Additional Other From
Preferred Common Paid-in Comprehensive Retained Treasury Restricted
Stock Stock Capital Income (Loss) Earnings Stock Stock Total
--------- ------ ----------- -------------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996............................... -- $190 $161,037 $ 4,442 $ 120,011 $(10,554) $(3,207) $ 271,919
Net income.......................... -- -- -- -- 36,860 -- 36,860
Change in restricted stock
receivable......................... -- -- -- -- -- -- (684) (684)
Treasury stock acquisitions......... -- -- -- -- -- (21,164) -- (21,164)
Treasury stock issued for
options exercised.................. -- -- (1,061) -- -- 6,302 -- 5,241
Common dividends declared
(0.15 per share)................... -- -- -- -- (2,797) -- -- (2,797)
Net change in unrealized
gains net of tax of $3,927......... -- -- -- 5,387 -- -- -- 5,387
Tax benefit from exercise of
stock options...................... -- -- 2,574 -- -- -- -- 2,574
------ ------ -------- -------- --------- -------- ------- ---------
Balance, December 31,
1997............................... -- 190 162,550 9,829 154,074 (25,416) (3,891) 297,336
Net income.......................... -- -- -- -- (141,184) -- -- (141,184)
Change in restricted stock
receivable......................... -- -- -- -- -- -- 1,846 1,846
Treasury stock issued for
options exercised.................. -- -- (6,833) -- -- 9,824 -- 2,991
Common dividends declared
(.15 per share).................... -- -- -- -- (2,770) -- -- (2,770)
Net change in unrealized
gains net of tax of
$(1,531)........................... -- -- -- (940) -- -- -- (940)
Tax benefit from exercise of
stock options...................... -- -- 748 -- -- -- -- 748
------ ------ -------- -------- --------- -------- ------- ---------
Balance, December 31,
1998............................... -- 190 156,465 8,889 10,120 (15,592) (2,045) 158,027
Net income.......................... -- -- -- -- 23,455 -- -- 23,455
Preferred Stock dividend............ -- -- -- -- (563) -- -- (563)
Change in restricted stock
receivable......................... -- -- -- -- -- -- 243 243
Treasury stock issued for
restricted stock................... -- -- (2,464) -- -- 2,544 -- 80
Common dividends declared
(0.04 per share)................... -- -- -- -- (698) -- -- (698)
Net change in unrealized
gains net of tax of
$(8,133)........................... -- -- -- (15,102) -- -- -- (15,102)
Issuance of preferred stock......... 30 -- 25,045 -- -- -- -- 25,075
Extinguishment of Deferrable
Capital Securities, net of
tax of $5,141...................... -- -- -- -- 9,548 -- -- 9,548
------ ------ -------- -------- --------- -------- ------- ---------
Balance, December 31,
1999............................... 30 $190 $179,046 $ (6,213) $ 41,862 $(13,048) $(1,802) $ 200,065
====== ====== ======== ======== ========= ======== ======= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
9
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)................................................................... $ 23,455 $(141,184) $ 36,860
Adjustments to reconcile net income (loss) to cash provided from
operations.......................................................................
Changes in:
Loss and LAE reserves............................................................ (150,202) (91,886) 140,152
Unearned premium reserves........................................................ (176,485) (55,537) 38,350
Deferred income taxes............................................................ 7,911 9,434 3,959
Accrued income taxes............................................................. 18,401 (34,933) (18,354)
Reinsurance balances payable..................................................... (45,589) (7,869) 5,735
Other liabilities................................................................ (21,875) (26,633) 18,617
Premiums in course of collection................................................. 153,299 179,874 (285,188)
Reinsurance recoverable on paid losses........................................... 33,651 25,063 (8,515)
Other assets..................................................................... 4,965 2,403 15,519
Policy acquisition costs deferred................................................... (48,739) (153,331) (112,981)
Policy acquisition costs amortized.................................................. 99,237 164,600 105,209
Investment gains.................................................................... (7,956) (3,272) (3,283)
Amortization and depreciation....................................................... 6,237 11,647 4,803
Goodwill impairment................................................................. -- 74,496 --
(Gain) Loss on disposition of property, plant, equipment............................ 410 -- (38)
--------- --------- ---------
Net cash used in operations...................................................... (103,280) (47,128) (59,155)
Investing Activities:
Investments sold, matured, and called:
Fixed maturities available for sale--matured, called and sold.................... 293,966 156,377 283,723
Equity securities................................................................ 21,588 3,822 2,291
Investments acquired:
Fixed maturities available for sale.............................................. (193,621) (116,007) (52,871)
Equity securities................................................................ (1,071) (4,323) --
Net cash paid for acquisition.................................................... -- -- (245,811)
Net (increase) decrease in short-term investments................................... 6,003 (12,005) (13,610)
Disposition of Vesta County Mutual.................................................. 11,200 -- --
Additions to property and equipment................................................. (2,294) (5,659) (4,182)
Dispositions of property and equipment.............................................. 671 1,677 289
--------- --------- ---------
Net cash provided from (used in) investing activities............................ 136,442 23,882 (30,171)
Financing Activities:
Net change in short term debt....................................................... (65,000) 25,000 23,000
Issuance of long term debt and deferrable capital securities........................ 44,082 -- 100,321
Retirement of long term debt and deferrable capital securities...................... (44,589) (300) --
Issuance of treasury stock.......................................................... -- -- 6,302
Acquisition of treasury stock....................................................... -- -- (21,164)
Dividends paid...................................................................... (698) (2,770) (2,797)
Preferred stock issuance............................................................ 25,075 -- --
Capital contributions from exercising stock options................................. 324 4,836 828
--------- --------- ---------
Net cash provided from (used in) financing activities............................... (40,806) 26,766 106,490
--------- --------- ---------
Increase (decrease) in cash.......................................................... (7,644) 3,520 17,164
Cash at beginning year............................................................... 25,321 21,801 4,637
--------- --------- ---------
Cash at end of year.................................................................. $ 17,677 $ 25,321 $ 21,801
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
10
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1999, Torchmark held
approximately 5.1 million 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 primary
insurance on personal risks. The lead insurer in the Vesta Group is Vesta Fire.
The Company focuses primarily on private passenger auto and property coverages.
In 1999, the Company discontinued its commercial line of business. See note R
and S. The Company also exited its reinsurance assumed line of business with the
exception of a large block of business being converted from assumed to direct.
(see Note R)
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 1998 and 1999 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, deferred policy
acquisition costs and reinsurance recoverables.
Investments: Investment 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.
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. If an
investment becomes permanently impaired, such impairment is treated as a
realized loss and the investment is adjusted to net realizable value.
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.
11
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Significant Accounting Policies (continued)
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 is recognized as revenue over the contract
period as reported by the cedant.
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 ("IBNR") 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 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.
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 1
to 9 years. 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.
Income Per Share: 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: 1999-
18,698,773, 1998-18,548,612, 1997-18,600,000. 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: 1999-20,202,061, 1998-18,548,612, 1997-19,053,000.
12
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A--Significant Accounting Policies (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- ------------- ---------
<S> <C> <C> <C>
(in thousands except per share
data)
BASIC NET INCOME PER SHARE:
Weighted average common shares outstanding.............................. 18,699 18,549 18,600
Net income (loss) available to common stockholders...................... $32,440 $(141,184) $36,860
Basic net income (loss) per share available to common
stockholders........................................................ $ 1.73 $ (7.61) $ 1.98
DILUTED NET INCOME PER SHARE:
Weighted average common shares outstanding.............................. 18,699 18,549 18,600
Net effect of assumed conversion of Preferred stock........................ 1,503 -- --
Net effect of the assumed exercise of stock options based on the
treasury stock method using average market price for the year........... -- -- 453
------- --------- -------
Total weighted average common shares and common stock
equivalents outstanding................................................. 20,202 18,549 19,053
Net income(loss) available to common
stockholder............................................................ $33,003 $(141,184) $36,860
Diluted net income (loss) per share available to common
stockholders........................................................... $ 1.63 $ (7.61) $ 1.93
</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 Standard. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires all derivatives to be recorded on the balance sheet at fair value,
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133. This statement defers the effective date of SFAS No. 133. As
a result, SFAS No. 133 will not be effective for the Company, until the year
2001. The impact of the reporting requirements of SFAS No. 133 on the Company
will depend on the nature and amount of derivative instruments the Company might
have at date of implementation. The Company does not currently believe the
impact will be material.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to the recognition of revenues. The
Company has evaluated the impact of the reporting requirements of SAB No. 101
and has determined that there will be no material impact on its consolidated
results of operations, financial position or cash flows.
13
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note B--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.
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, of which $65.5 million was
attributable to continuing operations and $9 million to discontinued operations.
Note C--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 generally
accepted accounting principles (GAAP). The most significant differences between
GAAP and statutory accounting principles 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) deferred income taxes are
provided for temporary differences between financial and taxable earnings; (c)
certain items are reported as assets (property and equipment, agents' balances,
prepaid expenses) rather than being charged directly to surplus as nonadmitted
items; (d) statutory accounting disallows reserve credits for reinsurance in
certain circumstances; (e) bonds are recorded at their market values instead of
amortized costs.
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,
--------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Statutory net income (loss).......................................... $ 67,234 $(107,074) $ (44,941)
Accounting Irregularities(1)......................................... -- 7,715 --
Deferral of acquisition costs........................................ 48,739 153,331 112,981
Amortization of acquisition costs.................................... (99,237) (164,600) (105,209)
Effects of retroactive reinsurance................................... 6,573 7,097 (16,945)
Differences in insurance policy liabilities.......................... 9,429 14,910 13,177
Reinsurance premium and loss accrual................................. -- -- 46,785
Deferred income taxes................................................ (11,365) 39,293 2,732
Income (loss) of non-insurance entities and other.................... 3,705 (10,751) 32,011
Investment gains..................................................... 495 -- 276
Goodwill and other intangible amortization........................... (2,118) (6,609) (4,007)
Loss on asset impairment............................................. -- (74,496) --
-------- --------- ---------
GAAP net income (loss)............................................... $ 23,455 $(141,184) $ 36,860
======== ========= =========
</TABLE>
14
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C--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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Statutory stockholder's equity....................................... $ 271,986 $ 220,210 $ 317,875
Deferred gain on retroactive reinsurance............................. (3,275) (9,848) (16,945)
Differences in insurance policy liabilities.......................... 7,044 55,343 15,554
Deferred policy acquisition costs.................................... 40,357 90,855 102,124
Deferred income taxes................................................ 13,489 19,090 7,310
Nonadmitted assets................................................... 13,689 22,131 297
Goodwill and other intangible assets................................. 24,914 24,394 96,141
Net liabilities of non-insurance entities............................ (163,208) (274,850) (231,204)
Unrealized gain (loss) on investments................................ (4,931) 10,702 6,184
--------- --------- ---------
GAAP stockholders' equity............................................ $ 200,065 $ 158,027 $ 297,336
========= ========= =========
</TABLE>
---------------
(1) 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 ADOI completed a target examination on Vesta
Fire's 1998 filing and issued its report on July 9, 1999. On November 30, 1999,
Vesta Fire, Vesta Insurance Corporation and Sheffield Insurance Corporation and
redomesticated from Alabama to Illinois and Shelby Casualty Insurance Company
redomesticated from Indiana to Illinois for regulatory purposes.
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 Illinois. The
restrictions are generally based on certain levels of surplus, investment income
and operating income, as determined under statutory accounting practices.
Illinois 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 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.
15
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note C--Statutory Accounting and Regulation (continued)
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's liabilities
(including underwriting risks related to the nature and experience of its
insurance business). Risk-based capital rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" ("ACL") of RBC. Based on calculations
made by the Company, the Company exceeds RBC requirements.
Note D--Investment Operations
Investment income is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Fixed maturities......................................................... $24,215 $27,930 $23,876
Equity securities........................................................ 135 422 248
Short-term investments................................................... 9,885 9,323 12,763
------- ------- -------
34,235 37,675 36,887
Less investment expense.................................................. (2,130) (2,617) (927)
------- ------- -------
Investment income........................................................ $32,105 $35,058 $35,960
Investment income allocated to discontinued
operations........................................................... (5,198) (6,196) (4,000)
Net investment income from
continuing operations................................................ $26,907 $28,862 $31,960
======= ======= =======
</TABLE>
An analysis of gains (losses) from investments is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
------------ ----------- --------
<S> <C> <C> <C>
Realized investment gains (losses) from:
Fixed maturities........................................................ $ (250) $ 159 $3,000
Equity securities....................................................... 8,206 3,113 283
-------- ------- ------
$ 7,956 $ 3,272 $3,283
-------- ------- ------
Net change in unrealized investment gains (losses) on:
Fixed maturities available for sale..................................... $(15,634) $ 4,060 $3,772
Equity securities available for sale.................................... (3,199) (6,531) 5,542
Less: Applicable tax (benefit) expense................................... (3,731) (1,531) 3,927
-------- ------- ------
Net change in unrealized gains (losses).................................. $(15,102) $ (940) $5,387
======== ======= ======
</TABLE>
16
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note D--Investment Operations (continued)
A summary of fixed maturities and equity securities by amortized cost and
estimated fair value at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
----------- ---------- ----------
Amortized Unrealized Unrealized Fair
1999: ----------- ---------- ---------- -----------
----- Cost Gains Losses Value
----------- ---------- ---------- -----------
Fixed maturities available for sale:
<S> <C> <C> <C> <C>
United States Government.......................................... $ 64,284 $ 158 $ 1,073 $ 63,369
States, municipalities and political subdivisions................. 36,651 241 586 36,306
Foreign governments............................................... 3,594 -- 129 3,465
Corporate......................................................... 157,310 34 5,226 152,118
Mortgage-backed securities, GNMA collateral....................... 86,921 29 2,779 84,171
-------- ------- ------- --------
Total Fixed Maturities........................................... 348,760 462 9,793 339,429
Equity securities.................................................. 2,092 82 309 1,865
-------- ------- ------- --------
Total portfolio.................................................. $350,852 $ 544 $10,102 $341,294
======== ======= ======= ========
1998:
-----
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>
A schedule of fixed maturities held for investment by contractual maturity at
December 31, 1999 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>
Cost or
-----------
Amortized Fair
----------- -----------
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less.............................................. $ 36,276 $ 35,853
Due from one to five years........................................... 127,765 124,093
Due from five to ten years........................................... 79,372 77,078
Due in ten years or more............................................. 18,426 18,234
-------- --------
$261,839 $255,258
Mortgage backed securities, including
GNMA's and GNMA collateral........................................ 86,921 84,171
-------- --------
Total................................................................ $348,760 $339,429
======== ========
</TABLE>
Proceeds from the sale of equity securities were $22 million, $4 million and
$2 million in 1999, 1998 and 1997, respectively. Gross gains realized on those
sales were $8.2 million, $3.1 million and $.3 million in 1999, 1998 and 1997,
respectively. Proceeds from sales, maturities and calls of fixed maturities were
$294 million in 1999, $156 million in 1998 and $284 million in 1997. Gross gains
realized on those sales were $1.7 million in 1999, $.2 million in 1998 and $3.4
million in 1997. Gross losses on those sales were $2 million in 1999, $.02
million in 1998 and $.3 million in 1997.
17
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note E--Property and Equipment
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
Estimated
---------
Useful
---------
December 31, Lives
-------------------- ---------
1999 1998
--------- ---------
<S> <C> <C> <C>
Building and real estate................................................. $15,664 $15,664 3-9 yrs
Data processing equipment................................................ 11,818 20,874 3-5 yrs
Furniture and office equipment........................................... 6,218 6,066 1-5 yrs
Other.................................................................... 6,780 6,408 1-5 yrs
------- -------
40,480 49,012
Accumulated Depreciation................................................. 24,878 30,570
------- -------
Net Property and Equipment............................................... $15,602 $18,442
======= =======
</TABLE>
Depreciation expense on property and equipment used in the business was $4.3
million, $4.2 million, and $2.9 million each of the years 1999, 1998, 1997
Note F--Deferred Policy Acquisition Costs
Deferred policy acquisition costs for the years ended December 31, 1999, 1998
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year......................................... $ 90,855 $ 102,124 $ 75,532
Deferred policy acquisition costs acquired in
acquisition of Shelby............................................. -- -- 18,820
Deferred during period............................................... 48,739 153,331 112,981
Amortized during period.............................................. (99,237) (164,600) (105,209)
-------- --------- ---------
Balance at end of year............................................... $ 40,357 $ 90,855 $ 102,124
======== ========= =========
</TABLE>
Commissions comprise the majority of the additions to deferred policy
acquisition costs in each year.
18
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note G--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,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Gross Losses and LAE reserves at beginning of
year............................................................. $ 504,911 $ 596,797 $ 173,275
Reinsurance Recoverable........................................... (206,139) (204,336) (60,343)
--------- --------- ---------
Net Losses and LAE reserves at beginning of year.................. 298,772 392,461 112,932
Increases (decreases) in provisions for losses and
LAE for claims incurred:
Current year..................................................... 268,931 396,091 311,089
Prior year....................................................... (22,167) (769) (12,451)
Acquisition of Shelby............................................. -- -- 300,315
Losses and LAE payments for claims incurred:
Current year..................................................... (198,503) (269,369) (166,447)
Prior year....................................................... (178,883) (219,642) (152,977)
--------- --------- ---------
Net Losses and LAE reserves at end of year........................ 168,150 298,772 392,461
Reinsurance Recoverable........................................... 186,559 206,139 204,336
--------- --------- ---------
Gross loss and LAE Reserves....................................... $ 354,709 $ 504,911 $ 596,797
========= ========= =========
</TABLE>
The favorable development of $22.2 million is primarily attributable to
positive development on personal lines and on the run out of the assumed
reinsurance lines, commutation gains and additional ceded recoveries.
Note H--Related Party Transactions
Vesta leases office space from SG/SPU Property I, LLC, formerly Torchmark
Development Corporation, which, until September 25, 1999 was a wholly owned
subsidiary of Torchmark Corporation. Rent expense of $1.7 million, $1.2 million
and $.7 million was charged to operations for the years ended December 31, 1999,
1998 and 1997, 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 $.6 million, $.6 million and $.4 million in fees to
WRAMCO pursuant to the Investment Services Agreement in 1999, 1998 and 1997,
respectively. In 1999, the Company cancelled the Investment Services Agreement
with WRAMCO.
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 1999, 1998 and 1997 was $1 thousand, $.9 million and $1.4
million, respectively. This agreement was terminated effective April 30, 1995,
and these products are no longer marketed through Liberty National agents.
19
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I--Commitments and Contingencies
Securities 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 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 items by issuance of
a current report on Form 8-K dated August 19, 1998. These restatements 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 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 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, which was
granted in 1999. The consolidated amended complaint also added as defendants
Torchmark Corporation and the Company's predecessor auditors, KPMG 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
conducted in the securities case. 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
20
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I--Commitments and Contingencies (continued)
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.
Pursuant to Delaware law and by-laws, the Company is obligated to indemnify
its current and former officers and directors for certain liabilities arising
from their employment with or service to the Company. The Company believes that
these indemnification obligations extend to its current and former officers' and
directors' costs of defense and other liabilities which may arise out of the
securities litigation described above.
The Company has purchased directors' and officers' liability insurance ("D&O
insurance") for the purposes of covering among other things the costs incurred
in connection with these indemnification obligations. For the period in which
most of the claims against the Company and certain of its directors and officers
were asserted, the Company had in place a primary D&O insurance policy providing
$25 million in coverage and an excess D&O insurance policy covering for an
additional $25 million in coverage. The issuer of the primary D&O insurance
policy, Cincinnati, has attempted to avoid coverage as discussed above, and the
Company is vigorously resisting its efforts to do so.
Subsequent to the initiation of the class actions described above, the Company
secured additional excess D&O insurance providing coverage for losses in excess
of $50 million up to $110 million, or additional excess coverage of $60 million
for the class actions. The Company paid for this additional excess policy in
full in 1998.
These matters are in their early stages and their ultimate outcome cannot be
determined. Accordingly, the Company has not currently set aside any financial
reserves relating to any of the above-referenced actions.
Other Litigation and Arbitration
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitration relating to the regular conduct of
its insurance business. These proceedings involve alleged breaches of contract,
torts, including bad faith and fraud claims and miscellaneous other specified
relief. Based upon information presently available, and in light of legal and
other defenses available to the Company and its subsidiaries, management does
not consider liability from any threatened or pending litigation regarding
routine matters to be material.
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 three treaty participants
accordingly. The aggregate amount included herein as recoverable from such
reinsurers totaled $54.4 million at December 31, 1999. The Company has collected
approximately $48.5 million from significant reinsurers via the conversion of
collateral on hand.
21
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I--Commitments and Contingencies (continued)
NRMA, one of the participants in the 20 percent whole account quota share
treaty, 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 the treaty and has filed a motion to
compel arbitration which was recently granted in a United States District Court
action. The Company has filed for arbitration against the other two participants
on the treaty and those arbitrations are in their early stages. 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.
A dispute has arisen with F&G Re (on behalf of USF&G) under two aggregate stop
loss reinsurance treaties whereby F&G Re assumed certain risk from the Company.
During 1999 F&G Re filed for arbitration under those two treaties.
While management believes its interpretation of the treaties' terms and
computations based thereon are correct, this arbitration is in its early stages
and its ultimate outcome cannot be determined at this time.
On September 23, 1999, Torchmark Corporation, the Company's largest common
stockholder, 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 result of operation.
On June 23, 1999, a subsidiary of Torchmark filed suit in the Circuit Court of
Jefferson County, Alabama against two subsidiaries of the Company. The lawsuit
claims that the Company's subsidiaries have failed to pay certain sums due under
a marketing and administrative services agreement between the parties. The suit
also seeks payment of certain commissions and administrative expenses. 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.
Under insurance guaranty fund laws, in most states, insurance companies doing
business therein can be assessed up to prescribed limits for policyholder losses
incurred by insolvent companies. The Company does not believe such assessments
will be materially different from amounts already provided for in the financial
statements.
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 $2.1 million, $1.8
million, and $1.2 million, for the years ending December 31, 1999, 1998, and
1997, 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, 1999, the
22
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I--Commitments and Contingencies (continued)
investment portfolio consisted of securities of the U.S. government or U.S.
government backed securities (13.1%); mortgage backed securities GNMA collateral
(17.4%); investment grade corporate bonds (31.4%); cash and short-term
investments (29.5%); securities of state and municipal governments (7.5%);
securities of foreign governments (0.7%); and corporate common stocks (0.4%).
Corporate equity and debt investments are made in a wide range of industries.
All of Vesta's investments at year-end 1999 were rated investment grade.
Note J--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,
-------------------------------
1999 1998 1997
-------- --------- ----------
<S> <C> <C> <C>
Paid in capital from tax benefit of stock option
exercises..................................................... -- $ 748 $2,574
</TABLE>
The following table summarizes certain amounts paid during the period:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Interest paid.................................................... $10,174 $11,193 $15,113
Income taxes paid................................................ $ -- $ -- $22,571
</TABLE>
Note K--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,
-----------------------------------
1999 1998 1997
--------- ----------- -----------
<S> <C> <C> <C>
Reinsurance ceded:
Premiums ceded................................................ $91,759 $310,652 $300,799
Losses and LAE recovered
and recoverable.............................................. $97,758 $199,026 $345,780
</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,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Losses and loss adjustment expense......................................... $186,558 $206,139
Retroactive Reinsurance Receivable......................................... 3,275 9,848
Unearned premiums.......................................................... 3,512 49,916
-------- --------
$193,345 $265,903
======== ========
</TABLE>
23
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Premiums assumed..................................................... $116,678 $341,956 $495,063
Losses and loss adjustment expenses assumed.......................... 69,348 230,497 333,488
</TABLE>
The effect of reinsurance on premiums written and earned, including premiums
for discontinued operations is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ---------------------------- ----------------------------
Written Earned Written Earned Written Earned
------------ ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Direct................................ $300,545 $371,416 $ 471,404 $ 478,389 $ 330,624 $ 323,394
Assumed............................... 7,215 116,678 287,617 341,956 535,427 495,063
Ceded................................. (41,506) (91,759) (267,431) (310,652) (339,576) (300,799)
-------- -------- --------- --------- --------- ---------
Net premiums......................... $266,254 $396,335 $ 491,590 $ 509,693 $ 526,475 $ 517,658
======== ======== ========= ========= ========= =========
</TABLE>
Note L--Income Taxes
Income tax expense (benefit) for the years ended December 31, 1999, 1998, and
1997 was allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Tax expense (benefit) from continuing operations....................... $13,633 $(48,555) $21,257
Tax expense (benefit) from discontinued operations..................... (1,208) (8,689) 1,859
Deferrable Capital Securities.......................................... (3,075) (3,076) (2,719)
------- -------- -------
$ 9,350 $(60,320) $20,397
======= ======== =======
</TABLE>
Income tax expense (benefit) attributable to income from operations consists
of:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998 1997
--------- ------------ -----------
<S> <C> <C> <C>
Current tax expense (benefit)......................................... $ 1,060 $(17,951) $25,848
Deferred tax expense (benefit)........................................ 11,365 (39,293) (2,732)
Discontinued operations income benefit (expense)...................... 1,208 8,689 (1,859)
------- -------- -------
Total tax expense from continuing
operations........................................................ $13,633 $(48,555) $21,257
======= ======== =======
</TABLE>
24
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note L--Income Taxes (continued)
Vesta's effective income tax rate differed from the statutory income tax rate
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997
----------------------- --------------------------- ------------------------
Amount % Amount % Amount %
----------- ---------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate............ $14,198 35% $(67,543) (35%) $22,759 35%
Increases (reductions) in tax
resulting from:
Tax exempt investment income.............. (2,204) (5) (2,246) (2) (2,019) (2)
State income tax.......................... -- -- -- -- 337 --
Goodwill.................................. 188 .4 13,109 8
Other..................................... 243 .6 (564) -- 2,039 2
------- -- -------- --- ------- --
$12,425 31% $(57,244) (29%) $23,116 35%
======= == ======== === ======= ==
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities included in
other liabilities at December 31, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
Deferred tax assets:
<S> <C> <C>
Unearned and advance premiums........................................................ $ 9,122 $20,312
Discounted unpaid losses............................................................. 8,217 13,615
Net operating loss/AMT credit carryforward........................................... 20,077 38,049
Goodwill............................................................................. 7,140 7,983
Retroactive Reinsurance.............................................................. 1,146 3,447
Deferred Compensation................................................................ 695 775
------- -------
Total deferred tax assets............................................................... $46,397 $84,181
======= =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
----------- ---------
Deferred tax liabilities:
<S> <C> <C>
Deferred acquisition costs........................................................... $20,565 $35,335
Contingent commissions............................................................... 2,002 4,005
Unrealized gains..................................................................... (1,779) 6,446
Fixed assets......................................................................... 2,889 2,606
Contingent receivables............................................................... 2,748 4,764
Salvage and subrogation.............................................................. 100 248
Reinsurance Recoverables............................................................. 5,958 10,982
Other................................................................................ 425 705
------- -------
Total deferred tax liabilities.......................................................... $32,908 $65,091
------- -------
Net deferred tax asset.................................................................. $13,489 $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 has determined that the benefits of its deferred tax
assets are realizable and accordingly, no valuation allowance has been recorded
at December 31, 1999 and 1998. Net operating loss carryforwards expire in 2019.
25
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note M--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
1999. Vesta's total cost for benefits under these plans was $.1 million for
1999, $.1 million for 1998 and $.7 million for 1997.
Note N--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.
26
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note N--Segment Information (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Revenues
Reinsurance Operations
Net premiums earned..................................................................... $ 96,029 $ 194,261 $ 335,360
Net investment income and realized gain/(loss).......................................... 10,659 9,136 17,976
-------- ---------- ----------
Total reinsurance...................................................................... 106,688 203,397 353,336
Personal insurance operations
Net premiums earned...................................................................... 248,077 247,064 139,425
Net investment income and realized gain/(loss)........................................... 24,204 22,998 17,267
Other.................................................................................... 9,327 5,473 2,094
-------- ---------- ----------
Total personal......................................................................... 281,608 275,535 158,786
Commercial insurance operations (discontinued)
Net premiums earned...................................................................... 52,230 68,368 42,873
Net investment income and realized gain/(loss)........................................... 5,198 6,196 4,000
Other.................................................................................... -- -- --
-------- ---------- ----------
Total commercial (discontinued)........................................................ 57,428 74,564 46,873
-------- ---------- ----------
Total revenues......................................................................... $445,724 $ 553,496 $ 558,995
======== ========== ==========
Total pretax income from operations
Reinsurance Operations
Underwriting gain (loss)................................................................ $ 5,493 $ (70,028) $ 38,788
Net investment income and realized gain/(loss).......................................... 10,659 9,136 17,976
Interest expense........................................................................ 3,700 6,184 7,711
-------- ---------- ----------
Gain on sale of renewal rights.......................................................... 15,000 -- --
-------- ---------- ----------
Total reinsurance...................................................................... 27,452 (67,076) 49,053
Personal Operations
Underwriting gain (loss)................................................................ (4,388) (51,005) (2,484)
Net investment income and realized gain/(loss).......................................... 24,204 22,998 17,267
Other income............................................................................ 9,327 5,473 2,094
Interest expense........................................................................ 9,515 7,870 3,149
Loss on asset impairment................................................................ -- 65,496 --
Goodwill................................................................................ 2,118 5,177 3,065
-------- ---------- ----------
Total personal......................................................................... 17,510 (101,077) 10,663
Commercial Operations(discontinued)
Underwriting gain (loss)................................................................ (8,646) (20,590) 2,252
Net investment income and realized gain/(loss).......................................... 5,198 6,196 4,000
Other income............................................................................ -- -- --
Loss on asset impairment................................................................ -- 9,000 --
Interest expense........................................................................ -- -- --
Goodwill................................................................................ -- 1,432 942
-------- ---------- ----------
Total commercial (discontinued)........................................................ (3,448) (24,826) 5,310
-------- ---------- ----------
Total pretax income (loss) from operations............................................. $ 41,514 $ (192,979) $ 65,026
======== ========== ==========
Total identifiable assets
Reinsurance operations
Investments and other assets............................................................ $ 84,741 $ 240,022 $ 681,273
Deferred acquisition costs.............................................................. 7,453 47,662 52,742
Personal operations
Investments and other assets............................................................ 636,505 803,283 580,809
Deferred acquisition costs.............................................................. 31,362 35,465 38,772
Commercial operations (discontinued)
Investments and other assets............................................................ 154,205 213,542 272,653
Deferred acquisition costs.............................................................. 1,542 7,728 10,610
-------- ---------- ----------
Total assets........................................................................... $915,809 $1,347,702 $1,636,859
======== ========== ==========
</TABLE>
The Company has reclassed prior year's segment data to reflect the
discontinuance of Commercial Lines. The reclasses reflect changes to the
Company's allocation of investment income and operating expenses to present the
Personal and Reinsurance segments on a continuing operations basis.
27
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O--Debt
Long-term debt and deferrable capital securities at December 31, 1999 and 1998
consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
8.75% Senior Debentures, due July 15, 2025...................................... $100,000 $100,000
12.5% Senior Notes, due December 30, 2006....................................... 44,082 --
Less: debt issue cost........................................................ (2,206) (1,698)
-------- --------
Long-term debt.............................................................. $141,876 $ 98,302
======== ========
8.525% Deferrable Capital Securities, issued by
Vesta Capital Trust I........................................................ $ 41,225 $100,000
======== ========
</TABLE>
The 12.5% senior notes have one million warrants attached that become
exercisable in the event that the notes are still outstanding on December 31,
2004. Based on the probability of exercise, Vesta's stock price at the date of
issuance and other factors, the value of the warrants is immaterial to the
financial statements.
The Company's short-term debt outstanding at December 31, 1999 and 1998 as
follows (in thousands):
<TABLE>
<CAPTION>
Outstanding Available
----------- ---------
<S> <C> <C>
1999........................................................................... $ 5,000 $10,000
1998........................................................................... $70,000 $ 0
</TABLE>
The credit agreement related to the 1998 line of credit contains certain
covenants that require, among other things, the Company to maintain a certain
consolidated net worth, maintain a certain amount of earnings before interest
and taxes available for the payment of interest and dividend expense, cause each
insurance subsidiary to maintain a certain total adjusted statutory capital, 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.
The Company's former 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 interest rate on the Amended Facility was the prime rate plus 1%,
provided that from and after September 30, 1999 the rate 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 Amended Facility required 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. Based on its ability and intent to make the required principal
payments, the Company assigned no value to the warrants. On September 30, 1999,
the Company repaid the Amended Credit Facility and cancelled the warrants.
28
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note O--Debt (continued)
As of December 31, 1999, the Company's credit facilities consisted of a $5
million unsecured line of credit and an additional $10 million line of credit,
secured by a pledge of the management contract between our wholly owned
management company, J. Gordon Gaines, Inc., and our operating insurance
subsidiaries and carried an interest rate of the bank's prime rate.
In 1997, our single purpose finance subsidiary, Vesta Capital Trust I, issued
$100 million principal amount of its 8.525% Deferrable Interest Capital
Securities. We have unconditionally guaranteed Vesta Capital Trust's obligation
to make semi-annual distributions on these capital securities, and we have
issued a debenture in a like amount to Vesta Capital Trust which requires us to
make interest payments in the same amounts and at the same times as the
distributions which are payable on these capital securities. The terms of the
capital securities and the underlying debenture permit us to defer interest
payments on the debentures, and, therefore, distributions on the capital
securities, for up to ten years. We exercised this right of deferral with
respect to the semi-annual payment originally due July 15, 1999. While we have
elected to resume payment on these capital securities effective January 15,
2000, including all accrued amounts due since July 15, 1999, we may elect to
defer payments again in the future. In the event we elect to defer such payments
again in the future, we will not be permitted to pay any dividends on our common
stock or other equity securities, including the preferred stock held by the
Birmingham Investment Group, LLC. On December 30, 1999, the Company exchanged
$44.1 million of 12.5% senior notes, due 2006 for $58.8 million of the
Deferrable Capital Securities. The resulting after-tax gain of $9.5 million was
recorded directly to retained earnings in accordance with EITF 86-32 "Early
Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock". As of
December 31, 1999, approximately $41 million of these capital securities
remained outstanding and carried a semi-annual distribution obligation of
approximately $1.8 million.
Covenants
The Credit Agreements and indentures related to the Company's commercial
credit facilities and long term debt described above contain various covenants
which restrict the Company's ability to incur additional indebtedness, issue
additional preferred stock, dispose of certain assets and pay dividends on its
common stock in excess of $.15 per share on an annual basis. In addition, these
agreements require Vesta to maintain certain minimum levels of consolidated net
income, statutory consolidated net income and statutory surplus, which levels
vary from quarter to quarter over the term of the credit agreement, and also
require Vesta Fire's "total adjusted capital" to be at least 150% of the
applicable "company action level" for Vesta Fire's risk based capital at any
time. The Company's liability to comply with these covenants and financial tests
may be affected by events beyond the Company's control, including economic,
financial and industry conditions. Failure to comply with covenants may result
in a default under the Company's credit agreements and/or indentures, and if any
such default were not remedied within the applicable grace period, if any, the
lenders under such agreements would be entitled to declare the amounts
outstanding thereunder due and payable.
The estimated fair value and carrying amounts of the Company's long term debt
are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Fair Value................................................. $ 58,227 $ 84,151
Carrying amount............................................ 183,101 198,302
</TABLE>
29
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P--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
value 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 August 27, 1999
and May 16, 1995, including an amendment to increase the shares of the Company's
common stock available for awards under the Plan 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 1999,
1998 and 1997, respectively; risk-free interest rates of 6.22%, 5.16% and 5.75%;
dividend yields of 1.67%, 0.44% and 0.27%; volatility factor of the expected
market price of the Company's common stock of 67.02, 44.7, and 38.75; and a
weighted-average expected life of the options of ten years for all years.
The Company's actual and pro forma information follows (in thousands except
for earnings per share information):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) available to common stockholders:
As reported...................................................... $32,440 $(141,184) $36,860
Pro forma........................................................ 31,809 (144,684) 33,576
Basic net income (loss) per common share:
As reported...................................................... $ 1.73 $ (7.61) $ 1.98
Pro forma........................................................ 1.70 (7.80) 1.81
Diluted net income (loss) per common share:
As reported...................................................... $ 1.63 $ (7.61) $ 1.93
Pro forma........................................................ 1.60 $ (7.80) $ 1.76
</TABLE>
30
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note P--Stock Options (continued)
The following summary sets forth activity under the Plan for the years ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- -----------------------
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.............. 564,048 $24.40 937,451 $25.65 1,022,872 $20.38
Granted......................................... 431,500 4.58 101,500 21.30 135,085 51.64
Exercised....................................... -- -- 237,000 17.16 220,506 17.15
Forfeited....................................... 134,912 16.91 237,903 35.14 -- --
-------- ------ -------- ------ ---------- ------
Outstanding--end of the year.................... 860,636 $15.64 564,048 $24.43 937,451 $25.65
======== ====== ======== ====== ========== ======
Weighted-average fair value of
options granted during the year................ $ 2.92 $ 12.56 $ 36.89
</TABLE>
Of the 860,636 outstanding options at December 31, 1999, 585,636 were
exercisable. Of the remaining 275,000 shares, 50% will vest in 2003 and 50% in
2004. Exercise prices for options outstanding as of December 31, 1999 ranged
from $4.44 to $59.19.
The following table shows expiration dates and the weighted average exercise
price for all outstanding options at December 31, 1999.
<TABLE>
<CAPTION>
Weighted Average
Number of ----------------
Expiration Date Shares Exercise Price
--------------- --------- ----------------
<S> <C> <C>
2003............................................. 90,917 16.14
2004............................................. 22,500 15.25
2005............................................. 80,418 20.98
2006............................................. 55,700 31.17
2007............................................. 69,798 37.15
2008............................................. 109,803 33.28
2009............................................. 431,500 4.58
</TABLE>
At December 31, 1999, the Company had issued 249,307 shares of restricted
stock. 74,307 shares have been issued to officers of the Company in exchange for
promissory notes. The common stock is being held by the Company for security for
the repayment of the notes. The balance of the notes at December 31, 1999 and
1998, respectively, was $1.8 million and $2.1 million. The promissory notes are
shown as deductions from stockholders' equity.
The restrictions on the remaining 175,000 shares expire in 2003 and 2004.
31
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note Q--Quarterly Financial Information (Unaudited)
The following is a summary of quarterly financial data, in thousands except
per share data:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
----------- ----------- -------------- ------------
1999 1999 1999 1999
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Gross premiums written...................................... $ 59,609 $84,462 $64,875 $53,260
Net premiums written........................................ 43,641 81,011 72,425 45,785
Premiums earned............................................. 105,604 83,745 87,782 66,975
Net investment income....................................... 6,564 6,159 6,338 7,846
Operating costs and expenses................................ 113,224 88,134 88,185 68,790
Net income (loss) from continuing operations................ 9,123 5,376 7,977 3,221
Preferred stock dividend.................................... -- -- -- 563
Gain on extinguishment of deferrable capital securities..... 9,548
Net income (loss) from discontinued operations.............. (330) (873) (2,947) 1,908
Net income available to common stockholders................. $ 8,793 $ 4,503 $ 5,030 $14,114
Diluted per share data:
Net income from continuing operations....................... .49 .29 .43 .06
Net income from discontinued operations..................... (.02) (.05) (.16) .12
Net income available to common stockholders................. .47 .24 .27 .65
Stockholder's equity per share.............................. 8.81 8.60 10.13 10.63
Cash dividends per share.................................... .04 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
March 31, June 30, September 30, December 31,
------------ ------------ -------------- --------------
1998 1998 1998 1998
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Gross premiums written.................................... $196,359 $220,529 $ 82,123 $ 135,600
Net premiums written...................................... 115,294 153,381 34,694 119,200
Premiums earned........................................... 120,875 147,812 47,802 124,836
Net investment income..................................... 7,631 7,461 6,784 10,258
Operating costs and expenses.............................. 129,995 174,854 83,473 193,267
Loss on asset impairment.................................. -- -- -- (65,496)
Net income (loss) from continuing operations.............. (1,577) (12,461) (21,465) (89,544)
Net income (loss) from discontinued operations............ 3,648 (4,726) (3,306) (11,753)
Net income available to common stockholders............... $ 2,071 $(17,185) $(24,773) $(101,297)
Diluted per share data:
Net income from continuing operations..................... (.09) (.68) (1.16) (4.82)
Net income from discontinued operations................... .20 (.25) (.18) (.63)
Net income available to common stockholders............... .11 (.93) (1.34) (5.45)
Stockholder's equity per share............................ 16.73 15.72 14.63 8.47
Cash dividends per share.................................. 0.04 0.04 0.04 0.04
</TABLE>
As discussed in Note S, the Company discontinued its commercial operations
effective in the fourth quarter of 1999. Quarters prior to such effective rates
have been reclassified in accordance with Accounting Principal Board Opinion No.
30 (APB 30) for presentation of discontinued operations.
As described in Note V, the Company revised its computation of its 1999 fourth
quarter net income available to common stockholders and related earnings per
share, previously reported amounts were $4,566, and $.18, respectively.
32
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note R--Reinsurance Assumed
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. The Company is exiting the reinsurance assumed business
with this transaction and continued conversion or commutation and termination of
the other assumed reinsurance business.
The Company acquired a block of personal lines of business from CIGNA on
December 31, 1997 via a 100% quota share reinsurance contract and entered into
an agreement whereby CIGNA would use its best efforts to renew the business on
Company paper as expeditiously as possible. The Company continues to convert
this business to its paper as state rate approvals are obtained and renewal
dates are reached. The results of this business are reported in the Reinsurance
Segment until renewals are made onto Company paper, at which time such policies
become reported in the Personal Lines Segment.
In connection with the above acquisition, the Company agreed to compensate the
Seller with an initial ceding commission of $18 million, $9 million of which
represented value of business acquired and quarterly commissions through
conversion. A portion of these quarterly commissions represents additional
payments for the renewal rights to the business. Such amounts, representing
initial and additional purchase price, have been capitalized as value of
business acquired, included in goodwill and other intangibles, herein and are
amortized over the estimated retention of such business. The Company changed its
estimate of such retention in the third quarter of 1999, resulting in a $3.4
million net income improvement for the year ended December 31, 1999 as compared
to results which would have been reported under previous estimates.
Note S--Discontinued Operations
In 1999, the Company elected to exit all commercial lines programs by not
accepting new commercial policy applications and non renewing existing in-force
policies at their renewal dates. In November of 1999 the Company received final
regulatory approval to non renew its commercial lines policies from all of the
states in which the Company wrote commercial lines. Such approval represented
the measurement date for treatment of the commercial segment as a discontinued
operation under APB 30. Therefore, the commercial operations have been
segregated from continuing operations herein for all periods presented. The
Company will continue to earn premium and incur losses on policies which were
in-force through November 1999. Operating results of commercial lines were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- ------------
<S> <C> <C> <C>
Net premium earned................................................ $52,230 $ 68,368 $42,873
======= ======== =======
Income (loss) from discontinued operations before tax............. (3,450) (24,826) 5,310
Income tax expense (benefit)...................................... (1,208) (8,689) 1,859
------- -------- -------
Income (loss) from discontinued operations........................ $(2,242) $(16,137) $ 3,451
======= ======== =======
Basic net income (loss) from discontinued operations
per common share................................................ (.12) (.87) .19
Diluted net income (loss) from discontinued operations
per common share................................................ (.11) (.87) .18
</TABLE>
33
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note S--Discontinued Operations (continued)
Assets and liabilities of the commercial lines are primarily comprised of the
following at December 31, 1999:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Investments and other assets............................................. $154,205 $213,542
Deferred acquisition costs............................................... 1,542 7,728
Reserves for loss, LAE and unearned premium.............................. 155,747 221,270
</TABLE>
Note T--Subsequent Events
Subsequent to December 31, 1999, the Company repaid the outstanding $5 million
on the revolving line of credit and cancelled the related credit agreement
effective February 29, 2000.
On March 3, 2000, the Company established a revolving credit facility which
consists of a $7.5 million unsecured line which bears interest at prime plus
.23% and an additional $7.5 million line, secured by a pledge of the management
contract between our wholly owned management company, J. Gordon Gaines, Inc. and
our operating subsidiaries.
Note U--Sale of Convertible Preferred Stock
On September 30, 1999, the Company raised $25.1 million from placement of its
Series A Convertible Preferred Stock. 2,950,000 shares of the Company's
preferred stock were issued at $8.50 per share. Each share of the preferred
stock is convertible into two shares of the Company's common stock. Dividends
are cumulative at a 9% rate compounded semi-annually. The preferred stock will
automatically be converted into shares of common stock of the Company at the
date the common stock achieves an average closing price of $8.00 per share for
twenty consecutive trading days. The preferred stock can also be converted at
any time at the election of the preferred stockholders and must be converted at
the end of fifteen years. The preferred stockholders have a liquidation
preference senior to common stock, have voting rights of 5.9 million shares of
common stock, and have the right to elect 3 members of the Board of Directors.
Note V--Revision of Earnings Per Share
Subsequent to the issuance of its December 31, 1999 consolidated financial
statements, Vesta's management determined that its calculation of net income
available to common stockholders was not in accordance with Emerging Issues Task
Force Topic No. ("EITF") D-42, "The Effect on the Calculation of Earnings Per
Share for the Redemption or Induced Conversion of Preferred Stock."
As described in Note O, the Company redeemed $58.8 million of the Deferrable
Capital Securities in December, 1999 at a net gain of $9.5 million which was
recorded directly to retained earnings in accordance with EITF 86-32 "Early
Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock". EITF
D-42 requires that the excess of the carrying amount of the Deferrable Capital
Securities over the fair value of the consideration transferred to the holders
be added to net income available to common stockholders in the calculation of
earnings per share. As a result, the consolidated financial statements for the
year ended December 31, 1999 have been restated as follows (dollars in thousands
except per share data):
34
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1999
-----------------
As Previously
Reported As Restated
---------------- ----------------
<S> <C> <C>
Income (loss) available to common
stockholders $22,892 $32,440
Basic income (loss) available to common
stockholders per common share $ 1.22 $ 1.73
Diluted income (loss) available to
common stockholders per common share $ 1.16 $ 1.63
</TABLE>
The restatement did not affect previously reported Assets, Liabilities, Net
Income, Comprehensive Income, Stockholder's Equity or cash flows as of and for
the year ending December 31, 1999.
35
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Index of documents filed as a part of this report:
<TABLE>
<CAPTION>
Page of
---------
this
---------
Report
---------
(1) Financial Statements:
Vesta Insurance Group, Inc.
<S> <C>
Report of Independent Accountants............................................................. 5
Independent Auditors' Report.................................................................. 6
Consolidated Balance Sheets at December 31, 1999 and 1998..................................... 7
Consolidated Statements of Operations for each of the years in the three-year period
ended December 31, 1999...................................................................... 8
Consolidated Statements of Stockholders' Equity for each of the years in the three-year
period ended December 31, 1999............................................................... 9
Consolidated Statements of Cash Flow for each of the years in the three-year period
ended December 31, 1999...................................................................... 10
Notes to Consolidated Financial Statements.................................................... 11
(2) Schedules Supporting Financial Statements for the three years ended December 31, 1999:
II. Condensed Financial Information of Registrant (Parent Company)........................... 37
III. Supplemental Insurance Information (Consolidated)....................................... 40
IV. Reinsurance (Consolidated)............................................................... 41
V. Valuation and Qualifying Accounts (Consolidated).......................................... 41
Schedules not referred to have been omitted as inapplicable or not required by Regulation S-X.
</TABLE>
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
36
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Assets
Assets Investment in affiliates........................................... $425,387 $430,910
Short-term investments.................................................... 3,584 4,791
-------- --------
Total investments...................................................... 428,971 435,701
Cash...................................................................... -- 10,523
Other assets.............................................................. 4,045 11,179
-------- --------
Total assets........................................................... $433,016 $457,403
======== ========
Liabilities
Other liabilities......................................................... $ 41,202 $ 27,981
Long term debt............................................................ 191,749 271,395
-------- --------
Total liabilities...................................................... 232,951 299,376
Stockholders' equity
Preferred stock $.01 par value, 5,000,000 shares authorized, issued:
1999--2,950,000; 1998--0................................................ 30 --
Common stock, $.01 par value, 32,000,000 shares authorized, issued:
1999--18,964,322 shares; 1998--18,964,322 shares........................ 190 190
Additional paid-in capital................................................ 179,046 156,465
Other comprehensive income, net of applicable taxes....................... (6,213) 8,889
Retained earnings......................................................... 41,862 10,120
Receivable from issuance of restricted stock.............................. (1,802) (2,045)
Treasury stock............................................................ (13,048) (15,592)
-------- --------
Total stockholders' equity............................................. 200,065 158,027
-------- --------
Total liabilities and stockholders' equity............................. $433,016 $457,403
======== ========
</TABLE>
37
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Revenues:
Net other income (loss)............................................ $ (4,109) $ 8,457 $ (5,224)
-------- --------- --------
Expenses:
Interest expenses.................................................. 18,080 22,579 10,901
Operating expenses................................................. 2,724 2,384 (10,327)
-------- --------- --------
Total expenses.................................................. 20,804 24,963 574
-------- --------- --------
Net loss before income tax and equity
in earnings of affiliates.......................................... (24,913) (16,506) (5,798)
Income tax benefit.................................................. 8,720 5,698 1,932
-------- --------- --------
Income before equity in earnings of affiliates...................... (16,193) (10,808) (3,866)
Equity in earnings of affiliates.................................... 39,648 (130,376) 40,726
-------- --------- --------
Net income (loss)................................................... $ 23,455 $(141,184) $ 36,860
======== ========= ========
</TABLE>
38
<PAGE>
VESTA INSURANCE GROUP, INC.
(PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Cash provided from operations........................................... $ 29,002 $ 6,526 $ 48,163
Cash used in investing activities:
Contribution to investments in affiliates............................ -- (25,000) (154,616)
Net (increase) decrease in short-term investments.................... 1,207 2,224 (35)
-------- -------- ---------
Cash provided by (used) in investing activities......................... 1,207 (22,776) (154,651)
Cash (used in) provided from financing activities:
Dividends paid....................................................... (698) (2,770) (2,797)
Acquisition of treasury stock........................................ -- -- (21,164)
Issuance of treasury stock........................................... -- -- 6,302
Preferred Stock issuance............................................. 25,075 -- --
Capital Contributions from exercising stock options.................. 324 4,836 828
Issuance (retirement) of debt and deferrable capital securities...... (65,507) 24,700 123,321
-------- -------- ---------
Cash (used in) provided from financing activities....................... (40,806) 26,766 106,490
Net increase (decrease) in cash......................................... (10,597) 10,516 2
Cash balance at beginning of period..................................... 10,523 7 5
-------- -------- ---------
Cash balance at end of period........................................... $ (74) $ 10,523 $ 7
======== ======== =========
</TABLE>
39
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION (CONSOLIDATED)
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
Reserves for
Deferred Unpaid Claims
Policy and Claim
Acquisition Adjustment Unearned
Costs Expenses Premiums
------------ ------------- --------------
<S> <C> <C> <C>
As of December 31, 1999:
Reinsurance........................................................ $ 7,453 $ 62,188 $ 30,007
Commercial......................................................... 1,542 150,018 5,729
Personal........................................................... 31,362 142,503 97,293
------- -------- --------
$40,357 $354,709 $133,029
======= ======== ========
As of December 31, 1998:
Reinsurance........................................................ $47,662 $148,021 $139,663
Commercial......................................................... 7,728 178,511 42,759
Personal........................................................... 35,465 178,379 127,093
------- -------- --------
$90,855 $504,911 $309,515
======= ======== ========
</TABLE>
For the Years Ended December 31, 1999, 1998 and 1997
(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, 1999:
Reinsurance................................ $ 96,029 $ 8,272 $ 46,687 $ 41,348 $ 2,500 $ 15,055
Commercial................................. 52,230 5,198 35,062 10,497 15,317 23,392
Personal................................... 248,076 18,635 165,014 47,392 40,059 227,807
-------- ------- -------- -------- ------- --------
$396,335 $32,105 $246,763 $ 99,237 $57,876 $266,254
======== ======= ======== ======== ======= ========
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
======== ======= ======== ======== ======= ========
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
======== ======= ======== ======== ======= ========
</TABLE>
40
<PAGE>
VESTA INSURANCE GROUP, INC.
SCHEDULE IV--REINSURANCE (CONSOLIDATED)
For the Years Ended December 31, 1999, 1998 and 1997
<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>
1999.............................................. 371,416 91,759 116,678 396,335 29.5%
1998.............................................. 478,389 310,652 341,956 509,693 67.1%
1997.............................................. 323,394 300,799 495,063 517,658 95.6%
</TABLE>
VESTA INSURANCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
Balance Charged Balance
at to Costs at End
Beginning and of
Description of Period Expenses Deductions Period
------------ --------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Allowance for premiums in course of collection:
1999............................................................ 14,212 1,550 13,350 2,412
1998............................................................ 654 13,688 130 14,212
1997............................................................ 70 797 213 654
</TABLE>
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report to be signed on its behalf by the 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 28, 2000.
VESTA INSURANCE GROUP, INC.
By /s/ Norman W. Gayle, III
--------------------------
Norman W. Gayle, III
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Norman W. Gayle, III Director, President November 28, 2000
---------------------------- (Co-Principal Executive Officer)
Norman W. Gayle, III
/s/ James E. Tait Director, Chairman of the Board November 28, 2000
---------------------------- (Co-Principal Executive Officer)
James E. Tait
/s/ William P. Cronin Senior Vice President, and November 28, 2000
---------------------------- Chief Financial Officer
William P. Cronin (Principal Financial Officer)
/s/ Hopson B. Nance Vice President, Controller
---------------------------- (Principal Accounting Officer)
Hopson B. Nance
/s/ Robert B. D. Batlivala Director November 28, 2000
----------------------------
Robert B. D. Batlivala, PhD.
/s/ Walter M. Beale, Jr. Director November 28, 2000
----------------------------
Walter M. Beale, Jr.
/s/ Ehney A. Camp, III Director November 28, 2000
----------------------------
Ehney A. Camp, III
/s/ Clifford F. Palmer Director November 28, 2000
----------------------------
Clifford F. Palmer
/s/ Stephen R. Windom Director November 28, 2000
----------------------------
Stephen R. Windom
/s/ Larry D. Striplin Director November 28, 2000
----------------------------
Larry D. Striplin
/s/ James A. Taylor Director November 28, 2000
----------------------------
James A. Taylor
Director November 28, 2000
----------------------------
Alan S. Farrior
</TABLE>
<PAGE>
EXHIBIT INDEX
11+ Statement regarding computation of earnings
21 List of subsidiaries
23.1+ Consent of KPMG LLP
23.2+ Consent of PricewaterhouseCoopers LLP
27+ Financial Data Schedule
---------------
+Filed herewith.
