-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A6yvBdASAVIWxBUp/cpCVhsa7px2u/l1vzyaQqrUpuUcQc3I7QS8NeRlfxl5qgrf Tm4dHT4mzu/mXix6AlgjkQ== 0001193125-04-191514.txt : 20041109 0001193125-04-191514.hdr.sgml : 20041109 20041109172150 ACCESSION NUMBER: 0001193125-04-191514 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALFA CORP CENTRAL INDEX KEY: 0000743532 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 630838024 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-11773 FILM NUMBER: 041130689 BUSINESS ADDRESS: STREET 1: P O BOX 11000 STREET 2: PO BOX 11000 CITY: MONTGOMERY STATE: AL ZIP: 36191-0001 BUSINESS PHONE: 3342883900 MAIL ADDRESS: STREET 1: P O BOX 11000 CITY: MONTGOMERY STATE: AL ZIP: 36191-0001 FORMER COMPANY: FORMER CONFORMED NAME: FEDERATED GUARANTY CORP DATE OF NAME CHANGE: 19870505 10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For Quarter Ended September 30, 2004

 

Commission File Number 0-11773

 


 

ALFA CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   063-0838024

(State of Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

2108 East South Boulevard, Montgomery, Alabama 36116

(Mail: P. O Box 11000, Montgomery, Alabama 36191-0001)

(Address and Zip Code of Principal Executive Offices)

 

Registrant’s Telephone Number

Including Area Code (334) 288-3900

 

None

Former name, former address and former fiscal year if changed since last report

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the close of the period covered by this report.

 

Class


 

Outstanding September 30, 2004


Common Stock, $1.00 par value   79,880,942 shares

 



Table of Contents

ALFA CORPORATION

 

INDEX

 

             Page No.

Part I.       Financial Information (Consolidated Unaudited)     
    Item 1.       Financial Statements     
        Balance Sheets (September 30, 2004 and December 31, 2003    3
        Statements of Income, Nine Months and Three Months ended September 30, 2004 and 2003    4
        Statements of Comprehensive Income, Nine and Three Months ended September 30, 2004 and 2003    5
        Statements of Cash Flows, Nine Months ended September 30, 2004 and 2003    6
        Notes to Financial Statements    7
        Report of Independent Registered Public Accounting Firm    17
    Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations    18
    Item 3.        Market Risk Disclosures    36
    Item 4.        Controls and Procedures    37
Part II.            Other Information     
    Item 1.        Legal Proceedings    38
    Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds    39
    Item 3.        Defaults Upon Senior Securities    39
    Item 4.        Submission of Matters to a Vote of Security Holders    39
    Item 5.        Other Information    39
    Item 6.        Exhibits    39

 

2


Table of Contents

ALFA CORPORATION

CONSOLIDATED BALANCE SHEETS

 

     September 30,
2004


   

December 31,

2003


 
     (Unaudited)        

Assets

                

Investments:

                

Fixed Maturities Held for Investment, at amortized cost (fair value $130,165 in 2004 and $173,214 in 2003)

   $ 119,684     $ 158,623  

Fixed Maturities Available for Sale, at fair value (amortized cost $1,260,626,357 in 2004 and $1,108,673,538 in 2003)

     1,311,679,846       1,166,418,720  

Equity Securities, at fair value (cost $85,221,068 in 2004 and $116,063,831 in 2003)

     98,325,064       135,082,791  

Investment Real Estate (net of accumulated depreciation of $1,677,073 in 2003)

     —         2,495,534  

Policy Loans

     57,983,043       55,282,441  

Collateral Loans

     119,828,114       101,876,180  

Commercial Leases

     122,674,438       118,121,257  

Other Long-term Investments

     150,445,172       111,450,952  

Short-term Investments

     107,254,177       111,252,991  
    


 


Total Investments

     1,968,309,538       1,802,139,489  

Cash

     10,253,032       10,892,516  

Accrued Investment Income

     16,485,220       15,569,095  

Accounts Receivable

     18,409,506       16,689,765  

Reinsurance Balances Receivable

     3,874,976       5,815,682  

Due from Affiliates

     2,433,835       2,203,955  

Deferred Policy Acquisition Costs

     181,878,228       176,252,537  

Other Assets

     21,074,863       15,511,547  
    


 


Total Assets

   $ 2,222,719,198     $ 2,045,074,586  
    


 


Liabilities

                

Policy Liabilities and Accruals - Property and Casualty Insurance

   $ 153,698,994     $ 153,831,653  

Policy Liabilities and Accruals - Life Insurance - Interest-Sensitive Products

     548,428,414       508,592,148  

Policy Liabilities and Accruals - Life Insurance - Other Products

     177,513,064       165,161,507  

Unearned Premiums

     190,393,330       170,292,775  

Dividends to Policyholders

     10,972,453       10,939,667  

Premium Deposit and Retirement Deposit Funds

     6,285,995       6,296,861  

Deferred Income Taxes

     43,091,366       50,383,545  

Other Liabilities

     102,984,733       53,460,552  

Due to Affiliates

     16,033,075       16,065,895  

Commercial Paper

     192,525,787       164,443,769  

Notes Payable

     70,000,000       70,000,000  

Notes Payable to Affiliates

     45,219,261       37,093,776  
    


 


Total Liabilities

     1,557,146,472       1,406,562,148  
    


 


Commitments and Contingencies

                

Stockholders’ Equity

                

Preferred Stock, $1 par value

     —         —    

Shares authorized: 1,000,000

Issued: None

                

Common Stock, $1 par value

     83,783,024       83,783,024  

Shares authorized: 110,000,000

Issued: 83,783,024

Outstanding: 2004 - 79,880,942; 2003 - 80,217,316

                

Capital in Excess of Par Value

     10,926,133       8,864,064  

Accumulated Other Comprehensive Income

     33,924,179       41,351,404  

Retained Earnings

     576,930,172       537,746,631  

Treasury Stock: at cost (2004 - 3,902,082 shares; 2003 - 3,565,708 shares)

     (39,990,782 )     (33,232,685 )
    


 


Total Stockholders’ Equity

     665,572,726       638,512,438  
    


 


Total Liabilities and Stockholders’ Equity

   $ 2,222,719,198     $ 2,045,074,586  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

ALFA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

    

Nine Months Ended

September 30,


  

Three Months Ended

September 30,


     2004

   2003

   2004

   2003

Revenues

                           

Premiums - Property and Casualty Insurance

   $ 366,361,371    $ 341,215,780    $ 124,089,818    $ 115,886,943

Premiums - Life Insurance

     27,381,569      25,536,915      8,813,442      8,388,647

Policy Charges - Life Insurance

     25,677,169      24,617,475      8,234,689      8,061,831

Net Investment Income

     67,258,467      63,794,337      22,562,539      20,803,110

Realized Investment Gains

     5,198,742      4,167,618      1,811,198      2,801,614

Other Income

     1,061,652      2,479,122      241,391      1,128,926
    

  

  

  

Total Revenues

     492,938,970      461,811,247      165,753,077      157,071,071
    

  

  

  

Benefits and Expenses

                           

Benefits & Settlement Expenses

     291,163,825      275,849,720      99,698,098      95,738,243

Dividends to Policyholders

     2,855,278      2,822,524      892,324      884,641

Amortization of Deferred Policy

                           

Acquisition Costs

     70,113,452      64,557,399      23,839,349      21,238,756

Other Operating Expenses

     37,232,519      40,433,598      13,385,534      13,465,234
    

  

  

  

Total Expenses

     401,365,074      383,663,241      137,815,305      131,326,874
    

  

  

  

Income Before Provision for Income Taxes

     91,573,896      78,148,006      27,937,772      25,744,197

Provision for Income Taxes

     24,810,629      21,449,501      7,217,523      6,963,141
    

  

  

  

Net Income

   $ 66,763,267    $ 56,698,505    $ 20,720,249    $ 18,781,056
    

  

  

  

Earnings Per Share:

                           

- Basic

   $ 0.83    $ 0.71    $ 0.26    $ 0.23
    

  

  

  

- Diluted

   $ 0.83    $ 0.71    $ 0.26    $ 0.23
    

  

  

  

Average Shares Outstanding

                           

- Basic

     80,024,581      79,645,126      79,938,616      79,991,986
    

  

  

  

- Diluted

     80,526,003      80,241,834      80,397,352      80,587,725
    

  

  

  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

ALFA CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

    

Nine Months Ended

September 30,


   

Three Months Ended

September 30,


     2004

    2003

    2004

    2003

Net Income

   $ 66,763,267     $ 56,698,505     $ 20,720,249     $ 18,781,056

Other Comprehensive (Loss) Income, net of tax:

                              

Change in Fair Value of Securities Available for Sale

     (5,380,791 )     9,173,037       11,655,714       4,166,891

Unrealized Gains (Losses) on Interest Rate Swap Contracts

     1,332,747       (1,060,844 )     (756,681 )     1,241,891

Less: Reclassification Adjustment for Realized Investment Gains

     3,379,181       2,708,952       1,177,278       1,821,048
    


 


 


 

Total Other Comprehensive (Loss) Income

     (7,427,225 )     5,403,241       9,721,755       3,587,734
    


 


 


 

Total Comprehensive Income

   $ 59,336,042     $ 62,101,746     $ 30,442,004     $ 22,368,790
    


 


 


 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

ALFA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine Months Ended September 30,

 
     2004

    2003

 

Cash Flows From Operating Activities:

                

Net Income

   $ 66,763,267     $ 56,698,505  

Adjustments to Reconcile Net Income to Net Cash

                

Provided by Operating Activities:

                

Policy Acquisition Costs Deferred

     (81,139,328 )     (75,033,471 )

Amortization of Deferred Policy Acquisition Costs

     70,113,452       64,557,399  

Depreciation and Amortization

     2,209,044       282,435  

Provision for Deferred Taxes

     (192,527 )     2,659,855  

Interest Credited on Policyholders’ Funds

     20,648,818       20,252,244  

Net Realized Investment Gains

     (5,198,742 )     (4,167,618 )

Other

     (936,899 )     41,742  

Changes in Operating Assets and Liabilities:

                

Accrued Investment Income

     (916,125 )     (519,687 )

Accounts Receivable

     (2,012,023 )     (2,710,789 )

Reinsurance Balances Receivable

     1,940,706       13,809  

Due from Affiliates

     (262,700 )     1,975,417  

Other Assets

     (2,325,127 )     (3,979,457 )

Liability for Policy Reserves

     12,501,763       9,800,180  

Liability for Unearned Premiums

     20,100,555       20,026,595  

Amounts Held for Others

     21,920       125,664  

Other Liabilities

     4,374,300       (9,120,866 )
    


 


Net Cash Provided by Operating Activities

     105,690,354       80,901,957  
    


 


Cash Flows from Investing Activities:

                

Maturities and Redemptions of Fixed Maturities Held for Investment

     38,141       100,981  

Maturities and Redemptions of Fixed Maturities Available for Sale

     256,747,942       542,838,314  

Maturities and Redemptions of Other Investments

     2,304,930       3,011,941  

Sales of Fixed Maturities Available for Sale

     13,901,529       25,946,968  

Sales of Equity Securities

     135,348,316       93,948,425  

Sales of Commercial Leases

     24,023,336       6,685,150  

Sales of Other Investments

     5,107,463       1,520,761  

Purchases of Fixed Maturities Available for Sale

     (421,158,536 )     (596,971,051 )

Purchases of Equity Securities

     (93,180,258 )     (167,233,436 )

Purchases of Other Investments

     (23,664,903 )     (14,116,870 )

Origination of Consumer Loans Receivable

     (55,444,382 )     (45,667,433 )

Principal Payments on Consumer Loans Receivable

     37,420,020       49,516,956  

Origination of Commercial Leases Receivable

     (72,253,209 )     (47,786,779 )

Principal Payments on Commercial Leases Receivable

     43,676,692       33,284,563  

Net Change in Short-term Investments

     2,206,932       16,102,782  

Net Change in Receivable/Payable on Securities

     2,469,395       (2,853,354 )

Net Proceeds from Sales of Subsidiaries

     9,845,925       —    
    


 


Net Cash Used in Investing Activities

     (132,610,667 )     (101,672,082 )
    


 


Cash Flows From Financing Activities:

                

Change in Commercial Paper

     28,082,018       16,138,298  

Change in Notes Payable to Affiliates

     8,125,485       (3,289,368 )

Stockholder Dividends Paid

     (20,590,145 )     (18,746,346 )

Purchases of Treasury Stock

     (10,658,310 )     (2,390,655 )

Proceeds from Exercise of Stock Options

     3,116,105       2,143,636  

Proceeds from Dividend Reinvestment Plan

     —         10,654,017  

Deposits of Policyholders’ Funds

     57,077,275       59,726,843  

Withdrawal of Policyholders’ Funds

     (38,871,599 )     (37,864,264 )
    


 


Net Cash Provided by Financing Activities

     26,280,829       26,372,161  
    


 


Net Change in Cash

     (639,484 )     5,602,036  

Cash - Beginning of Period

     10,892,516       9,761,820  
    


 


Cash - End of Period

   $ 10,253,032     $ 15,363,856  
    


 


Supplemental Disclosures of Cash Flow Information:

                

Cash Paid During the Period for:

                

Interest

   $ 4,815,747     $ 4,987,784  

Income Taxes

   $ 23,131,864     $ 15,741,450  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

ALFA CORPORATION

NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

September 30, 2004

 

1. Significant Accounting Policies

 

In the opinion of the Company, the accompanying consolidated unaudited financial statements contain all adjustments (consisting primarily of normal recurring accruals, except as explained in Note 2) necessary to present fairly its financial position, results of operations and cash flows. The accompanying financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America. A summary of the more significant accounting policies related to the Company’s business is set forth in the notes to its audited consolidated financial statements for the fiscal year ended December 31, 2003. The results of operations for the nine-month and three-month periods ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements also include the correction of an accounting treatment for tax benefits resulting from investments in affordable housing projects. For more detail on the impact of this correction, the reader should review Note 2, “Correction of Immaterial Accounting Error” below. Certain reclassifications have been made to conform previous classifications to September 30, 2004 classifications and descriptions.

 

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all related amendments can be found at www.alfains.com by first selecting “Invest in Alfa” and then selecting “Financial Reports.”

 

2. Correction of Immaterial Accounting Error

 

Various insurance subsidiaries of the Company invest in affordable housing tax credit partnerships. During the third quarter of 2004, it was determined that the equity method, as described in the Emerging Issue Tax Force Issue (“EITF”) Number 94-1, “Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects,” should have been used to account for these partnerships. The impact of this accounting correction resulted in a realized loss of $3.5 million, after taxes, relating to periods prior to January 1, 2004 including $1.7 million in 2003. The impact of correcting this error in 2004 was a reduction of net income, basic and diluted earnings per share of $0.04 for periods prior to January 1, 2004, including a loss of $0.02 per basic and diluted share in 2003. This correction was recorded in the third quarter of 2004 and impacted both the statement of income and balance sheet for the Company. The correction is not material to any prior period and will not be material to the financial statements for the current year.

 

7


Table of Contents

3. Stock-Based Employee Compensation

 

At September 30, 2004, the Company has a stock-based employee compensation plan, which is described more fully in the notes to the Company’s audited consolidated financial statements for the fiscal year ended December 31, 2003. The Company accounts for this plan using the recognition and measurement principles of the intrinsic value method. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

    2003

    2004

    2003

 

Net income as reported

   $ 66,763,267     $ 56,698,505     $ 20,720,249     $ 18,781,056  

Add: Total stock-based compensation expense included in reported net income, net of tax effect

     60,447       100,177       27,436       59,670  

Less: Total stock-based compensation expense determined under fair value based method for all awards, net of tax effect

     (1,509,389 )     (1,101,991 )     (530,865 )     (357,354 )
    


 


 


 


Pro forma net income

   $ 65,314,325     $ 55,696,691     $ 20,216,820     $ 18,483,372  
    


 


 


 


Earnings per share, as reported - Basic

   $ 0.83     $ 0.71     $ 0.26     $ 0.23  
    


 


 


 


              - Diluted

   $ 0.83     $ 0.71     $ 0.26     $ 0.23  
    


 


 


 


Pro forma earnings per share - Basic

   $ 0.82     $ 0.70     $ 0.25     $ 0.23  
    


 


 


 


              - Diluted

   $ 0.81     $ 0.69     $ 0.25     $ 0.23  
    


 


 


 


 

4. Pooling Agreement

 

Effective August 1, 1987, the Company entered into a property and casualty insurance Pooling Agreement (the “Pooling Agreement”) with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual Group (See Note 5). On January 1, 2001, Alfa Specialty Insurance Corporation (Specialty), a subsidiary of Mutual, also became a participant in the Pooling Agreement. The Mutual Group is a direct writer primarily of personal lines of property and casualty insurance in Alabama. The Company’s subsidiaries similarly are direct writers in Georgia and Mississippi. Both the Mutual Group and the Company write preferred risk automobile, homeowner, farmowner and mobile home insurance, fire and allied lines, standard risk automobile and homeowner insurance, and a limited amount of commercial insurance, including church and businessowner insurance. Specialty is a direct writer primarily of nonstandard risk automobile insurance. Under the terms of the Pooling Agreement, the Company cedes to Mutual all of its property and casualty business. Substantially all of the Mutual Group’s direct property and casualty business (together with the property and casualty business ceded by the Company) is included in the pool. Mutual currently retrocedes 65% of the pool to the Company and retains 35% within the Mutual Group. Effective January 1, 2001, Specialty’s property and casualty business likewise became included in the pool. On October 1, 1996, the Pooling Agreement was amended in conjunction with the restructuring of the Alfa Insurance Group’s catastrophe protection program. Effective November 1, 1996, the allocation of catastrophe costs among the members of the pool was changed to better reflect the economics of catastrophe finance. The amendment limited Alfa Corporation’s participation in any single catastrophic event or series of storms to its pool share (65%) of a lower catastrophe pool limit unless the loss exceeded an upper catastrophe pool limit. In cases where the upper catastrophe limit is exceeded on a 100% basis, the Company’s share in the loss would be based upon its amount of surplus relative to other members of the group. Lower and upper

 

8


Table of Contents

(Note 4., continued)

 

catastrophe pool limits are adjusted periodically due to increases in insured property risks. The limits and participation levels since inception of the program are summarized below:

 

    

Lower

Catastrophe

Pool Limit

(millions)


  

Upper

Catastrophe

Pool Limit

(millions)


  

Estimated

Coinsurance Allocation

of Catastrophes

Exceeding Upper

Catastrophe Pool Limit


November 1, 1996

   $ 10.0    $ 249.0    13%

July 1, 1999

     11.0      284.0    13%

January 1, 2001

     11.4      284.0    14%

January 1, 2002

     11.6      289.0    16%

January 1, 2003

     12.1      301.5    18%

January 1, 2004

     14.2      352.0    18%

 

The Company’s participation in the Pooling Agreement may be changed or terminated without the consent or approval of the Company’s shareholders. The Pooling Agreement may be terminated only by mutual agreement of the parties in writing.

 

The following table sets forth the premiums and losses ceded to and assumed from the pool for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

   Three Months Ended September 30,

     2004

   2003

   2004

   2003

     (in thousands)

Premiums ceded to pool

   $ 71,732    $ 64,565    $ 24,472    $ 22,043

Premiums assumed from pool

   $ 364,821    $ 339,585    $ 123,669    $ 115,524

Losses ceded to pool

   $ 55,218    $ 48,558    $ 26,217    $ 15,134

Losses assumed from pool

   $ 221,686    $ 213,785    $ 76,194    $ 73,799

 

The Company incurred $9.2 million and $7.9 million in storm losses in the second quarters of 2004 and 2003, respectively. These losses resulted in reductions to the Company’s net income of approximately $0.07 and $0.06 per diluted share, after reinsurance and taxes, in 2004 and 2003, respectively. No catastrophe losses were incurred in the first or third quarters of either year.

 

5. Other Long-term Investments

 

Included in the Company’s “Other Long-term Investments” are investments in partnerships of $68,518,143 and $35,832,636 at September 30, 2004 and December 31, 2003, respectively.

 

6. Contingent Liabilities

 

The property and casualty subsidiaries have entered into the reinsurance pooling agreement with Alfa Mutual Insurance Company and its affiliates as discussed in Note 4. Should any member of the affiliated group be unable to meet its obligation on a claim for a policy written by the Company’s property and casualty subsidiaries, the obligation to pay the claim would remain with the Company’s subsidiaries.

 

9


Table of Contents

(Note 6., continued)

 

The liability for estimated unpaid property and casualty losses and loss adjustment expenses is based on a detailed evaluation of reported losses and estimates of incurred but not reported losses. Adjustments to the liability based upon subsequent developments are included in current operations.

 

Certain legal proceedings are in process at September 30, 2004. Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled approximately $1.3 million in the first nine months of 2004, $1.1 million in 2003, and $5.3 million in 2002. These proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims, and miscellaneous other causes of action. These lawsuits involve claims for unspecified amounts of compensatory damages, mental anguish damages, and punitive damages.

 

Approximately 47 legal proceedings against Alfa Life Insurance Corporation (Life) were in process at September 30, 2004. Of the 47 proceedings, thirty-four were filed in 2004, eight were filed in 2003, one was filed in 2002, three were filed in 1999, and one was filed in 1996. One of the 47 pending cases was filed as a purported class action, but the plaintiffs recently dismissed the class allegations. In a case tried in January 2001, in Barbour County, Alabama, the jury returned a verdict for the plaintiff against Life for $500,000 in compensatory damages and $5,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $1,500,000. On appeal, the Alabama Supreme Court further reduced the total judgment to $400,000. Life has filed an Application for Rehearing with the Court seeking a further reduction of the award.

 

In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Alfa Mutual Fire Insurance Company. Additionally, three purported class action lawsuits are pending against the property and casualty companies involving a number of issues and allegations which could affect the Company because of a pooling agreement between the companies. Two purported class action lawsuits have been filed against Alfa Financial Corporation. These relate to OFC Capital leases with customers of NorVergence, a telecommunications provider who filed for Chapter 7 bankruptcy in July 2004. No class has been certified in any of these six purported class action cases. In the event a class is certified in any of these purported class actions, reserves may need to be adjusted.

 

Management believes adequate accruals have been established in these known cases. However, it should be noted that in Mississippi and Alabama, where the Company has substantial business, the likelihood of a judgment in any given suit, including a large mental anguish and/or punitive damage award by a jury, bearing little or no relation to actual damages, continues to exist, creating the potential for unpredictable material adverse financial results.

 

Based upon information presently available, management is unaware of any contingent liabilities arising from other threatened litigation that should be reserved or disclosed.

 

The Company periodically invests in partnerships that invest in affordable housing tax credits. At September 30, 2004, the Company had committed to fund partnerships of this type in the amount of approximately $38.0 million. These commitments are included under the heading of “Other Liabilities” on the Company’s Balance Sheet at September 30, 2004.

 

10


Table of Contents

7. Segment Information

 

In evaluating the performance of the Company’s segments, management believes operating income serves as a meaningful tool for assessing the profitability of the Company’s ongoing operations. Operating income, a non-GAAP financial measure, is defined by the Company as net income excluding net realized investment gains and losses, net of applicable taxes. Realized investment gains and losses are somewhat controllable by the Company through the timing of decisions to sell securities. Therefore, realized investment gains and losses are not indicative of future operating performance.

 

The table below summarizes net income by its components of operating income by segment, net realized gains and losses, and corporate expenses for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

    Nine Months Ended September 30,

    Three Months Ended September 30,

 
    2004

    2003

    % Change

    2004

    2003

    % Change

 
    (in thousands, except share and per share data)  

Net income

                                           

Property and casualty insurance

  $ 51,173     $ 40,071     28 %   $ 16,364     $ 12,537     31 %

Life insurance

    12,236       12,688     (4 %)     4,206       4,119     2 %
   


 


 

 


 


 

Total insurance operations

    63,409       52,759     20 %     20,570       16,656     23 %

Noninsurance operations income

    2,638       3,262     (19 %)     348       1,084     (68 %)

Net realized investment gains

    3,379       2,709     25 %     1,177       1,821     (35 %)

Corporate expenses

    (2,663 )     (2,031 )   31 %     (1,375 )     (780 )   76 %
   


 


 

 


 


 

Net income

  $ 66,763     $ 56,699     18 %   $ 20,720     $ 18,781     10 %
   


 


 

 


 


 

Net income per share-

                                           

Basic

  $ 0.83     $ 0.71     17 %   $ 0.26     $ 0.23     10 %
   


 


 

 


 


 

Diluted

  $ 0.83     $ 0.71     17 %   $ 0.26     $ 0.23     11 %
   


 


 

 


 


 

Weighted average shares outstanding –

                                           

Basic

    80,024,581       79,645,126             79,938,616       79,991,986        
   


 


       


 


     

Diluted

    80,526,003       80,241,834             80,397,352       80,587,725        
   


 


       


 


     

 

11


Table of Contents

(Note 7., continued)

 

The following table sets forth the components of property and casualty insurance earned premiums, net underwriting income, GAAP basis loss, expense and combined ratios, underwriting margin, net investment income, other income, reinsurance assumed, operating income, net realized investment gains and net income for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

    2003

    % Change

    2004

    2003

    % Change

 
     (in thousands)  

Earned premiums

                                            

Personal lines

   $ 352,835     $ 328,177     8 %   $ 119,612     $ 111,647     7 %

Commercial lines

     11,985       11,408     5 %     4,056       3,877     5 %

Pools, associations and fees

     3,597       3,547     1 %     1,191       1,184     1 %

Reinsurance ceded

     (2,056 )     (1,916 )   7 %     (769 )     (821 )   (6 )%
    


 


 

 


 


 

Total

   $ 366,361     $ 341,216     7 %   $ 124,090     $ 115,887     7 %
    


 


 

 


 


 

Net underwriting income

   $ 44,906     $ 31,557     42 %   $ 13,274     $ 9,103     46 %
    


 


 

 


 


 

Loss ratio

     60.7 %     62.4 %           61.7 %     63.9 %      

LAE ratio

     3.9 %     4.0 %           3.8 %     4.1 %      

Expense ratio

     23.1 %     24.4 %           23.8 %     24.1 %      
    


 


       


 


     

GAAP basis combined ratio

     87.7 %     90.8 %           89.3 %     92.1 %      
    


 


       


 


     

Underwriting margin

     12.3 %     9.2 %           10.7 %     7.9 %      
    


 


       


 


     

Net investment income

   $ 23,100     $ 21,987     5 %   $ 8,148     $ 7,423     10 %
    


 


 

 


 


 

Other income

   $ 203     $ 221     (8 )%   $ 47     $ 128     (63 )%
    


 


 

 


 


 

Reinsurance assumed

   $ (61 )   $ (246 )   (75 )%   $ (70 )   $ (218 )   (68 )%
    


 


 

 


 


 

Pre-tax operating income

   $ 68,148     $ 53,519     27 %   $ 21,399     $ 16,436     30 %
    


 


 

 


 


 

Operating income, net of tax

   $ 51,173     $ 40,071     28 %   $ 16,364     $ 12,537     31 %
    


 


 

 


 


 

Realized investment gains (losses), net of tax

   $ (2,718 )   $ 705     (485 )%   $ (2,783 )   $ 390     (814 )%
    


 


 

 


 


 

Net income

   $ 48,455     $ 40,776     19 %   $ 13,581     $ 12,927     5 %
    


 


 

 


 


 

 

12


Table of Contents

(Note 7., continued)

 

The following table sets forth life insurance premiums and policy charges, by type of policy, net investment income, benefits and expenses, amortization of deferred policy acquisition costs, life insurance operating income, net realized investment gains and losses, and net income for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

   2003

   % Change

    2004

   2003

   % Change

 
     (in thousands)  

Premiums and policy charges

                                        

Universal life policy charges

   $ 14,849    $ 14,106    5 %   $ 4,972    $ 4,751    5 %

Universal life policy charges – COLI

     2,824      2,672    6 %     664      587    13 %

Interest sensitive life policy charges

     8,005      7,839    2 %     2,599      2,724    (5 )%

Traditional life insurance premiums

     26,889      24,995    8 %     8,813      8,388    5 %

Group life insurance premiums

     492      542    (9 )%     0      0    0 %
    

  

  

 

  

  

Total

   $ 53,059    $ 50,154    6 %   $ 17,048    $ 16,450    4 %
    

  

  

 

  

  

Net investment income

   $ 36,579    $ 33,326    10 %   $ 13,044    $ 10,843    20 %
    

  

  

 

  

  

Benefits and expenses

   $ 66,098    $ 59,436    11 %   $ 22,118    $ 19,526    13 %
    

  

  

 

  

  

Amortization of deferred policy acquisition costs

   $ 6,854    $ 6,828    0 %   $ 2,270    $ 2,253    1 %
    

  

  

 

  

  

Pre-tax operating income

   $ 16,686    $ 17,216    (3 )%   $ 5,704    $ 5,514    3 %
    

  

  

 

  

  

Operating income, net of tax

   $ 12,236    $ 12,688    (4 )%   $ 4,206    $ 4,119    2 %
    

  

  

 

  

  

Realized investment gains, net of tax

   $ 6,250    $ 2,026    208 %   $ 3,961    $ 1,430    177 %
    

  

  

 

  

  

Net income

   $ 18,486    $ 14,714    26 %   $ 8,167    $ 5,549    47 %
    

  

  

 

  

  

 

8. Note Payable and Interest Rate Swap Contract

 

The Company uses variable-rate debt to partially fund its consumer loan and commercial lease portfolios. In particular, it has issued variable-rate long-term debt and commercial paper. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases.

 

13


Table of Contents

(Note 8., continued)

 

As part of its funding efforts, the Company issued a $70 million variable-rate long-term obligation with a life of fifteen years in the second quarter of 2002. Management believes it is prudent to limit the variability of a portion of its interest payments. The Company’s objective is to hedge 100 percent of its variable-rate long-term interest payments over the first five years of the life of the debt obligation.

 

To meet this objective, management entered into an interest rate swap. The interest rate swap changes the variable-rate cash flow exposure of the variable-rate long term debt obligation to fixed-rate cash flows by entering into a receive-variable, pay-fixed interest rate swap. Under the interest rate swap, the Company receives variable interest payments and makes fixed interest rate payments, thereby creating fixed-rate long-term debt and, therefore, managing fluctuations in cash flows resulting from interest rate risk.

 

The Company also uses derivative instruments through its covered call option program as a means of generating income.

 

The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.

 

The Company maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge position. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

 

Interest expense for the nine months ended September 30, 2004 includes no gains or losses from the interest rate swap. Changes in fair value of the interest rate swap designated as a hedging instrument of the variability of cash flows associated with floating-rate, long-term debt obligation are reported in accumulated other comprehensive income. The interest rate swap involves a LIBOR for LIBOR exchange and meets the criteria for short-cut accounting. Therefore, the interest rate swap has no ineffectiveness, thereby eliminating the reclassification of this amount to interest expense in subsequent periods.

 

9. Financial Accounting Developments

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.” While the Company continues to use the intrinsic value method to account for its stock options, notes contained in this filing for the nine-month and three-month periods ended September 30, 2004 have been enhanced to comply with the requirements set forth by this statement.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation addresses consolidation and disclosure issues associated with variable interest entities. The effective date for the interpretation has been delayed to December 31, 2003 on those variable interest entities in existence prior to February 1, 2003. The Company has evaluated the provisions of this interpretation and its requirements had no significant impact on the Company’s financial position or income.

 

14


Table of Contents

(Note 9., continued)

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. These changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after September 30, 2004 and for hedging relationships designated after September 30, 2004. At this time, the Company does not anticipate this standard having a significant impact on the Company’s financial position or income.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. The Company did not experience a significant impact on the Company’s financial position or income from this statement.

 

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts.” This SOP became effective for fiscal years beginning after December 15, 2003. The new rule changes accounting for separate accounts and sales inducements and changes the liability model by expanding the definition of “account balance” and addressing annuitization guarantees and minimum guaranteed death benefits. The Company has implemented this SOP effective January 1, 2004 and it did not have a significant impact on its financial position or income.

 

In March 2004, the FASB approved the consensus reached on the EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this consensus is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. Originally, the accounting provisions of EITF 03-1 were effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. In September 2004, the FASB issued two FASB Staff Positions (FSP), FSP EITF 03-1-a and FSP EITF 03-1-1, which delayed the measurement and recognition paragraphs of the consensus for further discussion. The disclosure requirements remain effective as originally issued under EITF 03-1 and have been adopted by the Company. The Company has evaluated the impact of the adoption of EITF 03-1, as written, and does not believe the impact is significant to the Company’s financial position or income at September 30, 2004. The Company will continue to monitor the developments of the FASB and EITF regarding the measurement and recognition paragraphs of this consensus.

 

10. Dissolution of Alfa Investment Corporation

 

On April 24, 2003, the Company’s Board of Directors approved a written consent to dissolve Alfa Investment Corporation. The Company was the only stockholder of this entity which was consolidated in its financial statements. Alfa Investment Corporation had served as the parent of Alfa Builders, Inc. which continued to operate as the Company’s wholly-owned construction subsidiary until it was sold in February 2004.

 

11. Sales of Alfa Builders, Inc. and Alfa Realty, Inc.

 

During 2003, MidCountry Financial Corporation, one of the investments of the Company’s finance subsidiary, pursued the opportunity to purchase Bayside Financial Corp. In order for this purchase to take place, approval had to be secured from the Office of Thrift Supervision. Consequently, due to ownership levels, this transaction

 

15


Table of Contents

(Note 11., continued)

 

qualified the finance subsidiary and the Company as unitary thrift holding companies. As a condition of approval, the Company agreed to sell its residential and commercial construction subsidiary and its real estate sales subsidiary. These sales took place during the first quarter of 2004 as Alfa Properties, Inc., the real estate subsidiary of Mutual, purchased Alfa Builders, Inc. and Alfa Realty, Inc. for approximately $5.5 million and $2.6 million respectively. These sales prices represented the fair value of each entity according to independent valuations. No gain or loss was recorded on these transactions.

 

12. Planned Acquisition of Vision Insurance Group, LLC

 

During the third quarter of 2004, the Company signed a definitive agreement to acquire Vision Insurance Group, LLC (“Vision”). Vision is a managing general agent writing new business in nine states. The Company will purchase Vision for $20 million in cash and common stock with an additional purchase consideration of up to $14 million based on future performance. The acquisition is anticipated to be completed in January 2005.

 

13. Formation of New Subsidiary

 

During the third quarter of 2004, the Company formed a new insurance subsidiary, Alfa Vision Insurance Corporation, (“Alfa Vision”) through which Vision will write its nonstandard automobile business. Vision currently operates in Texas, Missouri, Indiana, Ohio, Virginia, Tennessee, Arkansas, Kentucky, and Florida. It is anticipated that Alfa Vision will participate in the pooling agreement with other companies currently participating in that arrangement.

 

16


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders

Alfa Corporation:

 

We have reviewed the accompanying consolidated balance sheets of Alfa Corporation and subsidiaries as of September 30, 2004 and 2003, the related consolidated statements of income and comprehensive income for the nine-months and three-months ended September 30, 2004 and 2003, and the related consolidated statements of cash flows for the nine-months ended September 30, 2004 and 2003. These consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

KPMG LLP

 

Birmingham, Alabama

October 20, 2004

 

17


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis is intended to update the reader on matters affecting the financial condition and results of operations of Alfa Corporation and its subsidiaries for the nine-month and three-month periods ended September 30, 2004 and 2003. As a result, the following discussion should be read in conjunction with the consolidated financial statements and notes that are included in this 10-Q and in the annual report to stockholders for the year ended December 31, 2003.

 

The Company is a financial services holding company affiliated with the Alfa Mutual Insurance Companies, which own 55.2% of the Company’s common stock. The Company’s primary business is personal lines of property and casualty insurance and life insurance. At September 30, 2004, it also had noninsurance subsidiaries that engaged in consumer financing and commercial leasing. The Company and its subsidiaries together with the Alfa Mutual Insurance Companies currently service approximately 1.3 million policies primarily in Alabama, Georgia and Mississippi.

 

The Company’s revenue consists mainly of premiums earned, policy charges and net investment income. Benefit and settlement expenses consist primarily of claims paid and claims in process and pending and include an estimate of amounts incurred but not yet reported along with loss adjustment expenses. Other operating expenses consist primarily of compensation expenses and other overhead business expenses.

 

Operating results are reported through three primary business segments: property and casualty insurance operations, life insurance operations and noninsurance operations. Property and casualty insurance operations accounted for 78.2% of revenues and 72.6% of net income in the first nine months of 2004. Life insurance operations generated 20.1% of revenues and 27.7% of net income during the same period.

 

Future results of operations will depend in part on the Company’s ability to predict and control benefit and settlement expenses through underwriting criteria, product design and negotiation of favorable vendor contracts. The Company must also seek timely and accurate rate changes from insurance regulators in order to meet strategic business objectives. Selection of insurable risks, proper collateralization of loans and leases and continued staff development also impact the operating results of the Company. The Company’s inability to mitigate any or all risks mentioned above or other factors may adversely affect its profitability.

 

In evaluating the performance of the Company’s segments, management believes operating income serves as a meaningful tool for assessing the profitability of the Company’s ongoing operations. Operating income, a non-GAAP financial measure, is defined by the Company as net income excluding net realized investment gains and losses, net of applicable taxes. Realized investment gains and losses are somewhat controllable by the Company through the timing of decisions to sell securities. Therefore, realized investment gains and losses are not indicative of future operating performance.

 

18


Table of Contents

The following table sets forth consolidated summarized income statement information for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

    2003

    % Change

    2004

    2003

    % Change

 
     (in thousands)  

Revenues

                                            

Property and casualty insurance premiums

   $ 366,361     $ 341,216     7 %   $ 124,090     $ 115,887     7 %

Life insurance premiums and policy charges

     53,059       50,154     6 %     17,048       16,450     4 %
    


 


 

 


 


 

Total premiums and policy charges

   $ 419,420     $ 391,370     7 %   $ 141,138     $ 132,337     7 %
    


 


 

 


 


 

Net investment income

   $ 67,258     $ 63,794     5 %   $ 22,563     $ 20,803     8 %
    


 


 

 


 


 

Total revenues

   $ 492,939     $ 461,811     7 %   $ 165,753     $ 157,071     6 %
    


 


 

 


 


 

Net income

                                            

Property and casualty insurance

   $ 51,173     $ 40,071     28 %   $ 16,364     $ 12,537     31 %

Life insurance

     12,236       12,688     (4 %)     4,206       4,119     2 %
    


 


 

 


 


 

Total insurance operations

     63,409       52,759     20 %     20,570       16,656     23 %

Noninsurance operations

     2,638       3,262     (19 %)     348       1,084     (68 %)

Net realized investment gains

     3,379       2,709     25 %     1,177       1,821     (35 %)

Corporate expenses

     (2,663 )     (2,031 )   31 %     (1,375 )     (780 )   76 %
    


 


 

 


 


 

Net income

   $ 66,763     $ 56,699     18 %   $ 20,720     $ 18,781     10 %
    


 


 

 


 


 

Net income per share-

                                            

Basic

   $ 0.83     $ 0.71     17 %   $ 0.26     $ 0.23     10 %
    


 


 

 


 


 

Diluted

   $ 0.83     $ 0.71     17 %   $ 0.26     $ 0.23     11 %
    


 


 

 


 


 

Weighted average shares outstanding – Basic

     80,024,581       79,645,126             79,938,616       79,991,986        
    


 


       


 


     

Diluted

     80,526,003       80,241,834             80,397,352       80,587,725        
    


 


       


 


     

 

Total premiums and policy charges increased 7% in the first nine months of 2004 as a result of increased premium production in both property casualty and life business and continued good persistency. Net investment income increased 5% in the first nine months of 2004 and invested assets grew 9.2% in the nine months since December 31, 2003. The increase in net investment income for the nine-month and three-month periods ending September 30, 2004 was partially attributable to the impact of the correction of an immaterial error related to the Company’s accounting treatment of its subsidiaries’ investments in affordable housing tax credit partnerships of approximately $1.7 million.

 

Operating income increased by 28% in the property casualty subsidiaries due primarily to an improved loss ratio and reduction in the underwriting expense ratio during the first nine months of 2004. The 4% decrease in operating income in the life subsidiary is partially due to a higher mortality ratio of 104% compared to 97% during the first nine months of 2003. Mortality, a non-GAAP financial measure used by management, represents the percentage of actuarially expected claims paid. Therefore, in the first nine months of 2004, the Company experienced more unfavorable financial results when compared to 2003 due to the higher mortality ratio.

 

19


Table of Contents

Noninsurance operations were down 19% due to decreased earnings in the finance subsidiary. Earnings from the finance subsidiary’s investment in MidCountry Financial declined by approximately $160,000 when compared to the first nine months of 2003. Unfavorable reductions in the Company’s commercial lease earnings during the first three quarters of 2004 of approximately $408,000 resulted primarily from reserves established for potentially uncollectible balances and other transitional expenses related to the Chapter 7 bankruptcy filing of NorVergence, a telecommunications provider who supplied essential services to approximately 340 of the Company’s leasing customers.

 

The Company’s net income was positively impacted by realized investment gains during the first nine months of 2004. Included in realized investment losses for the nine-month and three-month periods ending September 30, 2004 is the impact of the correction of an error related to the Company’s accounting treatment of its subsidiaries’ investments in affordable housing tax credit partnerships of approximately $6.0 million, after income taxes. Corporate expenses increased by 31% in the first nine months of 2004 due primarily to increases in accounting fees, legal expenses and the impact of higher interest rates on the Company’s outstanding commercial paper portfolio.

 

20


Table of Contents

PROPERTY AND CASUALTY INSURANCE OPERATIONS

 

The following table sets forth the components of property and casualty insurance earned premiums, net underwriting income, GAAP basis loss, expense and combined ratios, underwriting margin, net investment income, other income, reinsurance assumed, operating income, net realized investment gains and net income for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

    2003

    % Change

    2004

    2003

    % Change

 
     (in thousands)  

Earned premiums

                                            

Personal lines

   $ 352,835     $ 328,177     8 %   $ 119,612     $ 111,647     7 %

Commercial lines

     11,985       11,408     5 %     4,056       3,877     5 %

Pools, associations and fees

     3,597       3,547     1 %     1,191       1,184     1 %

Reinsurance ceded

     (2,056 )     (1,916 )   7 %     (769 )     (821 )   (6 )%
    


 


 

 


 


 

Total

   $ 366,361     $ 341,216     7 %   $ 124,090     $ 115,887     7 %
    


 


 

 


 


 

Net underwriting income

   $ 44,906     $ 31,557     42 %   $ 13,274     $ 9,103     46 %
    


 


 

 


 


 

Loss ratio

     60.7 %     62.4 %           61.7 %     63.9 %      

LAE ratio

     3.9 %     4.0 %           3.8 %     4.1 %      

Expense ratio

     23.1 %     24.4 %           23.8 %     24.1 %      
    


 


       


 


     

GAAP basis combined ratio

     87.7 %     90.8 %           89.3 %     92.1 %      
    


 


       


 


     

Underwriting margin

     12.3 %     9.2 %           10.7 %     7.9 %      
    


 


       


 


     

Net investment income

   $ 23,100     $ 21,987     5 %   $ 8,148     $ 7,423     10 %
    


 


 

 


 


 

Other income

   $ 203     $ 221     (8 )%   $ 47     $ 128     (63 )%
    


 


 

 


 


 

Reinsurance assumed

   $ (61 )   $ (246 )   (75 )%   $ (70 )   $ (218 )   (68 )%
    


 


 

 


 


 

Pre-tax operating income

   $ 68,148     $ 53,519     27 %   $ 21,399     $ 16,436     30 %
    


 


 

 


 


 

Operating income, net of tax

   $ 51,173     $ 40,071     28 %   $ 16,364     $ 12,537     31 %
    


 


 

 


 


 

Realized investment gains (losses), net of tax

   $ (2,718 )   $ 705     (485 )%   $ (2,783 )   $ 390     (814 )%
    


 


 

 


 


 

Net income

   $ 48,455     $ 40,776     19 %   $ 13,581     $ 12,927     5 %
    


 


 

 


 


 

 

21


Table of Contents

Earned premiums increased 7% in the first nine months of 2004 due to greater homeowner production and the positive impact of rate increases. Continued good persistency in the automobile and homeowner lines also contributed to premium increases.

 

The overall loss ratio decreased to 60.7% for the first nine months of 2004 as the Company continued to experience favorable core loss ratios. The Company incurred $9.2 million and $7.9 million in storm losses in the second quarter of 2004 and 2003, respectively. No storm losses were recorded in the first or third quarters of either 2004 or 2003. Loss adjustment expenses in the first nine months decreased slightly to 3.9% of earned premiums in 2004 from 4.0% in the same period during 2003. In addition to the improvement in the Company’s core loss ratio, a decrease in the expense ratio from 2003 levels resulting from stable compensation expenses contributed to the improved underwriting margin. The Company has implemented changes to its processes in an effort to minimize staffing additions and capitalize on technological capabilities.

 

Net investment income increased 5% in the first nine months of 2004 in the property casualty subsidiaries due primarily to earnings on fixed maturities and the impact of a correction of an immaterial error recorded in the third quarter of 2004 related to the accounting for tax benefits resulting from investments in affordable housing projects. This correction positively impacted net investment income by $676,523 and negatively impacted net realized investment losses by $5.5 million, after income taxes, for the nine-month and three-month periods ending September 30, 2004. Invested assets increased 11.0% in the nine months since December 31, 2003.

 

LIFE INSURANCE OPERATIONS

 

The following table sets forth life insurance premiums and policy charges, by type of policy, net investment income, benefits and expenses, amortization of deferred policy acquisition costs, life insurance operating income, net realized investments gains and losses, and net income for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

     Nine Months Ended September 30,

    Three Months Ended September 30,

 
     2004

   2003

   % Change

    2004

   2003

   % Change

 
     (in thousands)  

Premiums and policy charges

                                        

Universal life policy charges

   $ 14,849    $ 14,106    5 %   $ 4,972    $ 4,751    5 %

Universal life policy charges - COLI

     2,824      2,672    6 %     664      587    13 %

Interest sensitive life policy charges

     8,005      7,839    2 %     2,599      2,724    (5 )%

Traditional life insurance premiums

     26,889      24,995    8 %     8,813      8,388    5 %

Group life insurance premiums

     492      542    (9 )%     0      0    0 %
    

  

  

 

  

  

Total

   $ 53,059    $ 50,154    6 %   $ 17,048    $ 16,450    4 %
    

  

  

 

  

  

Net investment income

   $ 36,579    $ 33,326    10 %   $ 13,044    $ 10,843    20 %
    

  

  

 

  

  

Benefits and expenses

   $ 66,098    $ 59,436    11 %   $ 22,118    $ 19,526    13 %
    

  

  

 

  

  

Amortization of deferred policy acquisition costs

   $ 6,854    $ 6,828    0 %   $ 2,270    $ 2,253    1 %
    

  

  

 

  

  

Pre-tax operating income

   $ 16,686    $ 17,216    (3 )%   $ 5,704    $ 5,514    3 %
    

  

  

 

  

  

Operating income, net of tax

   $ 12,236    $ 12,688    (4 )%   $ 4,206    $ 4,119    2 %
    

  

  

 

  

  

Realized investment gains, net of tax

   $ 6,250    $ 2,026    208 %   $ 3,961    $ 1,430    177 %
    

  

  

 

  

  

Net income

   $ 18,486    $ 14,714    26 %   $ 8,167    $ 5,549    47 %
    

  

  

 

  

  

 

22


Table of Contents

The Company’s life insurance premiums and policy charges increased 6% in the first nine months of 2004 due to strong persistency and new business resulting from the repricing of an interest sensitive product and adding a preferred underwriting class. First year collected premiums on traditional life business in the first nine months of 2004 declined 2% from the same period in 2003 due to a decline in premiums on a direct mail accidental death policy offset by increases in term and whole life premiums. Total new annualized premium increased 3.8% in the first nine months of 2004 after decreasing 3.4% in all of 2003.

 

Life insurance operating income decreased approximately 4% in the first nine months of 2004. This decrease was primarily the result of an increase in the mortality ratio of actual to expected death claims from 97% in the first nine months of 2003 to 104% in the first nine months of 2004. Positive cash flows resulted in a 6.1% increase in invested assets in the nine months since December 31, 2003 while investment income increased 10% from the first nine months of 2003 due primarily to the correction of an immaterial error recorded in the third quarter of 2004 related to the accounting for tax benefits resulting from investments in affordable housing projects. This correction positively impacted net investment income by $1.0 million and negatively impacted net realized investment gains by $505,284, after income taxes, for the nine-month and three-month periods ending September 30, 2004.

 

NONINSURANCE OPERATIONS

 

Noninsurance operations were down 19% due primarily to unfavorable results in the finance subsidiary. The finance subsidiary’s investment in MidCountry Financial yielded pre-tax income of approximately $597,000 during the first nine months of 2004 compared to $844,000 in the first three quarters of 2003. This decline is primarily attributable to acquisition activity expenses incurred in 2004. In addition, commercial lease operations experienced a decrease in earnings of approximately $408,000 after reserves were established related to the Chapter 7 bankruptcy filing of NorVergence, a telecommunications provider who previously supplied essential services to approximately 340 of the Company’s leasing customers. Income from the Company’s subsidiary covering certain employee benefits increased by approximately $268,000 to $347,000 for the first nine months in 2004. The sales of the Company’s real estate and construction subsidiaries in February 2004 have created unfavorable earnings comparisons since these business units incurred losses of approximately $47,000 prior to their dispositions in 2004 compared to earnings of approximately $480,000 during the first nine months of 2003.

 

CORPORATE

 

Corporate expenses increased 31%, or approximately $632,000, due primarily to an increase in accounting fees, legal fees and the impact of higher interest rates. Unfavorable increases in short-term interest rates partially offset by a slight reduction in the commercial paper borrowings attributable to corporate functions led the Company’s interest expense to rise from levels experienced in the first three quarters of 2003.

 

INVESTMENTS

 

The Company has historically produced positive cash flow from operations which has resulted in increasing amounts of funds available for investment and, consequently, higher investment income. Investment income is also affected by yield rates. Information about cash flows, invested assets and yield rates is presented below for the nine months ended September 30, 2004 and 2003:

 

    

Nine Months Ended

September 30,


 
     2004

    2003

 

Increase in invested assets since January 1, 2004 and 2003

   9.2 %   6.5 %

Investment yield rate (annualized)

   5.7 %   5.8 %

Increase/(decrease) in net investment income since September 30, 2003 and 2002

   5.4 %   (3.2 )%

 

23


Table of Contents

As a result of the overall positive cash flows from operations, invested assets grew 9.2% since January 1, 2004 and 10.8% since September 30, 2003 while net investment income increased 5.4%. The positive cash flow from operations is due primarily to the improved operating results in the Company’s property and casualty subsidiaries, which had $44.9 million in underwriting income in the first nine months of 2004 which was somewhat offset by the slight decline in profitability of the Company’s life subsidiary, which had $12.2 million in operating income in the same period. The premium collection from the COLI plan in the life insurance subsidiary provided positive cash flow in the first quarter of both periods. Net increases in cash resulting from increased borrowings were primarily used to support growth in the loan and lease portfolios of the finance subsidiary. During the first nine months of 2004, the Company also increased its investment in debt securities by approximately $145 million. The Company’s increase in net investment income resulted primarily from earnings on fixed maturities and the positive impact of a correction of approximately $1.7 million recorded in the third quarter of 2004 for an immaterial error related to the accounting for tax benefits resulting from investments in affordable housing projects. The overall yield rate, calculated using amortized cost, declined to 5.7%. The Company had realized investment gains of approximately $5.2 million in the first nine months of 2004 compared to realized investment gains of approximately $4.2 million during the same period of 2003. These gains are primarily from sales of equity securities and the correction of the immaterial accounting error mentioned above. The impact of this accounting correction resulted in a realized loss of $3.5 million, after taxes, relating to periods prior to January 1, 2004 including $1.7 million in 2003. Such realized gains on sales of equity securities are the result of market conditions and therefore can fluctuate from period to period.

 

The composition of the Company’s investment portfolio is as follows at September 30, 2004 and December 31, 2003:

 

    

September 30,

2004


   

December 31,

2003


 

Fixed maturities

            

Taxable

            

Mortgage backed (CMO’s)

   29.9 %   25.5 %

Corporate bonds

   20.3     21.0  
    

 

Total taxable

   50.2     46.5  

Tax exempts

   16.5     18.2  
    

 

Total fixed maturities

   66.7     64.7  
    

 

Equity securities

   5.0     7.5  

Real estate

   0.0     0.1  

Policy loans

   2.9     3.1  

Collateral loans

   6.1     5.7  

Commercial leases

   6.2     6.5  

Other long-term investments

   7.6     6.2  

Short-term investments

   5.5     6.2  
    

 

     100.0 %   100.0 %
    

 

 

24


Table of Contents

The rating of the Company’s portfolio of fixed maturities using the Standard & Poor’s rating categories is as follows at September 30, 2004 and December 31, 2003:

 

    

September 30,

2004


   

December 31,

2003


 

RATING

            

AAA to A-

   92.8     90.9 %

BBB+ to BBB-

   6.8     8.4  

BB+ and Below (Below investment grade)

   0.4     0.7  
    

 

     100.0 %   100.0 %
    

 

 

The fixed maturity portfolio was rated by an outside rating service. No securities were rated by Company management. The Company considers bonds with a quality rating of BB+ and below to be below investment grade or high yield bonds (also called junk bonds).

 

At September 30, 2004, approximately 44.9% of fixed maturities were mortgage-backed securities. Such securities are comprised of Collateralized Mortgage Obligations (CMO’s) and pass through securities. The Company routinely assesses its vulnerability to both prepayment risk and fluctuations in interest rates on these securities. Based on reviews of the Company’s portfolio of mortgage-backed securities, the impact of upward fluctuations in interest rates is currently a greater concern than that of prepayment risk due to record low mortgage rates during the last year. At September 30, 2004, the Company’s total portfolio of fixed maturities had gross unrealized gains of $59,107,923 and gross unrealized losses of $8,043,953. Securities are priced by nationally recognized pricing services or by broker/dealer securities firms. No securities were priced by the Company.

 

During the first nine months of 2004, the Company sold approximately $14.0 million in fixed maturities available for sale. These sales resulted in gross realized gains of $237,275 and gross realized losses of $355,450. During the same period in 2003, the Company sold approximately $25.9 million in fixed maturities available for sale. These sales resulted in gross realized gains of $1,507,103 and gross realized losses of $2,053,750.

 

The Company monitors its level of investments in high yield fixed maturities and equity investments held in issuers of high yield debt securities. Management believes the level of such investments is not significant to the Company’s financial condition. At September 30, 2004, the Company had unrealized gains of approximately $3.2 million in such investments. During the first nine months of 2004, the Company recognized a net loss of $151,375 on disposals of high yield debt securities. At September 30, 2003, the Company had unrealized gains of approximately $1.9 million in such investments.

 

During the first nine months of 2004, the Company wrote down one bond issue totaling $111,279 whose decline in value was deemed to be other than temporary.

 

The Company’s other investments consist primarily of assets leased under operating leases, investments in partnerships and joint ventures in addition to consumer loans and commercial leases originated by the finance subsidiary. These loans and leases are collateralized by automobiles, equipment and other property. At September 30, 2004, the delinquency ratio on the loan portfolio was 1.11% or $1.2 million, down from 1.52% or $1.5 million at December 31, 2003. The delinquency ratio on the lease portfolio at September 30, 2004 was 7.89% or $10.1 million, up from 2.29% or $3.1 million at December 31, 2003. Credit losses of approximately $478,200 were incurred in the first nine months of 2004 including an increase of approximately $86,000 in general reserves attributable to growth of the consumer loan portfolio. Leases charged off in the first nine months of 2004 were approximately $2,869,400. At September 30, 2004, the Company maintained an allowance for loan losses of $1,251,533 or approximately 1.1% of the outstanding loan balance. In addition, at September 30, 2004, the Company maintained an allowance for lease losses of $6,159,773 or approximately 4.8% of the outstanding lease balance.

 

25


Table of Contents

A customer of the Company’s commercial leasing operations, NorVergence, filed for Chapter 7 bankruptcy status on July 15, 2004. As a telecommunications provider, NorVergence supplied essential services on approximately 340 of the subsidiary’s leasing arrangements. During the third quarter of 2004, the Company did see an increase in delinquencies from the affected customers on the $7.8 million in leasing receivables OFC Capital held with its customers at September 30, 2004. NorVergence owed $123,363 for net leasing obligations at September 30, 2004 for which the Company fully reserved within its second quarter results. The Company has also reserved $1,994,297 for receivables on the associated leasing receivables owed by former NorVergence customers including $1,864,462 in the third quarter of 2004. As a service to its customers, the Company has reserved $511,500 for estimated expenses the Company expects to incur in securing each of them a replacement telecommunications provider.

 

During the third quarter of 2002, the Company’s finance subsidiary, Alfa Financial Corporation, invested $13.5 million in MidCountry Financial, a financial services holding company with two wholly-owned subsidiaries, Heights Finance Corp. and MidCountry Bank. Heights Finance Corp. was acquired by MidCountry Financial on August 30, 2002 and is a consumer finance company doing business in five Midwestern states. Bayside Bank was a federally chartered savings bank headquartered in Minnetonka, Minnesota and was acquired by MidCountry Financial at the end of 2003. Bayside Bank was renamed MidCountry Bank on July 19, 2004. Alfa Financial’s investment in MidCountry Financial gave it a 42 percent ownership in the originally formed entity. As a result of this significant ownership percentage, Alfa Financial accounts for earnings from MidCountry Financial using the equity method of accounting. Pre-tax operating income of approximately $597,000 positively impacted the first nine months of 2004.

 

INCOME TAXES

 

The effective tax rate in the first nine months of 2004 was 27.1% compared to 26.4% for the full year 2003 and 27.4% for the first nine months of 2003. The decrease in the effective tax rate in the first nine months of 2004 is due to increases in tax credits resulting from investments in partnerships established to construct and manage affordable housing. The increase over the 2003 full-year effective rate is due to increases in income before provision for income taxes adjusted by the relative mix of taxable versus tax-exempt income. Based on information available at September 30, 2004, the Company currently anticipates the effective tax rate recorded in the financial statements for the nine-month period ending September 30, 2004 to approximate the effective tax rate for all of 2004.

 

IMPACT OF INFLATION

 

Inflation increases consumers’ needs for both life and property and casualty insurance coverage. Inflation increases claims incurred by property and casualty insurers as property repairs, replacements and medical expenses increase. Such cost increases reduce profit margins to the extent that rate increases are not maintained on an adequate and timely basis. Since inflation has remained relatively low in recent years, financial results have not been significantly impacted by inflation.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company receives funds from its subsidiaries consisting of dividends, payments for funding federal income taxes, and reimbursement of expenses incurred at the corporate level for the subsidiaries. These funds are used for paying dividends to stockholders, corporate interest and expenses, federal income taxes, and for funding additional investments in its subsidiaries’ operations.

 

26


Table of Contents

The Company’s subsidiaries require cash in order to fund policy acquisition costs, claims, other policy benefits, interest expense, general operating expenses, and dividends to the Company. The major sources of the Company’s liquidity are operations and cash provided by maturing or liquidated investments. A significant portion of the Company’s investment portfolio consists of readily marketable securities which can be sold for cash. Based on a review of the Company’s matching of asset and liability maturities and on the interest sensitivity of the majority of policies in force, management believes the ultimate exposure to loss from interest rate fluctuations is not significant.

 

Net cash provided by operating activities for the first nine months of 2004 and 2003 approximated $105.7 million and $80.9 million, respectively. Such net positive cash flows provide the foundation of the Company’s assets/liability management program and are the primary drivers of the Company’s liquidity. As previously discussed, the Company also maintains a diversified portfolio of fixed maturity and equity securities which provide a secondary source of liquidity should net cash flows from operating activities prove inadequate to fund current operating needs. Management believes that such an eventuality is unlikely given the Company’s product mix (primarily short-duration personal lines property and casualty products), its ability to adjust premium rates (subject to regulatory oversight) to reflect emerging loss and expense trends and its catastrophe reinsurance program, amongst other factors.

 

The Company has a limited number of contractual obligations in the form of operating leases and debt obligations. These leases have primarily been originated by its commercial leasing subsidiary. Operating leases supporting the corporate headquarters are the responsibility of Alfa Mutual Insurance Company (Mutual), an affiliate. In turn, the Company reimburses Mutual monthly for a portion of these and other expenses based on a management and operating agreement. There are currently no plans to change the structure of this agreement. Included in the Company’s contractual obligations is the repayment of a $70 million debt obligation. This note, issued in the second quarter of 2002, is payable at the end of fifteen years. While the note carries a variable interest rate, the Company has entered into an interest rate swap contract to hedge interest rate variability and fix the interest rate for the first five years of the debt obligation at 4.945%.

 

The Company’s contractual obligations at September 30, 2004 are summarized below:

 

     Payments Due by Period

     Total

  

Less

than 1

year


  

1 - 3

years


  

4 - 5

years


  

After 5

years


Operating Lease Obligations

   $ 788,455    $ 151,485    $ 468,240    $ 168,730    $ —  

Capital Lease Obligations

     —        —        —        —        —  

Unconditional Purchase Obligations

     —        —        —        —        —  

Notes Payable to Affiliates

     45,219,261      45,219,261      —        —        —  

Long-Term Debt Obligation

     70,000,000      —        —        —        70,000,000

Other Long-Term Obligations

     —        —        —        —        —  
    

  

  

  

  

Total Contractual Obligations

   $ 116,007,716    $ 45,370,746    $ 468,240    $ 168,730    $ 70,000,000
    

  

  

  

  

The Company maintains a variety of funding agreements in the form of lines of credit with affiliated entities. The chart below depicts, at September 30, 2004, the cash outlay by the Company representing the potential full repayment of lines of credit it has outstanding with others. Also included with the amounts shown as “lines of credit” are the potential amounts the Company would have to supply to other affiliated entities if they made full use of their existing lines of credit during 2004 with the Company’s finance subsidiary, Alfa Financial

 

27


Table of Contents

Corporation. Other commercial commitments of the Company shown below include commercial paper outstanding, scheduled fundings of partnerships, funding of a policy administration system project of the life subsidiary and loans sold to members of the Alfa Mutual Group through which recourse against the finance subsidiary is available if repayment by the customer fails to occur.

 

     Amount of Commitment Expiration Per Period

    

Total

Amounts

Committed


  

Less

than 1

year


  

1 - 3

years


  

4 - 5

years


   After 5
years


Lines of Credit

   $ 37,965,000    $ —      $ 315,000    $ 37,650,000    $ —  

Standby Letters of Credit

     —        —        —        —        —  

Guarantees

     3,818,466      200,000      —        3,618,466      —  

Standby Repurchase Obligations

     —        —        —        —        —  

Other Commercial Commitments

     275,404,094      251,015,150      20,881,740      3,330,780      176,424
    

  

  

  

  

Total Commercial Commitments

   $ 317,187,560    $ 251,215,150    $ 21,196,740    $ 44,599,246    $ 176,424
    

  

  

  

  

Assessment of credit risk is a critical factor in the Company’s consumer loan and commercial leasing subsidiary. All credit decisions are made by personnel trained to limit loss exposure from unfavorable risks. In attempting to manage risk, the Company regularly reviews delinquent accounts and adjusts reserves for potential loan losses and potential lease losses. To the extent these reserves are inadequate at the time an account is written off, income would be negatively impacted. In addition, the Company monitors interest rates relative to the portfolio duration. Rising interest rates on commercial paper issued, the primary source of funding portfolio growth, could reduce the interest rate spread if the Company failed to adequately adjust interest rates charged to customers.

 

Total borrowings increased approximately $36.2 million in the first nine months of 2004 to $307.7 million. The majority of the short-term debt is commercial paper issued by the Company. At September 30, 2004, the Company had approximately $192.5 million in commercial paper at rates ranging from 1.57% to 1.80% with maturities ranging from October 4, 2004 to December 9, 2004. The Company intends to continue to use the commercial paper program as a major source to fund the consumer loan portfolio, commercial lease portfolio and other corporate short-term needs. In addition, the Company had $45.2 million in short-term debt outstanding to affiliates at September 30, 2004 with interest equal to commercial paper rates payable monthly. Also included in total borrowings is a variable rate note issued by the Company during the second quarter of 2002 in the amount of $70 million. This note is payable in its entirety at the end of fifteen years with interest payments due monthly. The Company is using the proceeds of this note to partially fund the consumer loan and commercial lease portfolios of its finance subsidiary. The Company has entered into an interest rate swap contract in order to achieve its objective of economically hedging 100 percent of its variable-rate long-term interest payments over the first five years of the note. Under the interest rate swap, the Company receives variable interest payments and makes fixed interest rate payments, thereby fixing the rate on such debt at 4.945%. The interest rate swap involves a LIBOR for LIBOR exchange and meets the criteria for short-cut accounting.

 

The commercial paper and variable/fixed rate promissory note are guaranteed by two affiliates, Alfa Mutual Insurance Company and Alfa Mutual Fire Insurance Company up to an aggregate limit of $300 million. Backup lines of credit are also in place up to $300 million. The backup lines agreements contain usual and customary covenants requiring the Company to meet certain operating levels. The Company has maintained full compliance with all such covenants. The Company has earned A-1+ and P-1 commercial paper ratings from Standard & Poor’s and Moody’s Investors Service, respectively.

 

28


Table of Contents

On October 25, 1993, the Company established a Stock Option Plan, pursuant to which a maximum aggregate of 4,000,000 shares of common stock were reserved for grant to key personnel. On April 26, 2001, the plan was amended to increase the maximum aggregate number of shares available for grant to 6,400,000 shares. Under the plan, options ratably become exercisable annually over three years and may not be exercised after ten years from the date of the award. During February 2004, the Company issued 780,400 options.

 

In October 1989, the Company’s Board of Directors approved a stock repurchase program authorizing the repurchase of up to 4,000,000 shares of its outstanding common stock in the open market or in negotiated transactions in such quantities and at such times and prices as management may decide. The Board increased the number of shares authorized for repurchase by 4,000,000 in both March 1999 and September 2001, bringing the total number of shares authorized for repurchase to 12,000,000. During the first nine months of 2004, the Company repurchased 790,343 shares at a cost of $10,658,310. At September 30, 2004, the total repurchased was 7,938,123 shares at a cost of $60,928,033.

 

Stock repurchase activity for the three months ended September 30, 2004 is summarized below:

 

    

Shares


  

Average Price

Per Share


Total Shares Authorized to Be Repurchased

             12,000,000       

Less: Total Shares Repurchased at June 30, 2004

        7,710,680            

Shares Repurchased –

                     

July               2004

   79,400              $ 13.49

August          2004

   51,443              $ 13.44

September     2004

   96,600              $ 13.71
    
                

Total Shares Repurchased in Three Months Ended September 30, 2004

        227,443         $ 13.57
         
           

Total Shares Repurchased under Stock Repurchase Program

             7,938,123       
              
      

Total Shares Available for Repurchase

             4,061,877       
              
      

 

The Company has reissued 2,456,432 treasury shares as a result of option exercises. In May 2002, the Company began selling treasury shares as a means of meeting provisions of stockholder participation in the Company’s dividend reinvestment plan. At September 30, 2004, the total sold was 1,595,609 shares at a cost of $9,576,005.

 

Due to the sensitivity of the products offered by the life subsidiary to interest rates fluctuations, the Company must assess the risk of surrenders exceeding expectations factored into its pricing program. Internal actuaries are used to determine the need for modifying the Company’s policies on surrender charges and assessing the Company’s competitiveness with regard to rates offered.

 

Cash surrenders paid to policyholders on a statutory basis totaled $12.9 million and $12.5 million in the first nine months of 2004 and 2003, respectively. This level of surrenders is within the Company’s pricing expectations. Historical persistency rates indicate a normal pattern of surrender activity. The structure of the surrender charges is such that persistency is encouraged. The majority of the policies in force have surrender charges which grade downward over a 12 to 15 year period. In addition, the majority of the in-force business is interest sensitive type policies which generally have lower rates of surrender. At September 30, 2004, the total amount of cash that would be required to fund all amounts subject to surrender was approximately $588.5 million.

 

29


Table of Contents

The Company’s business is concentrated geographically in Alabama, Georgia and Mississippi. Accordingly, unusually severe storms or other disasters in these contiguous states might have a more significant effect on the Company than on a more geographically diversified insurance company. Unusually severe storms, other natural disasters and other events could have an adverse impact on the Company’s financial condition and operating results. However, the Company’s current catastrophe protection program, which began November 1, 1996, reduced the earnings volatility caused by such catastrophe exposures.

 

The Company’s management uses estimates in determining loss reserves for inclusion in its financial statements. Periodic reviews are conducted by the Company’s internal actuaries to determine a range of reasonable loss reserves. In addition, the Company’s current catastrophe protection program, which began November 1, 1996, was established to address the economics of catastrophe finance. This plan limits the Company’s exposure to catastrophes which might otherwise deplete the Company’s surplus through the combination of shared catastrophe exposure within the Alfa Group and the purchase of reinsurance coverage from external reinsurers.

 

Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company; therefore, allowances are established if amounts are determined to be uncollectible. The Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurance to minimize exposure to significant losses from reinsurer insolvencies. At September 30, 2004, the Company does not believe there to be a significant concentration of credit risk related to its reinsurance program.

 

Lawsuits brought by policyholders or third-party claimants can create volatility in the Company’s earnings. The Company maintains in-house legal staff and, as needed, secures the services of external legal firms to present and protect its position. Certain legal proceedings are in process at September 30, 2004. These proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims, and miscellaneous other causes of action. These lawsuits involve claims for mental anguish and punitive damages. Costs for these and similar proceedings, including accruals for outstanding cases, are included in the financial statements of the Company. Management periodically reviews reserves established to cover potential costs of litigation including legal fees and potential damage assessments and adjusts them based on their best estimates. It should be noted that in Mississippi and Alabama, where the Company has substantial business, the likelihood of a judgment in any given suit, including a large mental anguish and/or punitive damage award by a jury, bearing little or no relation to actual damages, continues to exist, creating the potential for unpredictable material adverse financial results.

 

Increased public interest in the availability and affordability of insurance has prompted legislative, regulatory and judicial activity in several states. This includes efforts to contain insurance prices, restrict underwriting practices and risk classifications, mandate rate reductions and refunds, eliminate or reduce exemptions from antitrust laws and generally expand regulation. In 1999, the Alabama legislature passed a tort reform package that should help to curb some of the excessive litigation experienced in recent years. In addition, a mandatory insurance bill was passed to require motorists to obtain insurance coverage beginning in June 2000. While this requirement will affect both the revenues and losses incurred by the Company in the future, the full extent or impact is not possible to predict and the Company believes any impact on future results will not be significant.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

The Company’s “Summary of Significant Accounting Policies” is presented in the notes to its audited

 

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consolidated financial statements for the fiscal year ended December 31, 2003. As the Company operates in the property and casualty and life insurance industries, its accounting policies are well defined with industry-specific accounting literature governing the recognition of insurance-related revenues and expenses.

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make significant estimates and assumptions based on information available at the time the financial statements are prepared. In addition, management must ascertain the appropriateness and timing of any changes in these estimates and assumptions. Certain accounting estimates are particularly sensitive because of their significance to the Company’s financial statements and because of the possibility that subsequent events and available information may differ markedly from management’s judgments at the time financial statements are prepared. For the Company, the areas most subject to significant management judgments include reserves for property and casualty losses and loss adjustment expenses, reserves for future policy benefits, deferred policy acquisition costs, valuation of investments, and reserves for pending litigation. The application of these critical accounting estimates impacts the values at which 72% of the Company’s assets and 57% of the Company’s liabilities are reported and therefore have a direct effect on net earnings and stockholders’ equity.

 

Management routinely discusses changes in the Company’s critical accounting policies and estimates with the Audit Committee of the Company’s Board of Directors. The Company’s Audit Committee has also reviewed the disclosures contained herein.

 

RESERVES FOR PROPERTY CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES

 

The estimated liabilities for losses and loss adjustment expenses include the accumulation of estimates of losses for claims reported prior to the balance sheet dates, estimates of losses for claims incurred but not reported and the development of case reserves to ultimate values, and estimates of expenses for investigating, adjusting and settling all incurred claims. Amounts reported are estimates of the ultimate costs of settlement, net of estimated salvage and subrogation. The estimates are necessarily subject to the outcome of future events, such as changes in medical and repair costs as well as economic, political and social conditions that impact the settlement of claims. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims. Due to the Company’s current mix of exposures, the majority of claims are settled within twelve months of the date of loss. The amount of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions related to the type of loss. The amounts of loss reserves for unreported claims and loss adjustment expenses are determined using historical information by line of business as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results. Organized by accident year and evaluation dates, historical data on paid losses, loss adjustment expenses, case reserves, earned premium, catastrophe losses and carried reserves is provided to the Company’s actuaries who apply standard actuarial techniques to estimate a range of reasonable reserves. The carried reserve is then compared to these estimates to determine whether it is reasonable and whether any adjustments need to be recorded. The Company’s appointed actuary conducts his own analysis and renders an opinion as to the adequacy of the reserves. Reserve estimates are closely monitored and are rolled forward quarterly using the most recent information on reported claims. Each quarter, after the rolled forward analysis has been completed, a meeting is held to discuss the actuarial data. Management evaluates reserve level estimates across various segments and adjustments are made as deemed necessary. It is expected that such estimates will be more or less than the amounts ultimately paid when the claims are settled. Changes in these estimates are reflected in current operating results. An increase in the ending reserve for incurred but not reported

 

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losses of 1% would have negatively impacted income before income taxes by $461,909 at September 30, 2004. Similarly, increases of 1% in the reserves for unpaid losses and loss adjustment expenses would have reduced pretax earnings by $767,867 and $281,414 respectively. Due to the Company’s geographically-concentrated operations, it is possible that changes in assumptions based on regional data could cause fluctuations in reported results. However, the Company’s exposure to large adjustments in these reserves created by these assumption changes is partially limited by its participation in the Alfa Insurance Group’s catastrophe protection program. Historically, the Company’s reserves, in the aggregate, have been adequate when compared to actual results. Given the inherent variability in the estimates, management believes the aggregate reserves are within a reasonable and acceptable range of adequacy.

 

RESERVES FOR POLICYHOLDER BENEFITS

 

Benefit reserves for traditional life products are determined according to the provisions of Statement of Financial Accounting Standard (SFAS) No. 60, “Accounting and Reporting by Insurance Enterprises.” The methodology used requires that the present value of future benefits to be paid to or on behalf of policyholders less the present value of future net premiums (that portion of the gross premium required to provide for all future benefits and expenses) be determined. Such determination uses assumptions, including provision for adverse deviation, for expected investment yields, mortality, terminations and maintenance expenses applicable at the time the insurance contracts are issued. These assumptions determine the level and the sufficiency of reserves. The Company annually tests the validity of these assumptions.

 

Benefit reserves for universal life products are determined according to the provisions of SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments.” This standard directs that, for policies with an explicit account balance, the benefit reserve is the account balance without reduction for any applicable surrender charge. Benefit reserves for the Company’s annuity products, like those for universal life products, are determined using the requirements of SFAS No. 97.

 

In accordance with the provisions of SFAS No. 60 and the AICPA Audit and Accounting Guide, credit insurance reserves are held as unearned premium reserves calculated using the “rule of 78” method. Reserves for supplementary contracts with life contingencies are determined using the 1971 Individual Annuity Mortality Table and an interest rate of 7.5%. Likewise, reserves for accidental death benefits are determined predominately by using the 1959 Accidental Death Benefit Mortality Table and an interest rate of 3%. Reserves for disability benefits, both active and disabled lives, are calculated primarily from the 1952 Disability Study and a rate of 2.5%. A small portion of the Company’s disabled life reserves are calculated based on the 1970 Intercompany Group Disability Study and a rate of 3%.

 

Reserves for all other benefits are computed in accordance with presently accepted actuarial standards. Management believes that reserve amounts reflected in the Company’s balance sheet related to life products:

 

  are consistently applied and fairly stated in accordance with sound actuarial principles;

 

  are based on actuarial assumptions which are in accordance with contract provisions;

 

  make a good and sufficient provision for all unmatured obligations of the Company guaranteed under the terms of its contracts;

 

  are computed on the basis of assumptions consistent with those used in computing the corresponding items of the preceding year end; and

 

  include provision for all actuarial reserves and related items which ought to be established.

 

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VALUATION OF INVESTMENTS

 

Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in stockholders’ equity as a component of accumulated other comprehensive income (loss) and, accordingly, have no effect of net income. Fair values for fixed maturities are based on quoted market prices. The cost of investment securities sold is determined by the specific identification method. The Company monitors its investment portfolio and conducts quarterly reviews of investments that have experienced a decline in fair value below cost to evaluate whether the decline is other than temporary. Such evaluations involve judgment and consider the magnitude and reasons for a decline and the prospects for the fair value to recover in the near term. Declines in value created by market conditions or industry related events, and for which the Company has the intent to hold the investment for a period of time believed to be sufficient to allow a market recovery or to maturity, are considered to be temporary. Future adverse investment market conditions, or poor operating results of underlying investments, could result in an impairment charge in the future. Where a decline in fair value of an investment below its cost is deemed to be other than temporary, a charge is reflected in income for the difference between the cost or amortized cost and the estimated net realizable value. As a result, writedowns of approximately $111,000 were recorded in the first nine months of 2004 on fixed maturities. No writedowns on equity securities were recorded during the same time period.

 

POLICY ACQUISITION COSTS

 

Policy acquisition costs, such as commissions, premium taxes and certain other underwriting and marketing expenses that vary with and are directly related to the production of business have been deferred. Traditional life insurance acquisition costs are being amortized over the premium payment period of the related policies using assumptions consistent with those used in computing policy benefit reserves. Acquisition costs for universal life type policies are being amortized over the lives of the policies in relation to the present value of estimated gross profits which are determined based upon surrender charges and investment, mortality and expense margins. Investment income is considered, if necessary, in the determination of the recoverability of deferred policy acquisition costs. Acquisition costs for property and casualty insurance are amortized over the period in which the related premiums are earned. Future changes in estimates, such as the relative time certain employees spend in initial policy bookings, may require adjustments to the amounts deferred. Changes in underwriting and policy issuance processes may also give rise to changes in these deferred costs.

 

RESERVES FOR LITIGATION

 

The Company is subject to proceedings, lawsuits and claims in the normal course of business related to its insurance and noninsurance products. At the time a case becomes known, management evaluates the merits of the claim and determines the need for establishing estimated reserves for potential settlements or judgments as well as reserves for potential costs of defending the Company against the claim. These reserves may be adjusted as the matter develops. Periodically, and at least quarterly, management assesses all pending cases as a basis for evaluating reserve levels. At that point, any necessary adjustments are made to applicable reserves as determined by management and are included in current operating results. Reserves may be adjusted based upon outside counsels’ advice regarding the law and facts of the case, any revisions in the law applicable to the case, the results of depositions and/or other forms of discovery, general developments as the case progresses such as a favorable or an adverse trial court ruling, whether or not an outside carrier provides a defense and/or indemnification, whether a verdict is rendered for or against the Company, whether management believes an appeal will be successful, or other factors that may affect the anticipated outcome of the case. Management believes adequate reserves have been established in known cases. However, due to the uncertainty of future events, there can be no assurance that actual outcomes will not differ from the assessments made by management.

 

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FINANCIAL ACCOUNTING DEVELOPMENTS

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.” While the Company continues to use the intrinsic value method to account for its stock options, notes contained in this filing for the nine-month and three-month periods ended September 30, 2004 have been enhanced to comply with the requirements set forth by this statement.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation addresses consolidation and disclosure issues associated with variable interest entities. The effective date for the interpretation has been delayed to December 31, 2003 on those variable interest entities in existence prior to February 1, 2003. The Company has evaluated the provisions of this interpretation and its requirements had no significant impact on the Company’s financial position or income.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. These changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. This statement is effective for contracts entered into or modified after September 30, 2004 and for hedging relationships designated after September 30, 2004. At this time, the Company does not anticipate this standard having a significant impact on the Company’s financial position or income.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and is effective for financial instruments entered into or modified after May 31, 2003. The Company did not experience a significant impact on the Company’s financial position or income from this statement.

 

In July 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts for Separate Accounts.” This SOP became effective for fiscal years beginning after December 15, 2003. The new rule changes accounting for separate accounts and sales inducements and changes the liability model by expanding the definition of “account balance” and addressing annuitization guarantees and minimum guaranteed death benefits. The Company has implemented this SOP effective January 1, 2004 and it did not have a significant impact on its financial position or income.

 

In March 2004, the FASB approved the consensus reached on the EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this consensus is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. Originally, the accounting provisions of EITF 03-1 were effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements are effective only for annual periods ending after June 15, 2004. In September 2004, the FASB issued two FASB Staff Positions (FSP), FSP EITF 03-1-a and FSP EITF 03-1-1, which delayed the measurement and recognition paragraphs of the consensus for further discussion. The disclosure requirements remain effective as originally issued under EITF 03-1 and have been adopted by the Company. The Company has evaluated the impact of the adoption of EITF 03-1, as written, and does not believe the impact is significant to the Company’s financial position or income at September 30, 2004. The Company will continue to monitor the developments of the FASB and EITF regarding the measurement and recognition paragraphs of this consensus.

 

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INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

 

Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion or projection concerning the Company or its business, whether expressed or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, technological changes, political and legal contingencies and general economic conditions, as well as other risks and uncertainties more completely described in the Company’s filings with the Securities and Exchange Commission. If any of these assumptions or opinions prove incorrect, any forward-looking statements made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects and may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements.

 

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Item 3.

 

MARKET RISK DISCLOSURES

 

The Company’s objectives in managing its investment portfolio are to maximize investment income and investment returns while minimizing overall credit risk. Investment strategies are developed based on many factors including underwriting results, overall tax position, regulatory requirements, and fluctuations in interest rates. Investment decisions are made by management and approved by the Board of Directors. Market risk represents the potential for loss due to adverse changes in the fair value of securities. The market risk related to the Company’s fixed maturity portfolio are primarily interest rate risk and prepayment risk. The market risk related to the Company’s equity portfolio is equity price risk. For further information, reference is made to Management’s Discussion and Analysis of Results of Operations in Alfa Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

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Item 4.

 

CONTROLS AND PROCEDURES

 

The Company has evaluated the effectiveness of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. The evaluation was performed under the supervision and with the participation of the Company’s Disclosure Committee and Management, including the Chief Executive Officer and the Chief Financial Officer, within 90 days prior to the date of the filing of this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion.

 

Subsequent to the date of their evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

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PART II. OTHER INFORMATION

 

Item 1.     LEGAL PROCEEDINGS

 

Certain legal proceedings are in process at September 30, 2004. Costs for these and similar legal proceedings, including accruals for outstanding cases, totaled approximately $1.3 million in the first nine months of 2004, $1.1 million in 2003, and $5.3 million in 2002. These proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims, and miscellaneous other causes of action. These lawsuits involve claims for unspecified amounts of compensatory damages, mental anguish damages, and punitive damages.

 

Approximately 47 legal proceedings against Alfa Life Insurance Corporation (Life) were in process at September 30, 2004. Of the 47 proceedings, thirty-four were filed in 2004, eight were filed in 2003, one was filed in 2002, three were filed in 1999, and one was filed in 1996. One of the 47 pending cases was filed as a purported class action, but the plaintiffs recently dismissed the class allegations. In a case tried in January 2001, in Barbour County, Alabama, the jury returned a verdict for the plaintiff against Life for $500,000 in compensatory damages and $5,000,000 in punitive damages. After Life filed post-trial motions, the trial court reduced the punitive damage award to $1,500,000. On appeal, the Alabama Supreme Court further reduced the total judgment to $400,000. Life has filed an Application for Rehearing with the Court seeking a further reduction of the award.

 

In addition, one purported class action lawsuit is pending against both Alfa Builders, Inc. and Alfa Mutual Fire Insurance Company. Additionally, three purported class action lawsuits are pending against the property and casualty companies involving a number of issues and allegations which could affect the Company because of a pooling agreement between the companies. Two purported class action lawsuits have been filed against Alfa Financial Corporation. These relate to OFC Capital leases with customers of NorVergence, a telecommunications provider who filed for Chapter 7 bankruptcy in July 2004. No class has been certified in any of these six purported class action cases. In the event a class is certified in any of these purported class actions, reserves may need to be adjusted.

 

Management believes adequate accruals have been established in these known cases. However, it should be noted that in Mississippi and Alabama, where the Company has substantial business, the likelihood of a judgment in any given suit, including a large mental anguish and/or punitive damage award by a jury, bearing little or no relation to actual damages, continues to exist, creating the potential for unpredictable material adverse financial results.

 

Based upon information presently available, management is unaware of any contingent liabilities arising from other threatened litigation that should be reserved or disclosed.

 

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Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

      None

 

Item 3.     DEFAULTS UPON SENIOR SECURITIES

      None

 

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None

 

Item 5.     OTHER INFORMATION

      None

 

Item 6.     EXHIBITS

 

10.1    -   LLC Interest Purchase Agreement by and among Alfa Corporation and John Charles Russell, Carol Lynn Russell, the Trusts Identified on Exhibit A Hereto, The Community Foundation of Middle Tennessee, Inc. and The Vision Insurance Group, LLC
10.2    -   Stock Option Agreement under the Alfa Corporation Stock Incentive Plan
11    -   Statement of Computation of Per Share Earnings
15    -   Letter Regarding Unaudited Interim Financial Information
31.1    -   Certification of Alfa Corporation’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    -   Certification of Alfa Corporation’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    -   Certification of Alfa Corporation’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    -   Certification of Alfa Corporation’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Items other than those listed above are omitted because they are not required or are not applicable.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

ALFA CORPORATION

Date 11/09/04

 

By:

 

/S/ Jerry A. Newby


       

Jerry A. Newby

       

President

       

(Chief Executive Officer)

Date 11/09/04

 

By:

 

/S/ Stephen G. Rutledge


       

Stephen G. Rutledge

       

Senior Vice President

       

(Chief Financial Officer and Chief Investment Officer)

 

40

EX-10.1 2 dex101.htm LLC INTEREST PURCHASE AGREEMENT LLC Interest Purchase Agreement

Exhibit 10.1

 

 


 

LLC INTEREST PURCHASE AGREEMENT

 

by and among

 

ALFA CORPORATION

 

and

 

JOHN CHARLES RUSSELL,

 

CAROL LYNN RUSSELL,

 

THE TRUSTS IDENTIFIED ON EXHIBIT A HERETO,

 

THE COMMUNITY FOUNDATION OF MIDDLE TENNESSEE, INC.

 

and

 

THE VISION INSURANCE GROUP, LLC

 

Dated as of August 30, 2004

 



TABLE OF CONTENTS

 

ARTICLE 1

   DEFINITIONS    5

    SECTION 1.1

       CERTAIN DEFINITIONS    5

    SECTION 1.2

       INDEX OF CERTAIN DEFINED TERMS    10

ARTICLE 2

   PURCHASE AND SALE OF INTERESTS    12

    SECTION 2.1

       PURCHASE AND SALE OF INTERESTS    12

    SECTION 2.2

       PURCHASE PRICE    12

    SECTION 2.3

       EARNOUT PAYMENTS    13

    SECTION 2.4

       ACCOUNTS RECEIVABLE    15

    SECTION 2.5

       CLOSING DATE AND POST-CLOSING NET EQUITY SETTLEMENT    17

    SECTION 2.6

       PLACE AND DATE OF CLOSING; CLOSING DELIVERIES    19

    SECTION 2.7

       WIRE TRANSFERS; WITHHOLDING TAXES    20

ARTICLE 3

   REPRESENTATIONS AND WARRANTIES OF SELLERS AND VISION    20

    SECTION 3.1

       ORGANIZATION, STANDING AND POWER    20

    SECTION 3.2

       AUTHORITY    21

    SECTION 3.3

       GOVERNMENTAL AUTHORIZATION    21

    SECTION 3.4

       NON-CONTRAVENTION    21

    SECTION 3.5

       OWNERSHIP OF INTERESTS    22

    SECTION 3.6

       CAPITALIZATION OF TEXAS MGA    22

    SECTION 3.7

       FINANCIAL STATEMENTS; ABSENCE OF UNDISCLOSED LIABILITIES    22

    SECTION 3.8

       ABSENCE OF CERTAIN CHANGES    23

    SECTION 3.9

       MATERIAL CONTRACTS    24

    SECTION 3.10

       LITIGATION    25

    SECTION 3.11

       COMPLIANCE WITH LAWS; INSURANCE MATTERS    25

    SECTION 3.12

       ENVIRONMENTAL COMPLIANCE    27

    SECTION 3.13

       PERSONAL PROPERTY    27

    SECTION 3.14

       REAL PROPERTY    27

    SECTION 3.15

       INTELLECTUAL PROPERTY    28

    SECTION 3.16

       EMPLOYEE BENEFIT PLANS; ERISA    29

    SECTION 3.17

       LABOR AND EMPLOYMENT MATTERS    31

    SECTION 3.18

       TAX MATTERS    32

    SECTION 3.19

       OPERATIONS INSURANCE    33

    SECTION 3.20

       BROKER, FINANCIAL ADVISER    34

    SECTION 3.21

       DISCLOSURE    34

    SECTION 3.22

       FOUNDATIONS REPRESENTATIONS    34

ARTICLE 4

   REPRESENTATIONS AND WARRANTIES OF BUYER    35

    SECTION 4.1

       ORGANIZATION, STANDING AND POWER    35

    SECTION 4.2

       AUTHORITY    35

    SECTION 4.3

       GOVERNMENTAL AUTHORIZATION    35

    SECTION 4.4

       NON-CONTRAVENTION    35

    SECTION 4.5

       INVESTMENT INTENT    36

    SECTION 4.6

       SUFFICIENT FUNDS    36

    SECTION 4.7

       BUYER SHARES    36

    SECTION 4.8

       BUYER SEC FILINGS    36

ARTICLE 5

   COVENANTS    37

    SECTION 5.1

       CONDUCT OF BUSINESS    37

    SECTION 5.2

       EXCLUSIVITY    38

    SECTION 5.3

       COOPERATION    38
    SECTION 5.4        POST-CLOSING ACCESS    39


    SECTION 5.5

       FILING; OTHER ACTIONS; NOTIFICATIONS    39

    SECTION 5.6

       FURTHER ASSURANCES    40

    SECTION 5.7

       EXPENSES    40

    SECTION 5.8

       TAX MATTERS    40

    SECTION 5.9

       DISCLOSURE SUPPLEMENTS    42

    SECTION 5.10

       CERTAIN EMPLOYEE MATTERS    42

    SECTION 5.11

       PRESS RELEASES AND PUBLIC ANNOUNCEMENTS    44

    SECTION 5.12

       EARNOUT FRUSTRATION    44

    SECTION 5.13

       BUYER NONRECRUITMENT COVENANT    44

    SECTION 5.14

       JOHN RUSSELL NONRECRUITMENT, NONSOLICITATION AND NONCOMPETITION    45

    SECTION 5.15

       DORINCO REINSURANCE SETTLEMENT; PERSONAL GUARANTEES    46

ARTICLE 6

   CONDITIONS TO CLOSING    47

    SECTION 6.1

       CONDITIONS TO OBLIGATIONS OF SELLERS    47

    SECTION 6.2

       CONDITIONS TO OBLIGATIONS OF BUYER    48

ARTICLE 7

   TERMINATION    49

    SECTION 7.1

       TERMINATION BY MUTUAL CONSENT    49

    SECTION 7.2

       TERMINATION BY EITHER SELLERS OR BUYER    49

    SECTION 7.3

       TERMINATION BY SELLERS    49

    SECTION 7.4

       TERMINATION BY BUYER    50

    SECTION 7.5

       EFFECT OF TERMINATION AND ABANDONMENT    50

ARTICLE 8

   INDEMNIFICATION    50

    SECTION 8.1

       SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS    50

    SECTION 8.2

       OBLIGATION OF SELLERS TO INDEMNIFY    51

    SECTION 8.3

       OBLIGATION OF BUYER TO INDEMNIFY    52

    SECTION 8.4

       PROCEDURE FOR INDEMNIFICATION CLAIMS    53

    SECTION 8.5

       INSURANCE; SUBROGATION    54

    SECTION 8.6

       BUYERS RIGHTS OF SETOFF    55

    SECTION 8.7

       SOLE REMEDY    55

ARTICLE 9

   MISCELLANEOUS    55

    SECTION 9.1

       ARBITRATION    55

    SECTION 9.2

       ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES    56

    SECTION 9.3

       AMENDMENTS    56

    SECTION 9.4

       WAIVERS    56

    SECTION 9.5

       ASSIGNMENT    57

    SECTION 9.6

       NOTICES    57

    SECTION 9.7

       GOVERNING LAW    59

    SECTION 9.8

       COUNTERPARTS    59

    SECTION 9.9

       CAPTIONS    59

    SECTION 9.10

       INTERPRETATIONS    59

    SECTION 9.11

       SEVERABILITY    59

    SECTION 9.12

       SELLERS REPRESENTATIVE    60


EXHIBITS

 

Exhibit A    Vision’s Members
Exhibit B    Revenue Earnout Payment Formula and Terms
Exhibit C    EBITDA Earnout Payment Formula and Terms
Exhibit D    Monthly Treaty Reports
Exhibit E    Form of Subscription Agreement
Exhibit F    Form of John Russell Employment Agreement
Exhibit G    Form of Thomas Russell Employment Agreement
Exhibit H    Form of David Tetzlaff Employment Agreement
Exhibit I    Form of Litigation Indemnification Agreement
Exhibit J    Certain Dispositions and Assignments
Exhibit K    Bonus Agreements
SELLERS DISCLOSURE MEMORANDUM
Section 3.1    Vision Qualifications to do Business
Section 3.3    Governmental Authorizations
Section 3.4    Non-Contravention
Section 3.5    Ownership of Interests
Section 3.7(a)    Vision Financial Statements
Section 3.7(b)    Undisclosed Liabilities
Section 3.8    Changes Since December 31, 2003
Section 3.9    Material Contracts
Section 3.10    Litigation
Section 3.11    Permits; Insurance Matters
Section 3.13    Personal Property
Section 3.14    Real Property
Section 3.15    Intellectual Property
Section 3.16    Employee Benefit Plans
Section 3.17    Labor Matters
Section 3.18    Tax Matters
Section 3.19    Operations Insurance
Section 3.20    Broker, Financial Advisor
Section 5.10    Personal Leave Policy
Section 5.15    Personal Guarantees
Section 6.2(j)    Consents
Section 8.2    Certain Litigation


LLC INTEREST PURCHASE AGREEMENT

 

THIS LLC INTEREST PURCHASE AGREEMENT (this “Agreement”), dated as of August 30, 2004, is entered into by and among ALFA CORPORATION, a Delaware corporation (“Buyer”), JOHN CHARLES RUSSELL, an individual resident of the State of Tennessee (“John Russell”), CAROL LYNN RUSSELL, an individual resident of the State of Tennessee (“Carol Russell”), THE TRUSTS IDENTIFIED ON EXHIBIT A HERETO (the “Seller Trusts”), THE COMMUNITY FOUNDATION OF MIDDLE TENNESSEE, INC., a Tennessee not-for-profit corporation (the “Foundation”) (John Russell, Carol Russell, the Seller Trusts and the Foundation are, collectively, “Sellers”), and THE VISION INSURANCE GROUP, LLC, a Tennessee limited liability company (“Vision”).

 

BACKGROUND

 

Sellers collectively own 100% of the limited liability company interests of Vision (the “Interests”), with their respective membership percentages being set forth on Exhibit A hereto. In addition, John Russell owns 100% of the issued and outstanding capital stock of Vision MGA of Texas, Inc., a Texas corporation (“Texas MGA”), which was formed solely for the purpose of performing Vision’s business in Texas pursuant to regulatory requirements. The parties desire that John Russell cause Texas MGA to be merged with and into Vision prior to the Closing contemplated by this Agreement. The parties also desire that Sellers sell to Buyer, and Buyer purchase from Sellers, the Interests at Closing in accordance with the terms and conditions of this Agreement.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, do hereby agree as follows:

 

ARTICLE 1

DEFINITIONS

 

Section 1.1 Certain Definitions. The following capitalized terms have the respective meanings set forth below:

 

Affiliate means, with respect to a specified Person, any other Person controlling, controlled by or under common control with the specified Person.

 

American Safety Agreement means that certain Program Management and Underwriting Agreement for Personal Lines Private Passenger Automobile Insurance, dated March 1, 2000, by and between American Safety Casualty Insurance Company and Vision.

 

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Annual Statement” means the form of annual statement for property and casualty insurance companies prescribed by the National Association of Insurance Commissioners, or such comparable form that the applicable insurance carrier is required to use in lieu thereof by the insurance regulatory authority in the state of such insurance carrier’s domicile.

 

Average Buyer Share Price means the average per share closing price of Buyer Common Stock on the Nasdaq National Market for the ten Business Days ending on the third Business Day preceding (and not counting) the Closing Date.

 

AVICmeans Alfa Vision Insurance Corporation, an Alabama corporation and wholly owned subsidiary of Buyer, which was formed for the purpose of engaging in the Business with Vision after the Closing.

 

AVIC Licenses means certificates of authority for AVIC to engage in the business of automobile insurance in the following states: Arkansas, Florida, Indiana, Kentucky, Missouri, Ohio, Tennessee and Virginia; and qualification to transact business as a reinsurer in the state of Texas.

 

Business means the business of marketing, underwriting and administering insurance policies as conducted by Vision and Texas MGA, including the services performed by Vision and Texas MGA on behalf of insurance carriers.

 

Business Day means any day other than a Saturday, a Sunday, a day on which banking institutions in the State of Delaware are permitted or obligated by Law to be closed, or a day on which the Nasdaq National Market is not open for trading.

 

Buyer Common Stock means Buyer’s Common Stock, $1.00 par value per share.

 

Buyer Material Adverse Effect means any change, effect, matter, event, occurrence or circumstance, individually or collectively, that has or would reasonably be expected to have a material adverse effect on (i) the business, assets or properties (including intangible assets or properties), liabilities, results of operations or financial condition of Buyer and its Affiliates taken as a whole or (ii) the ability of Buyer to perform its obligations under this Agreement, other than such changes, effects, matters, events, occurrences or circumstances generally affecting the United States economy.

 

Closingmeans the consummation of the transactions contemplated by this Agreement.

 

Closing Date means the date on which the Closing actually occurs.

 

Closing Date Employee means each individual who is employed by Vision immediately prior to the Closing, after any terminations required pursuant to Section 5.10(a).

 

Code means the Internal Revenue Code of 1986, as amended. Any citation to a provision of the Code includes a citation to any successor provision.

 

6


Contract” means any written or oral agreement, arrangement, commitment, contract, indenture, instrument, lease or obligation of any kind or character to which any Person is a party or that is binding on any Person or its assets or business.

 

Corporate Overhead” means any corporate overhead or expenses of Buyer, including legal and accounting fees, allocated or charged to Vision, other than charges for services that are actually used by Vision. By way of example, and not by limitation, Corporate Overhead will not include reasonable charges to Vision for services performed by employees of Alfa Mutual Insurance Company who were employees of Vision prior to the Closing, or reasonable charges to Vision for financial accounting and audit services to the extent that Vision receives these services from or through Buyer rather than Vision purchasing them from unaffiliated sources. The intent of the parties is that Corporate Overhead will not include charges that Vision pays to Buyer or its other Affiliates for services that Vision would have performed for itself or purchased from other sources had Vision not been acquired by Buyer.

 

Environmental Laws means any federal, state or local laws, rules or regulations, and any orders or decrees, relating to the regulation or protection of the natural environment or to releases or threatened releases of Hazardous Materials into the soil, land surface or subsurface strata, surface waters (including navigable waters, ocean waters, streams, ponds, drainage basins, and wetlands), ground waters, drinking water supply, stream sediments, ambient air (including indoor air) and any other environmental medium or natural resource.

 

ERISA means the Employee Retirement Income Security Act of 1974, as amended, and all final and temporary regulations thereunder.

 

Exchange Actmeans the Securities Exchange Act of 1934, as amended.

 

GAAP means United States generally accepted accounting principles as in effect from time to time, consistently applied for all relevant time periods, applying accrual basis accounting.

 

Governmental Authority means any federal, state, county, local, foreign or other governmental or public agency, instrumentality, commission, authority, board or body.

 

Hazardous Materials means any waste or other substance that is listed, defined, designated or classified as, or otherwise determined to be, hazardous, radioactive or toxic or a pollutant or a contaminant under or pursuant to any Environmental Law, including any admixture or solution thereof, and specifically including petroleum and all derivatives thereof or synthetic substitutes therefor and asbestos or asbestos-containing materials.

 

Interests means 100% of the limited liability company membership interests of Vision.

 

Knowledge means, with respect to Sellers, those facts that are known or should reasonably have been known after due inquiry by each of the following individuals: John Russell, Carol Russell, Thomas Russell, David Tetzlaff, Joel Wit and Shannon Balmer.

 

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Law” means any domestic or foreign federal, state or local statute, law, ordinance, rule, administrative interpretation, regulation, order, judgment or decree applicable to the parties hereto.

 

Lien means any claim, charge, conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, pledge, reservation, security interest or other security arrangement, on or with respect to any asset or property.

 

Litigation means all suits, actions, causes of action (whether in law or at equity), arbitrations, claims, complaints, administrative and similar proceedings, and criminal prosecutions and investigations.

 

Loss means any loss, damage, liability, claim, cost or expense, including, but not limited to, reasonable attorneys’ fees.

 

MSC” means Mutual Service Casualty Insurance Company and its Affiliates, including Modern Service Insurance Company.

 

MSC Agreement means that certain Automobile Insurance Service Agreement dated October 13, 1999, by and between Vision and MSC, as amended on October 10, 2001.

 

90-Day Treasury Rate means the annual yield rate on the Closing Date of actively traded U.S. Treasury securities having a remaining duration to maturity of three months, as such rate is published under “Treasury Constant Maturities” in Federal Reserve Statistical Release H.15(519).

 

Order means any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any Governmental Authority, or any binding determination pursuant to arbitration or other similar alternative dispute resolution forum.

 

Permits means all licenses, permits, orders, approvals, registrations, authorizations, qualifications and filings with and under all federal, state, local or foreign Laws or Governmental Authorities.

 

Permitted Liens means (i) Liens for Taxes not yet due and payable, (ii) any minor imperfection of title that does not materially interfere with the present use or the continuation of such present use in the Business, (iii) materialmen’s or similar liens or obligations arising in the ordinary course of business securing accrued obligations not yet due and payable, (iv) purchase money Liens arising in the ordinary course of business, and (v) Liens reflected in the Vision Audited Statements.

 

Personmeans any individual, corporation, partnership, limited liability company, firm, joint venture, association, joint-stock company, trust, estate, unincorporated organization, governmental, judicial or regulatory body, business unit, division or other entity.

 

8


SAP” means the statutory accounting practices prescribed or permitted by the insurance regulatory authority in the state of domicile of the applicable insurance carrier, consistently applied for all relevant time periods.

 

Securities Act means the Securities Act of 1933, as amended.

 

SEC means the United States Securities and Exchange Commission.

 

Sellers Disclosure Memorandummeans the written information entitled “Sellers Disclosure Memorandum” delivered to Buyer prior to the date of this Agreement and referencing specific Sections of this Agreement. Any matter disclosed by Sellers therein with respect to one Section shall be deemed disclosed with respect to all other Sections, provided that the relevance to the Section from which any such matter is omitted is apparent from the disclosure with respect to the Section for which such matter is included.

 

Sellers Material Adverse Effect means any change, effect, matter, event, occurrence or circumstance, individually or collectively, that has or would reasonably be expected to have a material adverse effect on (i) the business, assets or properties (including intangible assets or properties), liabilities, results of operations or financial condition of Vision and Texas MGA taken as a whole or (ii) the ability of Sellers to perform their obligations under this Agreement, other than such changes, effects, matters, events, occurrences or circumstances specifically referred to in Sellers Disclosure Memorandum or generally affecting the United States economy.

 

Sellers Representativemeans John Russell. In the event of John Russell’s death or a disability that prevents him from serving as Sellers Representative, his estate or legal representative shall on a timely basis select one individual, reasonably acceptable to Buyer, to serve as Sellers Representative.

 

Tax means any federal, state, county, local or foreign tax, charge, fee, levy, impost, duty or other assessment, including income, gross receipts, premium, employment, payroll, withholding, excise, sales, gains, transfer, recording, license, real and personal property, use and occupation, capital stock, franchise, registration, ad valorem, alternative or add-on minimum, estimated or other tax, assessment or governmental charge of any kind whatsoever, imposed or required to be withheld by and Governmental Authority, including any interest, penalties and additions imposed thereon or with respect thereto, and including liability for taxes of another person under Treas. Reg. Section 1.1502-6 or similar provision of state, local or foreign law, as a transferee or successor, by contract or otherwise.

 

Tax Return means any return, filing, questionnaire, information return or other document required to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund and amended returns that may be filed, for any period with any taxing authority (whether domestic or foreign) in connection with any Tax (whether or not a payment is required to be made with respect to such filing).

 

Texas MGA means Vision MGA of Texas, Inc., a Texas corporation.

 

9


Underwriting Loss means the amount (computed in accordance with SAP) includable on line 8 of the “Underwriting and Investment Exhibit Statement of Income” in the Annual Statement of AVIC or its applicable Affiliate calculated in a consistent manner, to the extent such amounts are directly related to the insurance policies sold by Vision or an agent under contract with Vision, and to the extent such amount is a negative number.

 

Vision EBITDA means, for each applicable time period, (i) Vision Fee Income, less (ii) all of Vision’s expenses other than Corporate Overhead, and before reductions for interest, income taxes, depreciation and amortization, computed in accordance with GAAP, and plus or minus (iii) the net underwriting gain or loss of AVIC or any of its Affiliates directly related to the insurance policies sold by Vision or an agent under contract with Vision, computed in accordance with SAP and includable within the amounts on line 8 of the “Underwriting and Investment Exhibit Statement of Income” in AVIC’s or its applicable Affiliate’s Annual Statement.

 

Vision Fee Income means, for each applicable time period, all net commissions and fees due and payable to Vision in the ordinary course of its business of the type that have generally been included in the Vision Audited Statements as “Commission and fee income from managing general agent services, net of estimated return commissions,” including, but not limited to, service fees, renewal fees, installment fees, filing fees, reinstatement fees, NSF fees, “convenience” fees, late fees, “theft prevention” fees, endorsement fees, cancellation fees, policy fees, agent’s fee PIP, re-write fees, credit card usage fees, and motorists protection plan income, all as computed in accordance with GAAP.

 

Vision Revenues means the sum of (i) Vision Fee Income excluding all commissions plus (ii) the direct premiums written by AVIC or any of its Affiliates, or any other insurance carriers doing business with Vision, for the applicable time period that are derived solely from insurance policies sold by Vision or an agent under contract with Vision, computed in accordance with SAP and includable within the amounts on line 34, column 1 of the “Underwriting and Investment Exhibit, Part 1B – Premiums Written” in the applicable insurance carrier’s Annual Statement.

 

Section 1.2 Index of Certain Defined Terms. The capitalized terms set forth below are defined in the referenced sections:

 

Term


  

Section


Acquisition/Marketing Transaction    5.2
Actuarial Reports    3.11(e)
Agreement    1st Paragraph
Alfa Companies    5.14(a)
Allocation Schedule    2.2(d)
Annual Earnout Schedule    2.3(g)(i)
Asserted Liability    8.4(a)
Bonus Agreements    5.10(d)
Broker Agreement    5.7(b)
Business Activities    5.14(c)

 

10


Business Employees    3.17
Buyer    1st Paragraph
Buyer Indemnitees    8.2(a)
Buyer SEC Documents    4.8
Buyer Shares    2.2(b)(ii)
Carol Russell    1st Paragraph
Cash Portion    2.2(b)(i)
Claims Notice    8.4(a)
Closing Balance Sheet    2.5(b)(i)
Closing Interim Statements    2.5(a)
Contest Notice    8.4(b)
David Tetzlaff Employment Agreement    2.6(b)(vi)
Earnout Payments    2.3(b)
Earnout Period    2.3(a)
EBITDA Earnout Payment    2.3(b)
ERISA Affiliate    3.16(b)
Existing A/R LOC    2.4(a)
Existing A/R    2.4(a)
Final Net Members’ Equity    2.5(b)(v)
Foundation    1st Paragraph
Future Claims LOC    2.4(b)(ii)
Indemnified Party    8.4(a)
Indemnifying Party    8.4(a)
Initial Purchase Price    2.2(a)
Intellectual Property    3.15
Interim Net Members’ Equity    2.5(a)
Interim Statements    2.5(a)
John Russell    1st Paragraph
John Russell Employment Agreement    2.6(b)(iv)
June 30 Statements    3.7(a)
Leased Real Property    3.14(b)
Litigation Indemnification Agreement    2.6(b)(vii)
Material Contracts    3.9(a)
MSC and American Safety Claims    2.4(b)(iii)(1)
MSC and American Safety Reimbursements    2.4(b)(iii)(1)
Monthly Treaty Reports    2.4(b)(i)
Owned Personal Property    3.13(b)
Personal Guarantees    5.15(b)
Personal Property Leases    3.13(a)
Pre-Closing Tax Returns    5.8(a)
Real Property Leases    3.14(b)
Restricted Area    5.14(c)
Revenue Earnout Payment    2.3(b)
Seller Indemnitees    8.3(a)
Seller Indemnitors    8.2(a)
Sellers    1st Paragraph

 

11


Seller Trusts

   1st Paragraph

Special Bonuses

   5.10(d)

Straddle Period Tax Returns

   5.8(b)(i)

Subscription Agreement

   2.6(b)(iii)

Termination Date

   7.2

Termination Fee

   7.5(a)

Texas Merger

   5.1(a)

Thomas Russell Employment Agreement

   2.6(b)(v)

Umpire

   9.1(a)

Vision

   1st Paragraph

Vision Audited Statements

   3.7(a)

Vision Benefit Plans

   3.16(b)

Vision ERISA Plan

   3.16(b)

Vision Financial Statements

   3.7(a)

 

ARTICLE 2

PURCHASE AND SALE OF INTERESTS

 

Section 2.1 Purchase and Sale of Interests. On the Closing Date, Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, the Interests, free and clear of all Liens.

 

Section 2.2 Purchase Price.

 

(a) Amount. The aggregate consideration for the Interests shall be the sum of (i) Twenty Million Dollars ($20,000,000), subject to adjustment as provided in Section 2.5, payable at Closing (the “Initial Purchase Price”), plus (ii) the amount of Earnout Payments, if any, that may be payable after Closing in accordance with Section 2.3.

 

(b) Payment of Initial Purchase Price. Buyer shall pay the Initial Purchase Price to Sellers on the Closing Date as follows:

 

(i) Cash. Fifteen Million Dollars ($15,000,000), subject to adjustment as provided in Section 2.5, shall be paid in cash (the “Cash Portion”).

 

(ii) Stock. Five Million Dollars ($5,000,000) shall be paid by Buyer’s delivery to Sellers of that aggregate number of shares of Buyer Common Stock equal to $5,000,000 divided by the Average Buyer Share Price (the “Buyer Shares”). Notwithstanding the foregoing, if the Average Buyer Share Price is less than Thirteen Dollars ($13.00), Buyer may elect to pay Sellers all or any portion of the $5,000,000 in cash at Closing in lieu of delivering that amount of Buyer Shares.

 

(c) Allocation of Payments Among Sellers. The Initial Purchase Price, and any Earnout Payments that may become due, shall be paid to Sellers in accordance with the allocations set forth on Exhibit A.

 

12


(d) Allocation of Purchase Price for Tax Purposes. All amounts constituting consideration within the meaning of, and for the purposes of, Section 1060 of the Code and the regulations thereunder shall be allocated among the assets of Vision, including the assets acquired from Texas MGA, and any other rights acquired by Buyer hereunder, as applicable, in the manner required by Section 1060 of the Code and the regulations thereunder and all other applicable Laws. Within sixty calendar days after the Closing Date, Buyer shall provide Sellers with the schedule allocating all such amounts as provided herein (the “Allocation Schedule”). Buyer will revise the Allocation Schedule and deliver it to Sellers to the extent necessary to reflect the Earnout Payments and any other post-Closing payments made pursuant to or in connection with this Agreement. Each of the parties hereto agrees to report consistently with the Allocation Schedule for all Tax purposes, and not take any position inconsistent with the Allocation Schedule for any Tax purposes.

 

Section 2.3 Earnout Payments.

 

(a) Earnout Period. The “Earnout Period” shall commence on the Closing Date and end on December 31, 2009.

 

(b) Possible Earnout Payments. For each calendar year during the Earnout Period, Sellers shall be eligible to receive an annual cash payment based on the amount of Vision Revenue (each a “Revenue Earnout Payment”), and an annual cash payment based on the amount of Vision EBITDA (each an “EBITDA Earnout Payment”), if such payments are earned in accordance with this Section 2.3 (Revenue Earnout Payments and EBITDA Earnout Payments are collectively “Earnout Payments”).

 

(c) Maximums. The aggregate maximum Revenue Earnout Payment that may be earned for any single full calendar year is Seven Hundred Thousand Dollars ($700,000), and the aggregate maximum EBITDA Earnout Payment that may be earned for any single full calendar year is Two Million One Hundred Thousand Dollars ($2,100,000), subject to adjustment for calendar years 2005 and 2006 as described in Exhibit C. The aggregate maximum amount of all potential Earnout Payments that may be earned over the full Earnout Period is Fourteen Million Dollars ($14,000,000).

 

(d) Revenue Earnout Payment. Each possible Revenue Earnout Payment shall be computed in accordance with the formula and terms set forth on Exhibit B.

 

(e) EBITDA Earnout Payment. Each possible EBITDA Earnout Payment shall be computed in accordance with the formula and terms set forth on Exhibit C.

 

(f) Consistent Methodologies. All amounts used in the computation of the potential Earnout Payments shall be made using methodologies consistent with those used in preparing the Vision Financial Statements for 2003; provided, however, that if there is a material change in GAAP or SAP after Closing required by Law or any applicable Governmental Authority, the parties will apply such change to the computation and make appropriate counterbalancing adjustments to the targets set forth on Exhibits B and C; and provided, further, that all

 

13


uncollectible accounts receivable (to the extent not paid to Buyer pursuant to Section 2.4) shall be written off Vision’s books in accordance with Buyer’s policies generally regarding write-off of uncollectible accounts receivable.

 

(g) Annual Procedure.

 

(i) Not later than March 31 of each year beginning with March 31, 2006, Buyer shall deliver to Sellers Representative a schedule showing the computation of Vision Revenue, Vision EBITDA and any potential Earnout Payments (the “Annual Earnout Schedule”). Sellers Representative shall have thirty calendar days from the date of receipt of each Annual Earnout Schedule to notify Buyer in writing of any objections to such schedule, setting forth in reasonable detail the reasons for such objections. During such thirty calendar day period, Buyer shall make available to Sellers Representative and his representatives, at Buyer’s offices during normal business hours and at Sellers’ expense, all books and records of Vision and AVIC and its Affiliates as Sellers Representative shall reasonably request in order for Sellers Representative to perform his review of the Annual Earnout Schedule; provided, however, that in the event that Sellers Representative discovers an error(s) in the Annual Earnout Schedule, which would lead to an underpayment in the Earnout Payments of at least ten percent (10%), then such review shall be at Buyer’s expense.

 

(ii) In the event that Sellers Representative does not deliver a timely objection notice to Buyer in accordance with this subsection (g), the Annual Earnout Schedule as delivered by Buyer shall be deemed final and binding on all parties on the 31st calendar day after Sellers Representative’s receipt of the Annual Earnout Schedule.

 

(iii) In the event that Sellers Representative delivers a timely objection notice to Buyer in accordance with this subsection (g), Buyer and Sellers Representative shall attempt in good faith to resolve all disputes regarding the Annual Earnout Schedule within thirty calendar days from the date Buyer receives such objection notice from Sellers Representative.

 

(iv) If Buyer and Sellers Representative cannot reach agreement on all such disputes within such thirty calendar day period (or such longer period as they may mutually agree), then the issues remaining in dispute shall be submitted to arbitration in accordance with Section 9.1.

 

(v) Within three Business Days after each Annual Earnout Schedule becomes final and binding, if any Earnout Payment is due to Sellers, Buyer shall pay such Earnout Payment to Sellers in cash; provided, however, that if any of the Trusts identified on Exhibit A are terminated prior to the date upon which any Earnout Payment is due, Buyer shall pay the portion of the Earnout Payment owed to such Trust to Sellers Representative on behalf of such Trust. The parties shall treat a portion of any Earnout Payment as imputed interest if and to the extent required by Section 483 or Section 1274 of the Code.

 

14


(h) Reversal of Roles in Process. For any portion of the Earnout Period during which Sellers Representative serves as an officer of Vision, upon Buyer’s request, Sellers Representative shall prepare the Earnout Schedule and deliver it to Buyer, with the process in Section 2.3(g) being appropriately adjusted to permit Buyer the right to object to such Earnout Schedule.

 

(i) Operations of Vision During Earnout Period. The parties acknowledge and agree that they intend for Vision’s operations to continue after the Closing in a manner generally consistent with such operations immediately preceding the Closing. In the event that, during the Earnout Period, Vision is merged, combined or consolidated with Buyer or an Affiliate of Buyer, Buyer shall maintain separate books and records with respect to Vision for the determination of the Earnout Payments. In the event that, during the Earnout Period, Buyer or any of its Affiliates sells or otherwise transfers more than fifty percent of Vision’s equity or all or substantially all of Vision’s assets to an unaffiliated third party, then Buyer will either, as determined by Sellers Representative in his or her sole discretion, (i) cause the purchaser or transferee to assume Buyer’s obligations with respect to the Earnout Payments, or (ii) if Sellers earned at least fifty percent (50%) of the maximum Earnout Payment for any year prior to such transaction with an unaffiliated third party, pay or cause the purchaser or transferee to pay the Sellers in cash at the closing for such transaction an amount equal to seventy percent (70%) of the present value of the maximum Earnout Payments still potentially available to Sellers. If Sellers did not earn at least fifty percent (50%) of the maximum Earnout Payment for any year prior to such transaction with an unaffiliated third party, item (ii) will not be available.

 

Section 2.4 Accounts Receivable.

 

(a) Existing Accounts Receivable. At Closing, John Russell shall deliver to Buyer an irrevocable letter of credit in a form mutually acceptable to John Russell and Buyer (the “Existing A/R LOC”) for the aggregate outstanding amount owed to Vision and Texas MGA as of December 31, 2004 pursuant to the MSC Agreement and the American Safety Agreement (the “Existing A/R”). Such aggregate amount shall be (i) the amount reflected on the trial balance report used to prepare Vision’s November 30, 2004 financial statements, plus or minus (ii) an amount for December 2004 that is the average monthly increase or decrease, respectively, in the Existing A/R for the other eleven months of 2004. Vision shall provide the proposed amount of the Existing A/R LOC to Buyer not later than ten Business Days before Closing, and Buyer, Vision and John Russell shall cooperate to reach agreement on the amount before Closing. Not later than January 31, 2006, Buyer and Sellers Representative shall mutually determine whether Vision has not then collected any portion of the Existing A/R, and either John Russell shall pay to Buyer in cash any such uncollected amount within three Business Days after the uncollected amount is determined or, if John Russell does not make such payment, Buyer shall be entitled to draw such amount under the Existing A/R LOC. The Existing A/R LOC shall remain in effect for the benefit of Buyer until the process described in this subsection 2.4(a) has been completed.

 

(b) Accounts Receivable for Future Claims Paid.

 

(i) Attached as Exhibit D are the monthly treaty year reports (the “Monthly Treaty Reports”) that Vision and Texas MGA delivered to MSC and to American Safety

 

15


for the month ended July 2004. As reflected in these Monthly Treaty Reports, the “Outstanding” amount represents the amount of estimated case loss reserves for the Business under the MSC Agreement (excluding the portion of such amount reimbursable by ACE INA Group as a reinsurer for insurance policies written on or after July 1, 2001) and under the American Safety Agreement, which was an aggregate of $1,368,889 at July 31, 2004 (comprised of $894,465 for MSC and $474,424 for American Safety). Within fifteen calendar days after the end of each month prior to the Closing, Vision shall deliver to Buyer Monthly Treaty Reports for the month that will have just ended and, at the Closing, Sellers Representative shall certify that the Monthly Treaty Reports for November 30, 2004, which will be the then most recently delivered such reports, have been prepared in a manner consistent with Vision’s past methodology and in accordance with the MSC Agreement and the American Safety Agreement, as applicable.

 

(ii) At Closing, John Russell shall deliver to Buyer an irrevocable letter of credit in a form mutually acceptable to John Russell and Buyer (the “Future Claims LOC”) in an amount equal to the aggregate “Outstanding” amount reflected on the Monthly Treaty Reports for November 30, 2004 for the MSC Agreement (excluding the portion of such amount reimbursable by ACE INA Group as a reinsurer for insurance policies written on or after July 1, 2001) and for the American Safety Agreement. The Future Claims LOC shall remain in effect for the benefit of Buyer through the completion in 2008 of the annual procedure described below, provided, however, that if John Russell desires that any Future Claims LOC have a one-year term, Buyer shall be entitled to draw the full amount under the Future Claims LOC if a replacement letter of credit with identical terms is not delivered to Buyer prior to each one-year expiration.

 

(iii) Annual Procedure.

 

(1) For purposes of this Section 2.4, “MSC and American Safety Claims” means the aggregate net amount of claims paid by Vision for the years 2005, 2006 and 2007 under the MSC Agreement (excluding the portion of such amount reimbursable by ACE INA Group as a reinsurer for insurance policies written on and after July 1, 2001) and the American Safety Agreement, less subrogation and other recoveries by Vision with respect to those claims, plus legal expenses paid by Vision with respect to those claims. For purposes of this Section 2.4, “MSC and American Safety Reimbursements” means the amount Vision receives from MSC and American Safety for the years 2005, 2006 and 2007 as reimbursement of the MSC and American Safety Claims.

 

(2) Not later than January 31 of each of 2006, 2007 and 2008, Buyer and Sellers Representative shall mutually determine the amount of MSC and American Safety Claims paid during the immediately preceding calendar year and the amount of MSC and American Safety Reimbursements received during such period. In each of 2006 and 2007, the amount of the Future Claims LOC may be reduced by the amount of the MSC and American Safety Reimbursements received in 2005 and 2006, respectively. In 2008, once the amount of MSC and American Safety Claims and MSC and American Safety Reimbursements for

 

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2007 have been determined, if the aggregate MSC and American Safety Claims (not including any such claims relating to MSC and American Safety that are then less than ninety days old, unless Buyer has a reasonable basis for believing that such claims are uncollectible) exceeds the aggregate MSC and American Safety Reimbursements, either John Russell shall pay to Buyer in cash the amount of such excess within three Business Days or, if John Russell does not make such payment, Buyer shall be entitled to draw such amount under the Future Claims LOC.

 

(c) Adjustment to Purchase Price. Any payments made pursuant to this Section 2.4 shall be treated by Buyer and Sellers as an increase or reduction, as applicable, to the Initial Purchase Price for Tax and all other purposes.

 

Section 2.5 Closing Date and Post-Closing Net Equity Settlement.

 

(a) Closing Date Adjustment. Within fifteen calendar days after the end of each month prior to the Closing, Vision shall deliver to Buyer a balance sheet and income statement of Vision as of and for the month that will have just ended (the “Interim Statements”). At the Closing, Sellers Representative shall certify that the then most recently delivered Interim Statements (the “Closing Interim Statements”) have been prepared in a manner consistent with Vision’s past methodology and with GAAP, and that they present fairly, in all material respects, the financial condition of Vision as of its date and the results of operations of Vision year-to-date, except that the Closing Interim Statements will be unaudited and subject to normal year-end adjustments and lack footnotes and other presentation items. Based on the Closing Interim Statements, the Cash Portion of the Initial Purchase Price shall be adjusted as follows as applicable: (i) the Cash Portion shall be increased by the amount by which Vision’s total assets less its total liabilities as shown on the Closing Interim Statements (“Interim Net Members’ Equity”) is more than $1,664,794, or (ii) the Cash Portion shall be decreased by the amount by which Interim Net Members’ Equity is less than $1,664,794.

 

(b) Post-Closing Settlement.

 

(i) Not later than ninety calendar days after the Closing Date, Sellers Representative shall cause Vision to prepare a balance sheet as of the Closing Date (the “Closing Balance Sheet”). The Closing Balance Sheet: (1) will be prepared in accordance with GAAP, (2) will be prepared consistent in all material respects with the Vision Audited Statements, except to the extent that such Vision Audited Statements were not prepared in accordance with GAAP, (3) will include all accruals required by, and will otherwise be consistent with all express terms and conditions of, this Agreement, regardless of whether such accruals, terms or conditions are in accordance with GAAP or the Vision Audited Statements, and (4) will be accompanied by the report of the independent auditing firm Crowe Chizek & Company LLC, stating that the Closing Balance Sheet fairly presents the financial position, assets and liabilities of Vision as of the Closing Date and has been prepared in accordance with GAAP except as set forth in this subsection (b). The parties acknowledge and agree that the use of the Closing Interim Statements to make an adjustment, if any, to the Cash Portion does not preclude Buyer from adjusting prior period financial information of Vision in the Closing Balance Sheet.

 

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(ii) Buyer shall have sixty calendar days from the date of receipt of the Closing Balance Sheet to notify Sellers Representative in writing of any objections to the Closing Balance Sheet, setting forth in reasonable detail the reasons for Buyer’s objections. During such sixty calendar day period, Buyer shall have full and complete access to all books and records of Vision. Buyer shall also have access to all accountants’ work papers as Buyer shall deem appropriate in order for Buyer to perform its review of the Closing Balance Sheet.

 

(iii) In the event that Buyer does not deliver a timely objection notice to Sellers Representative in accordance with this subsection (b), the Closing Balance Sheet as delivered by Sellers Representative shall be deemed final and binding on all parties on the 31st calendar day after Buyer’s receipt of the Closing Balance Sheet.

 

(iv) In the event that Buyer delivers a timely objection notice to Sellers Representative in accordance with this subsection (b), Sellers Representative and Buyer shall attempt in good faith to resolve all disputes regarding the Closing Balance Sheet within thirty calendar days from the date Sellers Representative receives such objection notice from Buyer. If Sellers Representative and Buyer cannot reach agreement on all such disputes within such thirty calendar day period (or such longer period as they may mutually agree), then either party can submit the dispute to final and binding arbitration as provided in Section 9.1

 

(v) Within five Business Days after the Closing Balance Sheet becomes final and binding, the parties shall make such payment as is required by either of the following as applicable: (1) Buyer shall pay to Sellers in cash the amount by which Vision’s total assets less its total liabilities as shown on the Closing Balance Sheet (“Final Net Members’ Equity”) is more than the amount of Interim Net Member’s Equity; or (2) Sellers shall pay to Buyer in cash the amount by which Vision’s Final Net Members’ Equity is less than the amount of Interim Net Members’ Equity. Whichever payment is required by (1) or (2) of the preceding sentence, such payment shall be accompanied by the payment of interest on such amount at the 90-Day Treasury Rate for the number of days elapsed from (but not counting) the Closing Date to and including the date of payment.

 

(c) Adjustment to Purchase Price. Any payments made pursuant to this Section 2.5 shall be treated by Buyer and Sellers as an increase or reduction, as applicable, to the Initial Purchase Price for Tax and all other purposes.

 

(d) Reversal of Roles in Process. In the event that Sellers Representative does not serve as an officer of Vision through at least the date that the Closing Balance Sheet is delivered to Buyer, the process in this Section 2.5(b) shall be adjusted as appropriate to provide for Buyer to prepare and deliver the Closing Balance Sheet, with the Sellers Representative having rights to review and object thereto.

 

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Section 2.6 Place and Date of Closing; Closing Deliveries.

 

(a) The Closing shall take place at the offices of Alston & Bird LLP, 1201 West Peachtree Street, Atlanta, Georgia, at 9:00 a.m. eastern time on January 3, 2005. Subject to completion, the Closing shall be deemed effective as of 12:01 a.m. on January 1, 2005.

 

(b) At the Closing, Sellers shall deliver to Buyer the following:

 

(i) assignment of the Interests, free and clear of all Liens, executed by Sellers;

 

(ii) the documents, evidence and instruments specified in Section 6.2, executed by Sellers as contemplated thereby;

 

(iii) a subscription agreement for the Buyer Shares in substantially the form attached hereto as Exhibit E (the “Subscription Agreement”), executed by all Sellers who receive Buyer Shares;

 

(iv) an employment agreement in substantially the form of Exhibit F hereto executed by John Russell (the “John Russell Employment Agreement”);

 

(v) an employment agreement in substantially the form of Exhibit G hereto executed by Thomas Russell (the “Thomas Russell Employment Agreement”);

 

(vi) an employment agreement in substantially the form of Exhibit H hereto executed by David Tetzlaff (the “David Tetzlaff Employment Agreement”);

 

(vii) an agreement in substantially the form of Exhibit I hereto executed by John Russell (the “Litigation Indemnification Agreement”);

 

(viii) a certificate signed by each Seller certifying pursuant to Sections 897 and 1445 of the Code that none of the Sellers is a nonresident alien for U.S. Tax purposes;

 

(ix) the Existing A/R LOC and the Future Claims LOC;

 

(x) a certificate signed by Sellers Representative regarding the November 30, 2004 Monthly Treaty Reports, per Section 2.4(b)(i); and

 

(xi) a certificate signed by Sellers Representative regarding the Closing Interim Statements, per Section 2.5(a).

 

(c) At the Closing, Buyer shall deliver to Sellers the following:

 

(i) a cash payment equal to the amount of the Cash Portion, as adjusted pursuant to Section 2.5;

 

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(ii) the Buyer Shares or cash in lieu thereof, pursuant to Section 2.2;

 

(iii) the documents and instruments specified in Section 6.1, executed by Buyer as contemplated thereby;

 

(iv) the Subscription Agreement, executed by Buyer;

 

(v) the John Russell Employment Agreement, executed by Buyer or one of its Affiliates;

 

(vi) the Thomas Russell Employment Agreement, executed by Buyer or one of its Affiliates;

 

(vii) the David Tetzlaff Employment Agreement, executed by Buyer or one of its Affiliates; and

 

(viii) the Litigation Indemnification Agreement, executed by Buyer.

 

Section 2.7 Wire Transfers; Withholding Taxes. Any payment of cash required under this Agreement shall be paid to the recipient in immediately available funds, United States Dollars, by means of a wire transfer, if the recipient provides to the payer appropriate wire transfer instructions at least two Business Days prior to the required date of payment, and otherwise by means of a certified check.

 

ARTICLE 3

REPRESENTATIONS AND WARRANTIES OF SELLERS AND VISION

 

Vision and Sellers (other than the Foundation) hereby represent and warrant to Buyer as set forth in Sections 3.1 through 3.21, and the Foundation hereby represents and warrants to Buyer as set forth in Section 3.22:

 

Section 3.1 Organization, Standing and Power.

 

(a) Vision. Vision is a limited liability company duly organized, validly existing and in good standing under the Laws of the State of Tennessee and has full corporate power and authority to carry on its business as now conducted and to own, lease and operate all of its assets. Section 3.1 of Sellers Disclosure Memorandum lists all jurisdictions in which Vision is qualified to do business. Except as set forth in Section 3.1 of Sellers Disclosure Memorandum, Vision is duly qualified or licensed to do business as a foreign limited liability company in good standing in each jurisdiction in which the ownership of its assets or the conduct of its business requires such qualification or licensing, except for such jurisdictions where the failure to be so qualified or licensed would not have a Sellers Material Adverse Effect. Correct and complete copies of Vision’s articles of organization and all amendments thereto (certified by the Tennessee Secretary of State) and Vision’s operating agreement and all amendments thereto, have been made available to Buyer. All limited liability company records of Vision have been made available to Buyer for review, are correct and complete in all material respects, and accurately reflect the ownership of Vision.

 

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(b) Texas MGA. Texas MGA is a corporation duly organized, validly existing and in good standing under the Laws of the State of Texas and has full corporate power and authority to carry on its business as now conducted and to own, lease and operate all of its assets. Texas MGA is not qualified or licensed to do business in any jurisdiction other than the State of Texas, and the ownership of its assets and the conduct of its business do not require such qualification or licensing in any other jurisdiction. Correct and complete copies of Texas MGA’s articles of incorporation and all amendments thereto (certified by the Texas Secretary of State) and bylaws and all amendments thereto, have been made available to Buyer. All stock records of Texas MGA have been made available to Buyer for review, are correct and complete in all material respects and accurately reflect the stock ownership of Texas MGA.

 

Section 3.2 Authority. Sellers and Vision have all requisite power and authority to execute and deliver, and to perform their obligations under, this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Sellers and Vision and, subject to the due execution and delivery by Buyer, will be a valid and binding obligation of Sellers and Vision, enforceable against Sellers and Vision in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. John Russell is, and will be on the Closing Date, the trustee of each of the Seller Trusts, and he, as such trustee, has all requisite power and authority under the applicable trust documents to sell to Buyer hereunder all of the equity of Vision held in such Seller Trusts.

 

Section 3.3 Governmental Authorization. Except as set forth in Section 3.3 of Sellers Disclosure Memorandum, the execution, delivery and performance by Sellers and Vision of this Agreement and the consummation of the transactions contemplated hereby do not require Sellers or Vision to obtain any consent, approval or action of, make any filing with, or give any notice to, any Governmental Authority.

 

Section 3.4 Non-Contravention. Except as disclosed in Section 3.4 of Sellers Disclosure Memorandum, the execution, delivery and performance by Sellers and Vision of this Agreement and the consummation of the transactions contemplated hereby will not (a) violate any provision of the articles of organization or operating agreement of Vision; (b) violate any provision of the articles of incorporation or bylaws of Texas MGA; (c) violate, conflict with, result in the breach of or default under (or with notice, lapse of time, or both would result in such a breach or default), result in any modification of the effect of, provide the other contracting party the right to terminate or materially amend, or require the other contracting party to consent to the assignment or continuation of, any Material Contract to which either of Vision or Texas MGA is a party; (d) violate any Order against or binding upon Sellers, Vision or Texas MGA, except for such violations that would not have a Sellers Material Adverse Effect; (e) violate any agreement with, or condition imposed by, any Governmental Authority upon Sellers, Vision or Texas MGA, except for such violations that would not have a Sellers Material Adverse Effect; (f) subject to obtaining the governmental authorizations referred to in Section 3.3 hereof, violate

 

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any Law, except for such violations that would not, individually or in the aggregate, have a Sellers Material Adverse Effect; or (g) result in a breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or a revocation of, any Permit of Vision or Texas MGA, except for such breaches, violations, defaults, impairments or revocations that would not have a Sellers Material Adverse Effect.

 

Section 3.5 Ownership of Interests. Except as disclosed in Section 3.5 of Sellers Disclosure Memorandum, Sellers are the owners of 99% of the Interests, as set forth on Exhibit A, free and clear of all Liens and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such Interests) and such Interests, together with the 1% of Interests owned by the Foundation, constitute all of the limited liability company interests of Vision. Sellers will transfer and deliver to Buyer at the Closing good and marketable title to the Interests free and clear of all Liens and any such other limitation or restriction. Vision does not own, directly or indirectly, any equity or voting interest in, or otherwise control, any Person, and does not have any agreement or commitment to acquire any such interest.

 

Section 3.6 Capitalization of Texas MGA. The authorized capital stock of Texas MGA consists solely of 1,000 shares of common stock, par value $1.00 per share, of which 1,000 shares are issued and outstanding, all of which shares are owned by John Russell free and clear of all Liens and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such shares). All of the issued and outstanding shares of capital stock of Texas MGA (a) are validly issued and fully paid and are non-assessable under Law, (b) were issued pursuant to a valid exemption from registration under all applicable securities Laws, and (c) were not issued in violation of any preemptive rights of the current or past shareholders of Texas MGA. There are no equity securities of Texas MGA outstanding other than the shares owned by John Russell, and no outstanding Contracts, options, warrants or other rights relating to the capital stock of Texas MGA. Texas MGA does not own, directly or indirectly, any equity or voting interest in, or otherwise control, any Person, and does not have any agreement or commitment to acquire any such interest.

 

Section 3.7 Financial Statements; Absence of Undisclosed Liabilities.

 

(a) Section 3.7(a) of Sellers Disclosure Memorandum contains complete and correct copies of the audited consolidated balance sheets and statements of income and cash flow from operations of Vision and Texas MGA as of and for the fiscal years ended December 31, 2001, 2002 and 2003 (the “Vision Audited Statements”) and the unaudited consolidated balance sheet and statement of income and cash flow from operations of Vision and Texas MGA as of and for the six-month period ended June 30, 2004 (the “June 30 Statements”; collectively, the Vision Audited Statements and the June 30 Statements are the “Vision Financial Statements”). The Vision Financial Statements (i) are in accordance with the books and records of Vision and Texas MGA, (ii) have been prepared in accordance with GAAP, except to the extent that the June 30 Statements are unaudited, are subject to normal year-end adjustments and lack footnotes and other presentation items, and (iii) present fairly the consolidated financial position of Vision and Texas MGA as of the dates indicated and the results of Vision’s and Texas MGA’s operations for the periods then ended.

 

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(b) Neither Vision nor Texas MGA has any debts, liabilities or obligations, whether accrued, absolute or contingent, whether due or to become due, that would have been required to be disclosed by Vision or Texas MGA by GAAP, other than (i) as set forth in Section 3.7(b) of Sellers Disclosure Memorandum or (ii) as reserved against or otherwise reflected in the Vision Financial Statements, and all such debts, liabilities or obligations of Vision and Texas MGA shall be reserved against or otherwise reflected in the Closing Balance Sheet.

 

Section 3.8 Absence of Certain Changes. Since December 31, 2003, (i) except as disclosed in Section 3.8 of Sellers Disclosure Memorandum and (ii) except for the transactions contemplated hereby, Sellers, Vision and Texas MGA have conducted the Business in the ordinary course of business and there has not been:

 

(a) any change in Vision’s limited liability company interests; any assignment of any member’s governing rights; any grant of any option or right to purchase limited liability company interests of Vision; any issuance of any security convertible into such limited liability company interests; any grant of any registration rights with respect to such limited liability company interests; any purchase, redemption, retirement, or other acquisition by Vision of any of its limited liability company interests;

 

(b) any amendment to the articles of organization or operating agreement of Vision, nor any amendment to the articles of incorporation or bylaws of Texas MGA;

 

(c) any Lien placed on, or any sale or transfer of any of Vision’s or Texas MGA’s assets, except for sales or transfers of products and services made in the ordinary course of business and except for Permitted Liens;

 

(d) any capital expenditure by Vision or Texas MGA except in the ordinary course of business;

 

(e) any employment, deferred compensation, severance, retirement or other similar agreement (or any amendment to any such existing agreement) offered to or entered into with any Vision employee, any grant of any severance or termination pay or retention or similar bonus to any Vision employee, or any change in compensation or other benefits payable to any Vision employee other than merit or tenure increases granted in the ordinary course of business;

 

(f) any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees, or any lockouts, strikes, slowdowns, work stoppages or any threats thereof by or with respect to any Vision employees;

 

(g) any loans to any employee other than loans to employees in accordance with the terms of Vision’s 401(k) plan; or

 

(h) any event, occurrence or condition of any character that has had, or which might reasonably be expected to have, a Sellers Material Adverse Effect.

 

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Section 3.9 Material Contracts.

 

(a) Section 3.9 of Sellers Disclosure Memorandum contains a correct and complete list of all of the following types of Contracts (other than the Personal Property Leases and Real Property Leases) to which Vision or Texas MGA is a party or by which any of their respective assets or properties are bound, or pursuant to which Vision or Texas MGA has any rights, benefits, obligations or liabilities:

 

(i) all Contracts having a duration of three months or more that are not terminable without penalty upon sixty calendar days or less prior written notice by any party;

 

(ii) all Contracts that require or could reasonably be expected to require any party thereto to pay $25,000 or more in any twelve month period, or $50,000 or more in the aggregate;

 

(iii) all loan agreements, indentures, letters of credit, mortgages, security agreements, pledge agreements, deeds of trust, bonds, notes, purchase money liens, liens securing rental payments under capital lease arrangements, guarantees, instruments and other Contracts relating to the borrowing of money or obtaining of or extension of credit;

 

(iv) all joint venture, partnership and similar Contracts involving a sharing of profits or expenses;

 

(v) all broker, agency and sales promotion Contracts (other than standard form producer agreements entered into in the ordinary course of business);

 

(vi) all Contracts that require or could require the payment of any severance, retention or similar payments to employees on or after the date of this Agreement;

 

(vii) all Contracts that contain any restrictive covenant or confidentiality agreement (other than agreements relating solely to information about a customer’s business or services provided to the customer by Vision or Texas MGA) limiting the activities of Vision or Texas MGA;

 

(viii) all Contracts that constitute a lease or license of any Intellectual Property from any third party (other than licenses for commercially available software subject to “shrink wrap” or “click through” licenses, the license fees for which have not exceeded and do not and will not exceed in the aggregate $10,000 for any twelve (12) month period);

 

(ix) all stock purchase agreements, asset purchase agreements and other acquisition or divestiture agreements, including any Contracts relating to the acquisition, lease or disposition of any material assets or properties of Vision or Texas MGA during the past three years.

 

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The Contracts listed in Section 3.9 of Sellers Disclosure Memorandum are collectively the “Material Contracts.” A true and correct copy of each Material Contract (or, if oral, a written description thereof) has been made available to Buyer.

 

(b) Except as set forth in Section 3.9 of Sellers Disclosure Memorandum, each of the Material Contracts was entered into by either Vision or Texas MGA in the ordinary course of business, is in full force and effect and there exists no breach or violation of or default under any of such Material Contracts by either of Vision or Texas MGA or, to the Knowledge of Sellers, any other party to such Material Contracts or any event which, with notice or the lapse of time, or both, will create a breach or violation thereof or default thereunder by either of Vision or Texas MGA or any other party to such Material Contracts.

 

(c) Except as set forth in Section 3.9 of Sellers Disclosure Memorandum, there exists no actual or, to the Knowledge of Sellers, any threatened termination, cancellation or limitation of, or any amendment, modification or change to, any Material Contract which could reasonably be expected to have a Sellers Material Adverse Effect.

 

(d) Neither Vision nor Texas MGA has granted any power of attorney affecting or with respect to the Business that remains outstanding.

 

(e) The MSC Agreement and the American Safety Agreement are the only Contracts pursuant to which Vision or Texas MGA is required to fund the payment of claims on behalf of the insurance carrier and then seek reimbursement. All other Contracts between Vision or Texas MGA and the insurance carriers involved in the Business require Vision or Texas MGA to pay a claim only if the insurance carrier has funded the payment in advance.

 

Section 3.10 Litigation. Section 3.10 of Sellers Disclosure Memorandum lists all Litigation pending or, to the Knowledge of Sellers, threatened against Vision or Texas MGA or any of their respective assets or properties, or against Sellers with respect to Vision or Texas MGA. Section 3.10 of Sellers Disclosure Memorandum also lists all Orders outstanding against Vision or Texas MGA. Except as disclosed in Section 3.10 of Sellers Disclosure Memorandum, there is no Litigation pending or, to the Knowledge of Sellers, threatened against Sellers, Vision or Texas MGA or any of their properties or assets that, if adversely determined, could reasonably be expected to result in a Sellers Material Adverse Effect; nor is there any Order outstanding against Vision or Texas MGA that could reasonably be expected to result in a Sellers Material Adverse Effect.

 

Section 3.11 Compliance with Laws; Insurance Matters.

 

(a) Except as set forth in Section 3.11 of Sellers Disclosure Memorandum, Vision, Texas MGA and the Business are in compliance in all material respects with all Laws, including all Laws applicable to the operations of a managing general agent, and none of Sellers Representative, Vision or Texas MGA has received any written notice alleging any material violation of any Law.

 

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(b) Section 3.11 of Sellers Disclosure Memorandum sets forth a complete list of all material Permits held by Vision and Texas MGA, and all such Permits are valid and in full force and effect. Except as listed in Section 3.11 of Sellers Disclosure Memorandum, each of Vision and Texas MGA has all material Permits necessary to conduct its Business in the manner it is presently being conducted. Except as listed in Section 3.11 of Sellers Disclosure Memorandum, neither Vision nor Texas MGA has engaged in any activity that is reasonably likely to cause revocation or suspension of any of its Permits and no action or proceeding looking to or contemplating the revocation or suspension of any such Permit is pending or, to Sellers’ Knowledge, threatened.

 

(c) Except as set forth in Section 3.11 of Sellers Disclosure Memorandum, all forms of insurance policies (including applications) that have been or are marketed by Vision or Texas MGA are (and at all relevant times were) in all material respects approved by the applicable Governmental Authorities or have been filed with, and not objected to by, or are not required to be filed with, such Governmental Authorities. Sellers have made available to Buyer correct and complete copies of all insurance policies that have been or are marketed by Vision or Texas MGA.

 

(d) Except as set forth in Section 3.11 of Sellers Disclosure Memorandum, all insurance premium rates, commission rates and other types of fees related to the Business that are required to be filed with any Governmental Authorities have been so filed and approved, or otherwise are (and at all relevant times were) filed and not objected to within the period provided for rejection, and the premiums, commissions and other fees charged in connection with the Business conform in all material respects thereto.

 

(e) Sellers have provided to Buyer accurate and complete copies of the actuarial reports dated as of March 31, 2004 prepared by Vision for the third-party insurance carriers engaged in the Business with Vision and Texas MGA (the “Actuarial Reports”). The Actuarial Reports (i) accurately reflect the books and records of Vision and Texas MGA, (ii) have been prepared using generally accepted actuarial standards and in accordance with all applicable SAP, (iii) have been prepared using actuarial assumptions that are consistent with the terms and conditions of the underlying insurance policies, and (iv) have been delivered to and accepted without objection by the applicable insurance carriers.

 

(f) Section 3.11 of Sellers Disclosure Memorandum sets forth a correct and complete list of all consumer complaints received by Governmental Authorities regarding Vision, Texas MGA or any of the insurance carriers for whom Vision or Texas MGA market policies, during the period 2001 through June 2004, to the extent such complaints were communicated to Vision, Texas MGA or Sellers by the Governmental Authorities or insurers, along with a description of the resolution of each such complaint. No such complaint, individually or together with other such complaints, is reasonably likely to result in a Sellers Material Adverse Effect.

 

(g) All reports provided by Vision or Texas MGA to third parties with which Vision or Texas MGA does business, including reports regarding collections and remittances of cash, were accurate and complete in all material respects when provided to such third parties, and such reports accurately state the amounts of Vision’s and Texas MGA’s obligations to such third parties for remittances of cash owed thereto.

 

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Section 3.12 Environmental Compliance. Except as would not have a Sellers Material Adverse Effect: (a) Vision and Texas MGA are in compliance with all applicable Environmental Laws; (b) Vision and Texas MGA have all material Permits required under any applicable Environmental Laws and are in compliance with their respective requirements; and (c) there are no pending or, to Sellers’ Knowledge, threatened claims under Environmental Laws against Vision or Texas MGA.

 

Section 3.13 Personal Property.

 

(a) Section 3.13 of Sellers Disclosure Memorandum contains a true and correct list of each lease pursuant to which each of Vision and Texas MGA leases tangible personal property with an aggregate value in excess of $10,000 (the “Personal Property Leases”). True and correct copies of each lease listed on Section 3.13 of Sellers Disclosure Memorandum and any amendments, extensions, and renewals thereof are attached thereto. Each of the Personal Property Leases described in Section 3.13 of Sellers Disclosure Memorandum is in full force and effect, and there exists no breach or violation of or default under any of the Personal Property Leases by either Vision or Texas MGA or, to the Knowledge of Sellers, any other party to the Personal Property Leases, or any event which, with notice or lapse of time or both, will create a breach or violation thereof or default thereunder by either Vision or Texas MGA or any other party to the Personal Property Leases, the consequences of which, severally or in the aggregate, would have a Sellers Material Adverse Effect. No rights of Vision or Texas MGA under such leases have been assigned or otherwise transferred as security for any obligation of Vision or Texas MGA. The consummation of the transactions contemplated by this Agreement will not create or constitute a default or event of default under any such lease or require the consent of any other party to any such lease in order to avoid a default or event of default.

 

(b) Section 3.13 of Sellers Disclosure Memorandum contains a complete and correct list of each item of tangible personal property with a value in excess of $2,500 that is owned by either Vision and Texas MGA (collectively, the “Owned Personal Property”). Either Vision or Texas MGA has good, valid and marketable title to each item of Owned Personal Property, free and clear of all Liens other than Permitted Liens.

 

(c) Except as disclosed in Section 3.13 of Sellers Disclosure Memorandum, the Owned Personal Property and the personal property subject to the Personal Property Leases constitute all of the tangible personal property required to conduct the Business with the exception of any item of tangible personal property having a value of $2,500 or less.

 

Section 3.14 Real Property.

 

(a) Neither Vision nor Texas MGA owns any real property.

 

(b) Section 3.14 of Sellers Disclosure Memorandum contains a true and correct list of each lease (the “Real Property Leases”) pursuant to which each of Vision and Texas MGA leases

 

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any real property (the “Leased Real Property”) and a summary description of all structures and other improvements located on each such parcel of Leased Real Property. Each of the Real Property Leases listed in Section 3.14 of Sellers Disclosure Memorandum is in full force and effect and there is no existing default or event of default, real or claimed, or event which with notice or lapse of time or both would constitute a default thereunder by Vision or Texas MGA or, to the Knowledge of Sellers, any other party to such Real Property Leases. Except for Permitted Liens, the interests of Vision and Texas MGA in the Real Property Leases are free and clear of any Liens or rights of any third parties. The consummation of the transactions contemplated by this Agreement will not create or constitute a default or event of default under any Real Property Lease or require the consent of any other party to any Real Property Lease in order to avoid a default or event of default.

 

(c) There is no default or breach by Vision or Texas MGA nor, to the Knowledge of Sellers, any other party thereto, under any covenants, conditions, restrictions or easements which may affect the Leased Real Property or any portion or portions thereof which are to be performed or complied with by the owner of the Leased Real Property, and no condition or circumstance exists which, with the giving of notice or the passage of time, or both, would constitute a default or breach by Vision or Texas MGA nor, to the Knowledge of Sellers, any other party thereto, under any such covenants, conditions, restrictions, rights-of-way or easements.

 

Section 3.15 Intellectual Property.

 

(a) Section 3.15 of Sellers Disclosure Memorandum sets forth a complete and accurate list of all patents, trademarks, trade names, service marks, domain names, copyrights and computer software used in the Business. Except as set forth in Section 3.15 of Sellers Disclosure Memorandum, Vision or Texas MGA owns or has the uncontested right to use all Intellectual Property necessary for the conduct of the Business as presently conducted. For purposes of this Agreement, the term “Intellectual Property” shall mean, collectively, patents, designs, inventions, trademarks, trade names, domain names, service marks, copyrights, computer software, manufacturing processes and confidential or proprietary information.

 

(b) No claim is pending, or to the Knowledge of Sellers threatened, and neither Sellers, Vision nor Texas MGA has received any written notice that the conduct of the Business (including without limitation, the use of any Intellectual Property) infringes upon, misappropriates or conflicts with any rights in Intellectual Property claimed by any third party. No claim is pending, or to the Knowledge of Sellers threatened, alleging that any Intellectual Property owned or licensed by or to Vision or Texas MGA or which Vision or Texas MGA otherwise has the right to use is invalid or unenforceable by Vision or Texas MGA.

 

(c) Except as set forth in Section 3.15 of Sellers Disclosure Memorandum, no royalties or fees are payable by Vision or Texas MGA to anyone for use of the Intellectual Property (other than licenses for commercially available software subject to “shrink wrap” or “click through” licenses, the license fees for which have not exceeded and do not and will not exceed $5,000 for any twelve (12) month period). Correct and complete copies of all agreements pursuant to which Vision or Texas MGA licenses any Intellectual Property have been delivered to Buyer (other than licenses for commercially available software subject to “shrink wrap” or

 

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“click through” licenses, the license fees for which have not exceeded and do not and will not exceed $5,000 for any twelve (12) month period). Except as set forth in Section 3.15 of Sellers Disclosure Memorandum, all such agreements are in full force and effect, and, to the Knowledge of Sellers, there are no existing defaults or events of default, real or claimed, or events which with or without notice or lapse of time, or both, would constitute defaults under such agreements that would give the non-defaulting party a right to terminate such agreement or a right to receive any payment pursuant to such agreement.

 

Section 3.16 Employee Benefit Plans; ERISA.

 

(a) Texas MGA has never maintained, sponsored or contributed to any type of employee benefit or welfare plan.

 

(b) Section 3.16 of Sellers Disclosure Memorandum sets forth a correct and complete list of all pension, retirement, profit sharing, deferred compensation, severance pay, vacation, bonus or other incentive plan, all other written employee programs, arrangements or agreements, all medical, vision, dental or other health plans, all life insurance plans, and all other employee benefit plans or fringe benefit plans, including “employee benefit plans” as that term is defined in Section 3(3) of ERISA, adopted, maintained by, sponsored in whole or in part by, or contributed to at any time by Vision or any entity that is considered one employer with Vision under Section 4001 of ERISA or Code Section 414 (“ERISA Affiliate”) for the benefit of employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries and under which employees, retirees, dependents, spouses, directors, independent contractors or other beneficiaries are eligible to participate (collectively, the “Vision Benefit Plans”). Section 3.16 of Sellers Disclosure Memorandum includes a description of the benefits offered under any unwritten Vision Benefit Plan. Any of the Vision Benefit Plans that is an “employee pension benefit plan,” as that term is defined in Section 3(2) of ERISA, or an “employee welfare benefit plan,” as that term is defined in Section 3(1) of ERISA, is referred to herein as a “Vision ERISA Plan.” Neither Vision nor any of its ERISA Affiliates have ever maintained a “defined benefit plan,” as defined in Code Section 414(j). Vision has made available to Buyer copies of all Vision Benefit Plans.

 

(c) For each Vision Benefit Plan, Sellers have delivered or made available to Buyer true, correct and complete copies of all (i) trust agreements or other funding arrangements for such Vision Benefit Plan (including insurance contracts), and all amendments thereto; (ii) determination letters (including determination letters for each prior version of such Vision Benefit Plan and each plan that has been merged into such Vision Benefit Plan), rulings, opinion letters, information letters, or advisory opinions issued by the Internal Revenue Service, the Department of Labor, or the Pension Benefit Guaranty Corporation; (iii) annual reports or returns, audited or unaudited financial statements, actuarial valuations and reports, and summary annual reports prepared for any Vision Benefit Plan; (iv) summary plan descriptions and any material modifications thereto; (v) copies of any filings with the Internal Revenue Service; (vi) all personnel, payroll and employment manuals and policies; (vii) all collective bargaining agreements; (viii) all Contracts with third-party administrators, actuaries, investment managers, consultants and other independent contractors that relate to Vision Benefit Plans; (ix) IRS Forms 5500 filed in each of the most recent three plan years for Vision Benefit Plans, including all schedules thereto and opinions of independent accountants; and (x) complete and accurate written summaries of any Vision Benefit Plan that is oral.

 

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(d) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, all the Vision Benefit Plans and the related trusts subject to ERISA comply in all material respects with, and have been administered in substantial compliance with, (i) the provisions of ERISA, (ii) all provisions of the Code relating to qualification and tax exemption under Code Sections 401(a) and 501(a), and (iii) all other Laws, and neither Sellers nor Vision has received any written notice from any Governmental Authority questioning or challenging such compliance, nor are there any pending investigations or notices of pending investigation by a Governmental Authority.

 

(e) All Vision Benefit Plans are in compliance with the applicable terms of ERISA, the Code, all applicable federal and state securities Laws, and any other applicable Laws, the breach or violation of which are reasonably likely to have, individually or in the aggregate, a Sellers’ Material Adverse Effect. Each Vision ERISA Plan (and all prior versions of such Vision ERISA Plan) that is intended to be qualified under Code Section 401(a) has received a favorable determination letter from the Internal Revenue Service, and neither Sellers nor Vision are aware of any circumstances likely to result in revocation of any such favorable determination letter.

 

(f) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, all Vision Benefit Plan documents, and annual reports or returns, audited or unaudited financial statements, actuarial valuations, summary annual reports, and summary plan descriptions issued with respect to the Vision Benefit Plans are correct and complete and have been timely filed with the Internal Revenue Service, the Department of Labor, or distributed to participants of a Vision Benefit Plan (as required by Law) and there have been no changes in the information set forth therein.

 

(g) No “party in interest” (as defined in Section 3(14) of ERISA) or “disqualified person” (as defined in Section 4975(e)(2) of the Code) with respect to any Vision Benefit Plan has engaged in any nonexempt “prohibited transaction” (described in Section 4975(c) of the Code or Section 406 of ERISA).

 

(h) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum or as required under Section 601 et. seq. of ERISA or Code Section 4980B, Vision has never maintained a Vision Benefit Plan providing welfare benefits (as defined in ERISA Section 3(1)) to employees after retirement or other separation from service.

 

(i) Except as set forth in Section 3.16 of Sellers Disclosure Memorandum, there are no restrictions on the rights of Vision to amend or terminate any Vision Benefit Plan without incurring any liability thereunder. No Tax under Code Sections 4980B or 5000 has been incurred with respect to any Vision Benefit Plan and no circumstances exist that could give rise to such Taxes.

 

(j) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, neither the execution and delivery of this Agreement nor the consummation of the transactions

 

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contemplated hereby will (i) result in any payment (including severance, unemployment compensation, golden parachute, or otherwise) becoming due to any member, officer, employee or agent of Vision under any Vision Benefit Plan or otherwise, (ii) increase any benefits otherwise payable under any Vision Benefit Plan, or (iii) result in any acceleration of the time of payment or vesting of any such benefit. Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, no payment that is owed or may become due to any member, officer, employee or agent of Vision will be non-deductible or subject to Tax under Code Section 280G or 4999; nor will Vision be required to “gross up” or otherwise compensate such individuals because of the imposition of any excise Tax upon payment to such individual. No event has occurred or circumstances exist that could result in a material increase in premium costs of any Vision Benefit Plans that are insured, or a material increase in any benefit costs of any Vision Benefit Plans that are self-insured.

 

(k) Vision and Sellers have performed all of their respective obligations under the Vision Benefit Plans and have made appropriate entries in Vision’s financial records and statements for all such obligations that have accrued but that are not yet due. The actuarial present values of all accrued deferred compensation entitlements (including entitlements under any executive compensation, supplemental retirement or employment agreement) of employees and former employees of Vision and their respective beneficiaries have been fully reflected on the Vision Financial Statements to the extent required by and in accordance with GAAP. Vision and Sellers have made all required contributions and payments which are due and payable under each Vision Benefit Plan for all periods through and including the Closing Date.

 

(l) Other than routine claims for benefits, no claim against or legal proceeding involving any Vision Benefit Plan is pending or, to the Knowledge of Sellers, threatened.

 

(m) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, all Vision Benefit Plans that permit participants to direct the investment of plan assets comply with the requirements of ERISA Section 404(c) and accompanying regulations.

 

(n) Except as disclosed in Section 3.16 of Sellers Disclosure Memorandum, all individuals participating in (or eligible to participate in) any Vision Benefit Plan maintained (or contributed to) by Vision are common-law employees.

 

(o) Neither Vision nor any of its ERISA Affiliates have at anytime established, maintained or contributed to, or otherwise participated in, or had an obligation to maintain, contribute to, or otherwise participate in, any multiemployer plan as defined in ERISA Sections 4001(a)(3) and 3(37)(A).

 

Section 3.17 Labor and Employment Matters. Section 3.17 of Sellers Disclosure Memorandum contains a correct and complete list of all employees of Vision as of July 31, 2004 (the “Business Employees”), specifying for each person his or her job title. Except as disclosed in Section 3.17 of Sellers Disclosure Memorandum, the employment of all Business Employees is terminable at will by Vision without any penalty to or severance obligation becoming owed by Vision. Except as set forth in Section 3.17 of Sellers Disclosure Memorandum, (i) Vision is not a party to any union agreement or collective bargaining agreement or work rules or practices

 

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agreed to with any labor organization or employee association applicable to the Business Employees and no attempt to organize any of such employees has been made or is pending, (ii) since January 1, 2001, there has been no labor strike, dispute, slowdown, stoppage or lockout against or affecting Vision, and (iii) no unfair labor practice charge or complaint against Vision is pending before the National Labor Relations Board or any similar Governmental Authority with respect to any of the Business Employees, and neither Vision nor Sellers is aware of any circumstance that could support such a charge or complaint.

 

Section 3.18 Tax Matters. Except as set forth in Section 3.18 of Sellers Disclosure Memorandum:

 

(a) All Tax Returns required to be filed by or with respect to each of Vision and Texas MGA have been timely filed with the appropriate Taxing authorities; all federal, state, local, foreign and other Taxes that are shown to be due on such Tax Returns have been timely paid or adequately reserved for on the books and records of Vision or Texas MGA, as applicable; and all such Tax Returns are complete and accurate in all material respects.

 

(b) Prior to the date hereof, Sellers have provided to Buyer copies of the portions of all federal Tax Returns, and copies of all state Tax Returns, applicable to either of Vision or Texas MGA for the taxable periods ending in 2001, 2002 and 2003. No claim has ever been made by an authority in a jurisdiction where Vision or Texas MGA does not file a Tax Return that such company may be subject to Taxes by that jurisdiction.

 

(c) There are no outstanding agreements extending or waiving the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, Taxes due for any taxable period with respect to any Tax for which Vision or Texas MGA may be subject or liable.

 

(d) None of Sellers, Vision or Texas MGA has received any notice of assessment or proposed assessment in connection with any Taxes of or relating to Vision or Texas MGA. No audit, assessment, collection or other proceeding by any Governmental Authority is pending or, to the Knowledge of Sellers, threatened with respect to (i) any Taxes due from or with respect to Vision or Texas MGA or (ii) any Tax Return of or with respect to Vision or Texas MGA.

 

(e) There are no Liens for Taxes upon the assets or properties of Vision or Texas MGA, except for Permitted Liens.

 

(f) Neither Vision nor Texas MGA is a party to any agreement relating to the sharing or allocation of Taxes or indemnification agreement with respect to Taxes or similar contract or arrangement.

 

(g) Neither Vision nor Texas MGA has been a member of an affiliated group filing a consolidated federal income Tax Return (other than Vision and Texas MGA filing a consolidated return together), or has any liability for Taxes of any Person under Treas. Reg. § 1.1502-6 or § 1.1502-78 (or similar provision of state, local or foreign law) as a transferee or successor, by contract or otherwise.

 

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(h) Vision has not filed an election under Treasury Regulation Section 301.7701-3 to be classified other than as provided in Treasury Regulation Section 301.7701-3(b). At all times, Vision has been classified as a partnership for all Tax purposes, and no Taxing authority has taken a position inconsistent with such classification.

 

(i) Each of Vision and Texas MGA has complied with all applicable Laws relating to the withholding of Taxes and the payment thereof to appropriate authorities, including Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee or independent contractor, and Taxes required to be withheld and paid pursuant to Sections 1441 and 1442 of the Code or similar provision under foreign Law. Each of Vision and Texas MGA is in compliance with, and its records contain all information and documents (including properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under federal, state, and local Tax Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code.

 

(j) Neither of Vision or Texas MGA has made any payments, is obligated to make any payments, or is a party to any agreement that could obligate it to make any payments, that could be disallowed as a deduction under Section 280G or 162(m) of the Code.

 

(k) Each of Texas MGA and Vision has paid fully and timely, or adequately reserved on the financial statements of Vision, any Taxes that became due upon the merger of Texas MGA with and into Vision.

 

(l) None of the Seller Trusts has created or will create any Tax liability for Vision, including any payroll or other compensation related Taxes.

 

Section 3.19 Operations Insurance. Section 3.19 of Sellers Disclosure Memorandum lists all liability, property and casualty, flood, workers’ compensation, employers’ liability, directors and officers’ liability, surety bonds, key man life insurance and other similar insurance Contracts that insure the business, properties, operations or affairs of Vision or Texas MGA or affect or relate to the ownership, use or operations of any of the assets or properties of Vision or Texas MGA. Each such insurance Contract is in full force and effect, all premiums due thereon have been paid, and, to the Knowledge of Sellers, no such insurance Contract is the subject of a notice of cancellation or non-renewal by the issuing insurer. Sellers have made available to Buyer complete and correct copies of all such insurance Contracts together with all riders and amendments thereto. Section 3.19 of Sellers Disclosure Memorandum sets forth a correct and complete list of all claims filed under any of such insurance Contracts (or predecessors thereto) by Sellers, Vision or MGA within the past three years. Except as set forth in Section 3.19 of Sellers Disclosure Memorandum, to the Knowledge of Sellers, the insurance companies issuing such policies are solvent and not operating under the protection of any receivership, liquidation, rehabilitation, conservatorship or other bankruptcy, insolvency or similar proceeding. Sellers, Vision and Texas MGA have complied in all material respects with the terms and provisions of such policies.

 

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Section 3.20 Broker, Financial Adviser.. Except as set forth in Section 3.19 of the Sellers Disclosure Memorandum, neither Vision nor Texas MGA has any liability or obligation to pay any fees, commissions or similar payments to any broker, finder or financial adviser with respect to the transactions contemplated by this Agreement.

 

Section 3.21 Disclosure. This Agreement, and each certificate or other instrument or document required to be furnished by or on behalf of Sellers, Vision or Texas MGA to Buyer or any of its agents or representatives pursuant hereto, taken as a whole, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements contained herein or therein in light of the circumstances under which they were made, not misleading.

 

Section 3.22 Foundation’s Representations.

 

(a) The Foundation is a not-for-profit corporation duly organized, validly existing and in good standing under the Laws of the State of Tennessee and has full corporate power and authority to carry on its business as now conducted. The Foundation has received a determination letter, and such letter is still in force, from the Internal Revenue Service stating that the Foundation qualifies as a charitable organization under Section 501(c)(3) of the Code.

 

(b) The Foundation has all requisite power and authority to execute and deliver, and to perform its obligations under, this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Foundation and, subject to the due execution and delivery by the other Sellers and by Buyer, will be a valid and binding obligation of the Foundation, enforceable against the Foundation in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.

 

(c) The execution, delivery and performance by the Foundation of this Agreement and the consummation of the transactions contemplated hereby do not require the Foundation to obtain any consent, approval or action of, make any filing with, or give any notice to, any Governmental Authority.

 

(d) The execution, delivery and performance by the Foundation of this Agreement and the consummation of the transactions contemplated hereby will not (a) violate any provision of the articles of organization or bylaws of the Foundation; (b) violate any Order against or binding upon the Foundation; (c) violate, in any material respect, any agreement with, or condition imposed by, any Governmental Authority upon Foundation; or (d) violate any Law in any material respect.

 

(e) The Foundation is the owner of 1% of the Interests, as set forth on Exhibit A, free and clear of all Liens and any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such Interests). The Foundation will transfer and deliver to Buyer at the Closing good and marketable title to such 1% of the Interests free and clear of all Liens and any such other limitation or restriction.

 

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ARTICLE 4

REPRESENTATIONS AND WARRANTIES OF BUYER

 

Buyer hereby represents and warrants to Sellers as follows:

 

Section 4.1 Organization, Standing and Power. Buyer is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware and has full corporate power and authority to carry on its business as now conducted and to own, lease and operate all of its assets. Buyer is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the ownership of its assets or the conduct of its Business requires such qualification, except for such jurisdictions where the failure to be so qualified would not have a Buyer Material Adverse Effect.

 

Section 4.2 Authority. Buyer has all requisite power and authority to execute and deliver, and to perform its obligations under, this Agreement and to consummate the transactions contemplated hereby, and the performance by Buyer of its obligations under this Agreement have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer, and subject to the due execution and delivery by Sellers and Vision will, upon due execution and delivery, be a valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except as (i) the enforceability hereof may be limited by bankruptcy, insolvency, moratorium or other similar Laws affecting the enforcement of creditors’ rights generally, and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.

 

Section 4.3 Governmental Authorization. Other than obtaining the AVIC Licenses, the consummation of the transactions contemplated hereby do not require Buyer to obtain any consent, approval or action of, make any filing with, or give any notice to, any Governmental Authority.

 

Section 4.4 Non-Contravention. The execution, delivery and performance by Buyer of this Agreement and the consummation of the transactions contemplated hereby will not (a) violate any provision of the certificate of incorporation or bylaws of Buyer; (b) violate, conflict with, result in the breach of or default under (or with notice, lapse of time, or both would result in such a breach or default), result in any modification of the effect of, provide the other contracting party the right to terminate or materially amend, or require the other contracting party to consent to the assignment or continuation of, any material Contract to which Buyer is a party; (c) violate any Order against or binding upon Buyer, except for such violations that would not have a Buyer Material Adverse Effect; (d) violate any agreement with, or condition imposed by, any Governmental Authority upon Buyer, except for such violations that would not have a Buyer Material Adverse Effect; (e) subject to obtaining the governmental authorizations referred to in Section 4.3 hereof, violate any Law, except for such violations that would not have a Buyer Material Adverse Effect; or (f) result in a breach or violation of any of the terms or conditions of, constitute a default under, or otherwise cause an impairment or a revocation of, any Permit related to Buyer’s business, except for such breaches, violations, defaults, impairments or revocations that would not have a Buyer Material Adverse Effect.

 

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Section 4.5 Investment Intent. Buyer is purchasing the Interests solely for investment, with no present intention to resell or distribute the Interests within the Securities Act. Buyer hereby acknowledges that the Interests have not been registered pursuant to the Securities Act and may not be transferred in the absence of such registration or an exemption therefrom under such Securities Act.

 

Section 4.6 Sufficient Funds. Buyer has or will have at Closing sufficient funds available to pay the Cash Portion, and to pay all its fees and expenses related to the transactions contemplated hereby.

 

Section 4.7 Buyer Shares. The issuance of the Buyer Shares pursuant to this Agreement has been duly authorized by all necessary corporate action on the part of Buyer. When issued and delivered pursuant to this Agreement, the Buyer Shares shall be duly authorized, validly issued, fully paid, non-assessable and not subject to preemptive rights.

 

Section 4.8 Buyer SEC Filings. Buyer has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC since January 1, 2003 (the “Buyer SEC Documents”). As of their respective dates, the Buyer SEC Documents complied in all material respects with the requirements of the Securities Act or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Buyer SEC Documents, and none of the Buyer SEC Documents when filed contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except to the extent that information contained in any Buyer SEC Document has been revised or superseded by a later filed Buyer SEC Document, none of the Buyer SEC Documents contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of Buyer included in the Buyer SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly present in all material respects the consolidated financial position of Buyer and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the Buyer SEC Documents, and except for liabilities and obligations incurred in the ordinary course of business consistent with past practice since the date of the most recent consolidated balance sheet included in the Buyer SEC Documents, neither Buyer nor any of its subsidiaries has any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by GAAP to be recognized or disclosed on a consolidated balance sheet of Buyer and its consolidated subsidiaries or in the notes thereto.

 

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ARTICLE 5

COVENANTS

 

Section 5.1 Conduct of Business.

 

(a) Texas Merger. Prior to the Closing, Sellers and Vision shall cause Texas MGA to be merged with and into Vision (the “Texas Merger”), and shall cause Vision to have as of the Closing Date all qualifications, licenses and third-party Contracts required for Vision to conduct the Business in the State of Texas. Vision shall provide Buyer with copies of all documents necessary to effect, or otherwise relating to, the Merger prior to their execution or filing, as applicable. Vision shall be responsible for ensuring that the Merger complies with all Laws, Permits and Material Contracts of Vision and Texas MGA.

 

(b) Maintain Ordinary Course of Business. Prior to the Closing, except as necessary to effect the transactions contemplated by this Agreement, Sellers shall cause Vision and Texas MGA to (i) in all material respects, operate the Business as presently operated and only in the ordinary course of business, (ii) use commercially reasonable efforts to preserve the value of the Business, and (iii) use commercially reasonable efforts to preserve their relationships with and the goodwill of their customers, suppliers, employees and other Persons having business dealings with either of Vision or Texas MGA

 

(c) Specific Restrictions. Without limiting the generality of Section 5.1(b), except as necessary to effect the transactions contemplated by this Agreement, or except with the prior approval of Buyer (which shall not be unreasonably withheld, conditioned or delayed), Sellers will not, and will cause Vision and Texas MGA not to:

 

(i) enter into any contract that would constitute a Material Contract, other than in the ordinary course of business;

 

(ii) dispose of or acquire any asset used or to be used in the Business, other than acquisitions or dispositions in the ordinary course of business; provided, however, that Buyer acknowledges that Vision will make those certain dispositions of assets and assignments of Contracts to Vision officers, which are detailed in Exhibit J, subsequent to the execution of the Agreement;

 

(iii) enter into, adopt or (except as may be required by Law or the terms of any such arrangement) modify or terminate any bonus, profit sharing, severance, termination, LLC interest or stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any employee, or amend any such arrangement as it relates to employees (except for changes in compensation payable to any employee that is a merit or tenure increase granted in the ordinary course of business);

 

(iv) materially change any of its underwriting, pricing, actuarial, commission or investment practices or policies except as contemplated by the terms of this Agreement or except as required by the terms of one of the Material Contracts, or make, or agree to

 

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make, any material change in any of its financial, Tax or accounting practices or policies, or in any assumption underlying such a practice or policy, in either case including any basis for establishing reserves, or any depreciation or amortization policies or rates, in each case other than as required by a change in GAAP, SAP or applicable Law;

 

(v) (A) issue, sell, pledge, redeem, transfer, dispose of or encumber any of the Interests or any shares of capital stock of Texas MGA, (B) amend its certificate of incorporation, articles of organization, operating agreement or bylaws, (C) incur or modify any material indebtedness or other material liability, (D) make or authorize or commit for any capital expenditures other than in amounts not exceeding $30,000 for an individual expenditure or $100,000 in the aggregate, or (E) make any acquisition of, or investment in, assets or stock of any other Person (other than in the ordinary course of business);

 

(vi) increase the salary or other compensation of any Business Employee;

 

(vii) hire any new employees or terminate any Business Employee, other than in the ordinary course of business;

 

(viii) take any action or omit to take any action, which action or omission would result in a material breach of any of Sellers’ representations and warranties set forth in this Agreement; or

 

(ix) agree in writing or otherwise to take any of the actions described above in this Section 5.1(c).

 

Section 5.2 Exclusivity. Neither Sellers nor Vision will (and Sellers shall cause Texas MGA not to), directly or indirectly, solicit, initiate or encourage the submission of any proposals for or enter into or continue any discussions with respect to, (i) the acquisition by any Person of any of the membership interests or assets of Vision or capital stock or assets of Texas MGA (including any acquisition structured as a merger, consolidation, or share exchange), or (ii) any transaction pursuant to which Vision or Texas MGA would enter into any marketing relationship with an insurance carrier other than an Affiliate of Buyer (any “Acquisition/Marketing Transaction”), or furnish or permit to be furnished any non-public information concerning Vision or Texas MGA or the Business to any Person (other than Buyer and its representatives), other than information furnished in the ordinary course of business. Sellers shall promptly notify Buyer of any inquiry or proposal received by Sellers, Vision or Texas MGA or any representative thereof with respect to any such Acquisition/Marketing Transaction. Sellers, Vision and Texas MGA and their representatives shall immediately cease and cause to be terminated any existing activities, discussions or negotiations with any Person other than Buyer in respect of any Acquisition/Marketing Transaction.

 

Section 5.3 Cooperation. Prior to the Closing Date, Sellers shall, and shall cause Vision to, cooperate with Buyer, upon Buyer’s reasonable request (without causing undue disruption of the conduct of the Business), to develop plans for the integration of the Business with that of Buyer and its Affiliates and to allow Buyer to make continued review of the books,

 

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records, assets, liabilities, business and operations of Vision and Texas MGA. Without limiting the generality of the foregoing, Sellers shall, and shall cause Vision and Texas MGA to, cooperate with Buyer to audit and implement changes as reasonably requested by Buyer in connection with Vision’s and Texas MGA’s internal accounting, billing and cash management systems. In addition, Sellers shall provide Buyer or its representatives with reasonable access to the Business Employees to facilitate the transition of such employees from Vision Benefits Plans to such benefit plans as may be made available to them following the Closing Date, or for other reasonable purposes as the parties may mutually agree.

 

Section 5.4 Post-Closing Access.

 

(a) By Sellers. Following the Closing, Sellers shall allow Buyer and its representatives, upon reasonable prior notice, during regular business hours and at Buyer’s expense, the right to examine and make copies of any Sellers books and records for any reasonable business purpose concerning the conduct of the Business prior to the Closing Date.

 

(b) By Buyer. At the Closing, Sellers shall leave in the possession of Vision all original books and records of Vision and Texas MGA, and Sellers shall only be allowed to retain copies of such books and records as they may reasonably need for Tax and other reasonable business purposes. Following the Closing Date, Buyer shall allow Sellers and their representatives, upon reasonable prior notice, during regular business hours and at Sellers’ expense, the right to examine and make copies of such books and records of Vision or Texas MGA for any reasonable business purpose. Access to such books and records may not unreasonably interfere with Buyer’s or any successor company’s business operations.

 

Section 5.5 Filings; Other Actions; Notifications.

 

(a) Generally. Prior to the Closing, Sellers and Buyer shall cooperate with each other and use (and shall cause their respective Affiliates to use) all commercially reasonable efforts to do or cause to be done all things necessary, proper or advisable on its part under applicable Laws and this Agreement to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including, without limitation, preparing and filing as promptly as practicable all documentation to effect all necessary notices, reports and other filings. Sellers and Buyer each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Sellers, Vision or Buyer, as the case may be, or any of their Affiliates, from any third party or Governmental Authority with respect to the transactions contemplated by this Agreement. Sellers and Buyer each shall give prompt notice to the other of any change that is reasonably likely to result in a Sellers Material Adverse Effect or Buyer Material Adverse Effect, respectively.

 

(b) AVIC Licenses. Prior to the Closing, Buyer will cause AVIC to use all commercially reasonable efforts to obtain as expeditiously as possible the AVIC Licenses. Nothing in this Agreement shall be construed to require Buyer or any of its Affiliates, in connection with the receipt of any such AVIC License, to agree or commit to (i) sell, hold separate, discontinue or limit, before or after the Closing Date, any assets, businesses or interest

 

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in any assets or businesses of Buyer or any of its Affiliates (including for this purpose Vision), or (ii) any conditions relating to, or changes or restrictions in, the operations of the business of Buyer or its Affiliates, in each case if the action required would, in Buyer’s reasonable judgment, adversely impact the economic or business benefits to Buyer of the transactions contemplated by this Agreement.

 

(c) Policy Forms and Rates. Prior to the Closing, at Buyer’s request, Vision shall use all commercially reasonable efforts to prepare and assist Buyer in filing all insurance policy form and rate filings that may be necessary in order for AVIC or another insurance company affiliated with Buyer to issue insurance policies marketed by Vision as part of the Business.

 

Section 5.6 Further Assurances. On and after the Closing Date, Sellers (as reasonably requested from time to time by Buyer) and Buyer (as reasonably requested from time to time by Sellers) shall take all reasonably appropriate action and execute any additional documents, instruments or conveyances of any kind (not containing additional representations and warranties) which may be reasonably necessary to carry out any of the provisions of this Agreement.

 

Section 5.7 Expenses.

 

(a) Except as otherwise specifically provided in this Agreement, the parties to this Agreement shall bear their respective expenses incurred in connection with the preparation, execution and performance of this Agreement and the transactions contemplated hereby, including, without limitation, all fees and expenses of agents, representatives, counsel, investment bankers, actuaries and accountants. All such expenses of Sellers and Vision shall be paid by Vision and shall either be paid prior to the Closing or accrued as a liability on the Closing Balance Sheet.

 

(b) Prior to the Closing, John Russell and Vision will use commercially reasonable efforts to have Vision assign to John Russell, and John Russell assume, all of Vision’s obligations under that certain Broker Agreement dated May 3, 2004 between Vision and Kemper and Bowron LLC (the “Broker Agreement”), pursuant to a form of assignment and assumption agreement reasonably acceptable to Buyer. In the event that such assignment and assumption is not effected prior to Closing, John Russell agrees that after Closing he shall reimburse Vision immediately for any and all amounts that Vision is required to pay or other costs incurred by Vision pursuant to such Broker Agreement.

 

Section 5.8 Tax Matters.

 

(a) Tax Periods Ending Before the Closing Date.

 

(i) Sellers shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for Vision and Texas MGA for all periods ending prior to the Closing Date which are to be filed on or after the Closing Date, including a final federal income Tax Return (“Pre-Closing Tax Returns”). The Pre-Closing Tax Returns shall be prepared by Sellers in a manner that is, to the extent permitted by Law, consistent with the last Tax

 

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Return filed by Sellers prior to the date of this Agreement in each relevant jurisdiction with respect to Vision and Texas MGA. A copy of the Pre-Closing Tax Returns shall be submitted to the Buyer at least thirty calendar days prior to their due date, including extensions, and all reasonable changes requested by Buyer shall be made to the Tax Returns. Sellers agree to make an election under Section 754 of the Code on the final federal income Tax Return for Vision, if the Buyer so requests.

 

(ii) Sellers shall timely pay all Taxes of Vision and Texas MGA with respect to such periods ending prior to the Closing Date.

 

(b) Tax Periods Beginning Before and Ending On or After the Closing Date.

 

(i) Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of Vision for Tax periods which begin before the Closing Date and end on or after the Closing Date (“Straddle Period Tax Returns”). Buyer shall provide Sellers a copy of such Tax Returns within twenty days prior to their due date for Sellers’ review and comment.

 

(ii) Sellers shall pay to Buyer within seven calendar days after the date on which Buyer provides Seller with copies of the Tax Returns described in Section 5.8(b)(i) an amount equal to the portion of such Taxes allocable to the portion of such Taxable period ending on the Closing Date (based on the method described in Section 5.8(b)(iii)).

 

(iii) For purposes of this Agreement, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall (x) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of calendar days in the Taxable period ending on the Closing Date and the denominator of which is the number of calendar days in the entire Taxable period, and (y) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of Visions.

 

(c) Cooperation on Tax Matters. Buyer and Sellers shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party’s request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Vision shall (i) retain all books and records with respect to Tax matters pertinent to Vision and Texas MGA relating to any

 

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Taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Sellers, any extensions thereof) of the respective Taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (ii) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, Vision or Sellers, as the case may be, shall allow the other party to take possession of such books and records. Buyer and Sellers further agree, upon request, to use their commercially reasonable efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated by this Agreement). Following the Closing Date, Buyer shall allow Sellers and their representatives, upon reasonable prior notice, during regular business hours and at Seller’s expense, the right to examine and make copies of such books and records of Vision or Texas MGA.

 

(d) Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be borne by Sellers. Vision will file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by any Law, Sellers will, and will cause their Affiliates to, join in the execution of any such Tax Returns and other documentation. The parties will cooperate to the extent reasonably necessary to prepare such filings or returns as may be required.

 

Section 5.9 Disclosure Supplements. From time to time prior to the Closing, Sellers shall promptly supplement or amend the Sellers Disclosure Memorandum to reflect any matter that, if existing, occurring or known on the date hereof, should have been so disclosed or that is necessary to correct any information in such Sellers Disclosure Memorandum that was or has been rendered inaccurate since the date hereof; provided, however, that for purposes of determining the rights and obligations of the parties under this Agreement, any such supplemental or amended disclosure shall not be deemed to have been disclosed as of the date hereof, or to cure any breach or inaccuracy of Seller’s representations and warranties, unless so agreed to in writing by Buyer; and provided, further, that such supplemental or amended disclosures by Sellers shall not entitle Buyer to refuse to consummate the transactions contemplated hereby unless such supplemental or amended disclosures, individually or in the aggregate, disclose a failure of Sellers to satisfy any of the conditions to Closing specified in Section 6.2 hereof.

 

Section 5.10 Certain Employee Matters.

 

(a) Employment Application Process; Notices to Employees. Prior to the Closing, and at the request of Buyer, Vision shall require all of its employees to participate in Buyer’s employment application process, including drug testing, credit reporting and other applicable background screens. Buyer shall be responsible for administering such process, and Buyer shall be responsible for ensuring that such process complies with all Laws. If Buyer determines that any of Vision’s employees do not satisfy Buyer’s normal and customary employment criteria, Vision shall terminate such employees prior to the Closing Date if Buyer so requests, and such

 

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individuals shall not be Closing Date Employees. The costs of such termination, including any severance payments, shall be paid by Vision prior to the Closing or accrued on the Closing Balance Sheet. Vision and Buyer shall cooperate and mutually approve any notices or other announcements provided to Vision’s employees regarding the transactions contemplated hereby or any compensation or benefits to be provided to such employees after the Closing.

 

(b) Credit for Prior Service. Subject to applicable Laws, Buyer shall make available to the Closing Date Employees, either on the Closing Date or as soon thereafter as practicable, employee benefit plans generally provided to the other similarly situated employees of Buyer and its Affiliates. To the extent that any employee benefit plan, program or policy of Buyer is made available to the Closing Date Employees after the Closing Date, Buyer shall, or shall cause its applicable Affiliate to, grant the Closing Date Employees credit for service with Vision prior to the Closing Date for purposes of eligibility and vesting (but not for benefit accrual) to the extent that service of Buyer’s or its applicable Affiliate’s employees is recognized for any such purpose.

 

(c) Personal Leave Accrual. After the Closing Date, subject to applicable Laws, Buyer shall credit each Closing Date Employee with all unused personal leave accumulated with Vision before the Closing Date in accordance with Vision’s personal leave policy set forth in Section 5.10 of Sellers Disclosure Memorandum, and the Closing Balance Sheet shall include an accrual for the cost of such vacation. In addition, any unused sick leave will be credited to the Buyer’s short-term disability plan.

 

(d) Employee Bonuses.

 

(i) Special Agreements. John Russell and Vision have entered into Agreements and Releases with certain current and former Vision employees as set forth and attached as Exhibit K (the “Bonus Agreements”), pursuant to which such individuals will be entitled to certain bonus payments in connection with the Closing (“Special Bonuses”). With respect to each such Bonus Agreement that gives Vision the discretion to elect a form of payment to the current or former employee, John Russell and Vision agree that Vision shall elect a form of payment that does not entitle the current or former employee to any portion of any Earnout Payment. The Bonus Agreements shall not be assigned, amended or modified in any way prior to the Closing, and Vision shall not enter into any Bonus Agreement not listed on Exhibit K on the date of this Agreement. None of Sellers nor Vision has made any commitment to any current or former employee of Vision that could permit such employee to share in any Earnout Payment.

 

(ii) Costs. As between Vision and John Russell, John Russell shall personally be responsible for all costs of the Special Bonuses and all costs under the Bonus Agreements, including all Taxes owed by Vision in connection therewith and other costs to Vision. Prior to the Closing, John Russell shall make a capital contribution to Vision of sufficient cash to cover all such costs of the Special Bonuses and other amounts owed in connection with the Bonus Agreements, or allocate a sufficient amount of the Cash Portion or the Initial Purchase Price to make such Special Bonuses and other payments, or otherwise make appropriate provision to reimburse Vision as may be agreed by Buyer.

 

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With respect to any other bonuses of any other type due to employees of Vision, prior to the Closing, Vision shall pay all cash or other bonuses to which Vision employees are entitled, or such obligations will be accrued on the Closing Balance Sheet.

 

(e) Treatment of Certain Vision Benefit Plans. Prior to the Closing Date, Vision will take all actions reasonably necessary or appropriate to fulfill all of its obligations to contribute to and administer the Vision Benefit Plans in accordance with their terms, including making all employer contributions to the accounts of all Vision employees through the day immediately preceding the Closing Date. In addition, at the request of Buyer, Vision will take all steps reasonably necessary to terminate (i) effective on the Business Day immediately preceding the Closing Date, each Vision Benefit Plan that is a plan subject to ERISA, and (ii) effective prior to the Closing Date, any other Vision Benefit Plan that may be requested by Buyer, in each case with Vision providing any required notices, adopting any required amendments and adopting appropriate board of directors resolutions. In addition, prior to the Closing Date, Vision shall take any and all further actions necessary to retain the tax-qualified status of each Vision Benefit Plan that is a tax-qualified plan, including: (i) the preparation, execution and submission of such plans to the Internal Revenue Service under the Employee Plan Compliance Resolution System set forth in Revenue Procedure 2003-44; (ii) the preparation and execution of any amendment deemed necessary in connection with such submission; (iii) the retention of service providers to assist in the preparation of such submission; and (iv) the preparation and distribution of the appropriate employee communications related to the submission. Vision shall provide Buyer with copies of all documents produced in accordance with the preceding sentence prior to their execution or distribution, as applicable. Any costs to Vision of terminating Vision Benefit Plans shall be paid by Vision prior to the Closing or accrued on the Closing Balance Sheet.

 

Section 5.11 Press Releases and Public Announcements. With Sellers and Vision being one party for this purpose, and Buyer being one party, each party shall submit any proposed press release, media alert, public announcement or other similar notice related to this Agreement or any transaction contemplated hereby, to the other party for its approval (which approval shall not be unreasonably withheld, conditioned or delayed) not less than three Business Days prior to sending any such release, alert, announcement or notice. Without such approval of the other party, no disclosure of this Agreement or the transactions contemplated hereby shall be made except to the extent required by applicable Law or Order, or by applicable rules or regulations of a national or foreign stock exchange or the Automated Quotation System maintained by the National Association of Securities Dealers, Inc.

 

Section 5.12 Earnout Frustration. Buyer shall not, and shall cause Vision not to, take any action the primary purpose of which is to frustrate (i) the ability of Vision to meet the EBITDA or Revenue targets necessary to earn the Earnout Payments or (ii) the payment of the Earnout Payments if earned. Sellers acknowledge and agree that Buyer or Vision may take actions with the primary purpose of changing Vision’s Business for economic, regulatory or other rational business reasons that might have an unintended effect on the Earnout Payments, and that such actions will not violate this Section 5.12.

 

Section 5.13 Buyer Nonrecruitment Covenant. Buyer hereby specifically acknowledges and agrees that at no time prior to the Closing Date or, in the event the

 

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transactions contemplated by this Agreement are not consummated, that for a period of one year after the termination of this Agreement, will Buyer or any of its Affiliates employ or seek to employ any individual who, at the time of the execution of this Agreement, currently works or worked during the past three months for Vision, except with the written consent of Vision; provided, however, that the foregoing shall not prevent Buyer or its Affiliates from employing an individual who contacts Buyer or its Affiliates on his or her own initiative without any direct or indirect solicitation by or encouragement from Buyer or its Affiliates (other than general solicitations in publications or on websites, or use of search firms, in each case not targeted specifically at such individual).

 

Section 5.14 John Russell Nonrecruitment, Nonsolicitation and Noncompetition Covenants.

 

(a) Nonrecruitment of Employees. In consideration of the Initial Purchase Price and possible Earnout Payments to be paid to John Russell as a Seller hereunder, John Russell hereby agrees that, during the five years immediately following the Closing Date, he shall not, directly or indirectly, solicit or recruit for employment or encourage to leave employment with Buyer or any of its Affiliates (including Vision for purposes of this Section 5.14) (collectively, the “Alfa Companies”), on his own behalf or on behalf of any other person or entity other than an Alfa Company, any person employed by an Alfa Company or any person who was employed by an Alfa Company within the twelve months immediately preceding such solicitation or recruitment. In addition, John Russell agrees to exercise commercially reasonable efforts to prevent any of the activities listed in this Section 5.14(a) from occurring. Notwithstanding the foregoing, the prohibitions of this Section 5.14 shall not prohibit John Russell, or any entity with respect to which John Russell is an employee, director, or investor, from employing an individual who contacts John Russell or such entity on his or her own initiative without any direct or indirect solicitation by or encouragement from John Russell or such entity (other than general solicitations in publications or on websites, or the use of search firms, so long as such general solicitations or search firm activities are not targeted specifically at an Alfa Company employee).

 

(b) Nonsolicitation of Policyholders and Agents. In consideration of the Initial Purchase Price and possible Earnout Payments to be paid to John Russell as a Seller hereunder, John Russell hereby agrees that, during the five years immediately following the Closing Date, he shall not, directly or indirectly, on behalf of himself or of anyone other than an Alfa Company, (i) solicit or attempt to solicit any person covered by a non-standard automobile policy issued by any Alfa Company for the purpose of selling such person a non-standard automobile insurance policy issued by any insurance company other than an Alfa Company; or (ii) solicit or attempt to solicit any person who is, or has been during the twelve months prior to such act of solicitation, an agent appointed by any Alfa Company to sell non-standard automobile insurance for the purpose of appointing such person to sell non-standard automobile insurance for any insurance company other than an Alfa Company. In addition, John Russell agrees to exercise commercially reasonable efforts to prevent any of the activities listed in this Section 5.14(b) from occurring.

 

(c) Noncompetition. In consideration of the Initial Purchase Price and possible Earnout Payments to be paid to John Russell as a Seller hereunder, John Russell hereby agrees

 

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that, during the five years immediately following the Closing Date, he shall not, without the prior written consent of Buyer, engage or participate in the Business Activities within the Restricted Area, as a business executive or equity owner, of any business or enterprise that directly competes with the Alfa Companies. For purposes of this Section 5.14(c), the “Business Activities” shall be the business of marketing, underwriting and administering non-standard automobile insurance policies. For purposes of this Section 5.14(c), the “Restricted Area” shall be the States of Alabama, Arkansas, Florida, Georgia, Indiana, Kentucky, Mississippi, Missouri, Ohio, Tennessee, Texas and Virginia. Nothing in this Section 5.14(c) shall prohibit John Russell from acquiring or holding, for investment purposes only, less than five percent (5%) of the outstanding publicly traded securities of any corporation which may compete directly or indirectly with the Alfa Companies.

 

(d) Certain Limits. In the event that, during the five years following the Closing Date, Buyer or one of its Affiliates terminates the employment of John Russell without “Cause” (as that term is defined in the John Russell Employment Agreement), and thereafter John Russell elects, in his sole discretion, to forego his eligibility to receive future potential Earnout Payments, then the covenants in Sections 5.14(a), (b) and (c) shall not apply for the period of time that John Russell foregoes such eligibility to receive potential Earnout Payments; provided, however, that in no event shall the covenants in Sections 5.14(a), (b) and (c) apply for less than three years after the Closing Date.

 

(e) Enforceability of Covenants. John Russell acknowledges that the Alfa Companies have a present and future expectation of business within the geographic areas served by them and from their present and proposed customers. John Russell further acknowledges the reasonableness of the term, geographic area and scope of the covenants set forth in this Section 5.14, and agrees that he will not, in any action, suit or other proceeding, deny the reasonableness of, or assert the unreasonableness of, the premises, consideration or scope of the covenants set forth herein. John Russell further acknowledges that complying with the provisions contained in this Section 5.14 will not preclude him from engaging in a lawful profession, trade or business, or from becoming gainfully employed. John Russell and Buyer agree that John Russell’s obligations under the covenants in this Section 5.14 are separate and distinct under this Agreement, and the failure or alleged failure of any Alfa Company to perform its obligations under any provision of this Agreement, the John Russell Employment Agreement or any other agreement among the parties, shall not constitute a defense to the enforceability of the covenants in this Section 5.14. John Russell agrees that any breach of any of the covenants in this Section 5.14 will result in irreparable damage and injury to the Alfa Companies and that Buyer will be entitled to injunctive relief in any court of competent jurisdiction without the necessity of posting any bond. John Russell also agrees that he shall be responsible for all damages incurred by the Alfa Companies due to any breach of the restrictive covenants contained in this Agreement and that Buyer shall be entitled to have John Russell pay all costs and attorneys’ fees incurred by Buyer in enforcing the restrictive covenants in this Section 5.14.

 

Section 5.15 Dorinco Reinsurance Settlement; Personal Guarantees.

 

(a) Dorinco Reinsurance Settlement. Prior to Closing, Sellers and Vision shall use commercially reasonable efforts to enter into a written agreement with Dorinco Reinsurance

 

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Company, in form and substance reasonably satisfactory to Sellers Representative and Buyer and approved by Buyer prior to its execution, which shall supersede any and all oral Contracts between Vision and Dorinco Reinsurance Company. At Closing, either (i) John Russell shall personally pay to Dorinco Reinsurance Company any and all amounts owed thereto by Vision; or (ii) the Closing Interim Statements and the Closing Balance Sheet shall include an accrued liability for the full amount owed to Dorinco Reinsurance Company by Vision, in which event Vision will make the payment to Dorinco Reinsurance Company. In addition, John Russell shall indemnify Buyer for any other Loss arising in connection with the business relationship between Vision and Dorinco Reinsurance Company.

 

(b) Personal Guarantees. John Russell is currently obligated under the four personal guarantees listed in Section 5.15 of the Sellers Disclosure Memorandum (the “Personal Guarantees”). At Closing, or as soon as practicable thereafter, Buyer shall, or shall cause Vision to, take all actions necessary to cancel the Personal Guarantees or otherwise remove John Russell from any liability thereunder, provided that Section 5.15(a) has been complied with.

 

ARTICLE 6

CONDITIONS TO CLOSING

 

Section 6.1 Conditions to Obligations of Sellers. The obligations of Sellers to consummate the transactions contemplated hereby are subject to the fulfillment prior to or at Closing of the following conditions, any one or more of which may be waived by Sellers:

 

(a) Representations and Warranties. The representations and warranties of Buyer set forth in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) at and as of the Closing Date, as though made at and as of such date except for changes permitted by this Agreement and except to the extent that any representation or warranty is made as of a specified date, in which case such representation or warranty shall be true in all material respects (or in all respects in the case of any such representation or warranty containing any materiality qualification) as of such date.

 

(b) Covenants. Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing.

 

(c) Bringdown Certificate. Buyer shall have delivered to Sellers a certificate to the effect that each of the conditions specified above in Sections 6.1(a) and (b) is satisfied in all respects.

 

(d) No Injunction. There shall not be any injunction, judgment, Order, decree or ruling in effect that prohibits or enjoins, or any Litigation pending that seeks to prohibit or enjoin or that seeks material monetary damages with respect to, the consummation of the transactions contemplated by this Agreement.

 

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(e) Certified Resolutions. Buyer shall have delivered to Sellers a certified copy of the resolutions duly adopted by Buyer’s board of directors approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.

 

(f) Good Standing Certificate. Buyer shall have delivered to Sellers a certificate of good standing for Buyer issued within fifteen calendar days prior to the Closing Date by the Delaware Secretary of State.

 

(g) No Buyer Material Adverse Effect. There shall not have occurred any Buyer Material Adverse Effect, and Sellers shall have received from Buyer a certificate dated as of the Closing Date signed by Buyer to such effect.

 

(h) Other Deliveries. Sellers shall have received all other documents, instruments and payments listed in Section 2.6(c).

 

Section 6.2 Conditions to Obligations of Buyer. The obligations of Buyer to consummate the transactions contemplated hereby are subject to the fulfillment prior to or at Closing of the following conditions, any one or more of which may be waived by Buyer:

 

(a) Representations and Warranties. The representations and warranties of Sellers and Vision set forth in this Agreement shall be true and correct in all material respects (or in all respects in the case of any representation or warranty containing any materiality qualification) at and as of the Closing Date as though made at and as of such date except for changes permitted by this Agreement and except to the extent that any representation or warranty is made as of a specified date, in which case such representation or warranty shall be true in all material respects (or in all respects in the case of any such representation or warranty containing any materiality qualification) as of such date.

 

(b) Covenants. Sellers and Vision shall have performed and complied with all of their covenants hereunder in all material respects through the Closing.

 

(c) Bringdown Certificate. Sellers shall have delivered to Buyer a certificate to the effect that each of the conditions specified above in Sections 6.2(a) and (b) is satisfied in all respects.

 

(d) No Injunction. There shall not be any injunction, judgment, Order, decree or ruling in effect that prohibits or enjoins, or any Litigation pending that seeks to prohibit or enjoin or that seeks material monetary damages with respect to, the consummation of the transactions contemplated by this Agreement.

 

(e) Certified Resolutions. Sellers shall have delivered to Buyer a certified copy of the resolutions duly adopted by Vision’s members, or other limited liability company action, approving the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby.

 

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(f) Good Standing Certificates. Sellers shall have delivered to Buyer a certificate of good standing for Vision issued within fifteen calendar days prior to the Closing Date by the Secretary of State or other applicable Governmental Authority of each jurisdiction listed in Section 3.1 of Sellers Disclosure Memorandum.

 

(g) MGA Licenses. Sellers shall have delivered to Buyer evidence reasonably satisfactory to Buyer that all of Vision’s managing general agent licenses listed in Section 3.11 of Sellers Disclosure Memorandum are in full force and effect as of the Closing Date.

 

(h) No Sellers Material Adverse Effect. There shall not have occurred any Sellers Material Adverse Effect, and Buyer shall have received a certificate dated as of the Closing Date signed by Sellers to such effect.

 

(i) Texas Merger. Seller shall have delivered to Buyer a copy of certificates of merger issued by the Secretaries of State of Texas and Tennessee confirming that the Texas Merger was effective prior to the Closing Date.

 

(j) Third-Party Consents. Sellers shall have delivered to Buyer evidence reasonably satisfactory to Buyer that the approvals and consents listed in Section 6.2(j) of Sellers Disclosure Memorandum have been received or deemed received in each case without any conditions, restrictions or limitations.

 

(k) Other Deliveries. Buyer shall have received all other documents, instruments and payments listed in Section 2.6(b).

 

ARTICLE 7

TERMINATION

 

Section 7.1 Termination by Mutual Consent. This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing Date by mutual written consent of Sellers and Buyer.

 

Section 7.2 Termination by Either Sellers or Buyer. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by either Sellers or Buyer, upon five Business Days’ notice to the other party, if the Closing does not occur on January 3, 2005 (the “Termination Date”). The right to terminate this Agreement pursuant to this Section 7.2 shall not be available to any party that has breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure of the transactions contemplated by this Agreement to be consummated.

 

Section 7.3 Termination by Sellers. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date by Sellers if there has been a material breach by Buyer of any representation, warranty, covenant or agreement contained in this Agreement that, individually or together with all such breaches, would prevent any of the conditions set forth in Article 6 from being satisfied (other than by waiver) prior to the Termination Date and that is not curable or, if curable, is not cured within twenty calendar days after written notice of such breach is given by Sellers to Buyer.

 

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Section 7.4 Termination by Buyer. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date by Buyer if there has been a material breach by Sellers of any representation, warranty, covenant or agreement contained in this Agreement that, individually or together with all such breaches, would prevent any of the conditions set forth in Article 6 from being satisfied (other than by waiver) prior to the Termination Date and that is not curable or, if curable, is not cured within twenty calendar days after written notice of such breach is given by Buyer to Sellers.

 

Section 7.5 Effect of Termination and Abandonment.

 

(a) Certain Termination Fee. In the event that (i) all the conditions to Buyer’s obligation to close that are set forth in Section 6.2 have been satisfied or waived on or before January 3, 2005, (ii) the transactions contemplated by this Agreement are not consummated by close of business on January 3, 2005, and (iii) Sellers have not breached in any material respect their obligations under this Agreement in any manner that shall have proximately contributed to the occurrence of the failure of the transactions contemplated by this Agreement to be consummated, then Buyer shall pay to Sellers a termination fee of Two Million Dollars ($2,000,000) in cash not later than January 7, 2005 (the “Termination Fee”). Any such Termination Fee paid by Buyer shall be paid to the Sellers Representative on behalf of the Sellers.

 

(b) In the event of termination of this Agreement and the abandonment of the transactions pursuant to this Article 7, this Agreement shall become void and of no effect with no liability on the part of any party hereto (or of any of its representatives); provided, however, except as otherwise provided herein, no such termination shall relieve any party hereto of any liability or damages resulting from any breach of this Agreement; and provided, further, that if Buyer pays the Termination Fee contemplated by Section 7.5(a), such Termination Fee shall be the only amount to which Sellers are entitled under the circumstances described in Section 7.5(a), regardless of any reason for Buyer’s refusal or failure to consummate the transactions, and Sellers hereby acknowledge and agree that they shall not seek nor be entitled to any other remedy of any type.

 

ARTICLE 8

INDEMNIFICATION

 

Section 8.1 Survival of Representations, Warranties and Covenants. All representations and warranties, and all pre-closing covenants and agreements, made or undertaken by the parties in this Agreement shall survive the Closing through close of business on the third anniversary of the Closing Date; provided, however, that the representations and warranties contained in Sections 3.16 and 3.18 shall terminate at close of business on the later of the third anniversary of the Closing Date or the 60th calendar day following the expiration of the applicable statute of limitations with respect to the matters contained therein; provided, further,

 

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that the representations and warranties contained in Sections 3.5, 3.6 and 3.11(g) shall survive the Closing indefinitely; and provided, further that the representations and warranties in Section 3.10 shall survive the Closing through close of business on the second anniversary of the Closing Date.

 

Section 8.2 Obligation of Sellers to Indemnify.

 

(a) Obligation to Indemnify. John Russell and Carol Russell (together, “Seller Indemnitors”), jointly and severally, covenant and agree to defend, indemnify and hold harmless Buyer, its Affiliates (including, for this purpose, Vision after the Closing), and their respective officers, directors and employees (collectively, the “Buyer Indemnitees”) from and against, and pay or reimburse the Buyer Indemnitees for, any and all Losses asserted against, imposed upon or incurred by Buyer Indemnitees resulting from, arising out of, based upon or otherwise in respect of any of the following:

 

(i) any breach of or inaccuracy in any representation or warranty of Sellers or Vision contained in this Agreement (such breach or inaccuracy being determined without regard to (1) any materiality qualification contained in or otherwise applicable to such representation or warranty or (2) whether disclosed to Buyer in any supplementation pursuant to Section 5.9);

 

(ii) any failure of Sellers or Vision to perform any pre-Closing covenant or agreement hereunder, or any failure of Sellers to perform any post-Closing covenant or agreement hereunder, unless waived in writing by Buyer;

 

(iii) any Taxes of the Sellers, Vision or Texas MGA related to taxable periods ending (or the portion of a taxable period ending) prior to the Closing Date;

 

(iv) any Loss with respect to the Bonus Agreements or the Special Bonuses, including any claim to a Special Bonus made by a Person who did not receive such a payment;

 

(v) any Loss resulting from discrepancies between the amounts that Vision collected on behalf of, and the amounts Vision remitted to, the insurance carriers with which Vision or Texas MGA does business, in Vision’s or Texas MGA’s capacity as fiduciary for such carriers;

 

(vi) any Loss with respect to the Litigation matters described in Section 8.2 of Sellers Disclosure Memorandum;

 

(vii) the indemnity provided for in Section 5.15(a); or

 

(viii) the reasonable costs to Buyer of enforcing this indemnity against Seller Indemnitors.

 

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(b) Deductible. Seller Indemnitors shall not be required to indemnify the Buyer Indemnitees with respect to any claim for indemnification pursuant to Section 8.2(a)(i) unless and until (i) the amount of any such individual claim (or series of related claims) exceeds Twenty-Five Thousand Dollars ($25,000), at which time Seller Indemnitors shall be liable for only the amount by which such claim (or series of related claims) exceeds Twenty-Five Thousand Dollars ($25,000), or (ii) the aggregate amount of all such claims (including those under $25,000 per claim) exceeds One Hundred Thousand Dollars ($100,000), at which time Seller Indemnitors shall be liable for only the amount by which such claim exceeds Fifty Thousand Dollars ($50,000). Notwithstanding the foregoing sentence, indemnification claims relating to Sections 3.1 (“Organization, Standing and Power”), 3.2 (“Authority”), 3.5 (“Ownership of Interests”), 3.6 (“Capitalization of Texas MGA”), 3.11(g) (“Compliance With Laws; Insurance Matters”), 3.16 (“Employee Benefits Plans; ERISA”), and 3.18 (“Tax Matters”), and indemnification claims pursuant to Sections 8.2(a)(ii), (iii), (iv), (v), (vi), (vii) and (viii) shall not be subject to any deductible.

 

(c) Cap. The Buyer Indemnitees shall not be entitled to recover from the Seller Indemnitors under the provisions of Section 8.2(a) an aggregate amount in excess of 0.75 multiplied by the Initial Purchase Price plus any Earnout Payments that are paid.

 

Section 8.3 Obligation of Buyer to Indemnify.

 

(a) Obligation to Indemnify. Buyer covenants and agrees to defend, indemnify and hold harmless Sellers and their Affiliates (for this purpose, not including Vision after the Closing), and their respective officers, directors and employees (collectively, the “Seller Indemnitees”) from and against, and pay or reimburse the Seller Indemnitees for, any and all Losses asserted against, imposed upon or incurred by Seller Indemnitees resulting from, arising out of, based upon or otherwise in respect of any of the following:

 

(i) any breach of or inaccuracy in any representation or warranty of Buyer contained in this Agreement;

 

(ii) any failure of Buyer to perform any pre-Closing or post-Closing covenant or agreement hereunder, unless waived in writing by Sellers;

 

(iii) any wrongful termination of an employee by Vision pursuant to Buyer’s instructions under Section 5.10(a); or

 

(iv) the reasonable costs to Sellers of enforcing this indemnity against Buyer.

 

(b) Deductible. Buyer shall not be required to indemnify the Seller Indemnitees with respect to any claim for indemnification pursuant to Section 8.3(a)(i) unless and until (i) the amount of any such individual claim (or series of related claims) exceeds Twenty-Five Thousand Dollars ($25,000), at which time Buyer shall be liable for only the amount by which such claim (or series of related claims) exceeds Twenty-Five Thousand Dollars ($25,000), or (ii) the aggregate amount of all such claims (including those under $25,000 per claim) exceeds One Hundred Thousand Dollars ($100,000), at which time Buyer shall be liable for only the amount

 

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by which such claims exceed Fifty Thousand Dollars ($50,000). Notwithstanding the foregoing sentence, indemnification claims relating to Sections 4.1 (“Organization, Standing and Power”), 4.2 (“Authority”) and 4.6 (“Sufficient Funds”), and indemnification claims pursuant to Sections 8.3(a)(ii), (iii) and (iv), shall not be subject to any deductible.

 

(c) Cap. The Seller Indemnitees shall not be entitled to recover from Buyer under the provisions of Section 8.3(a) an aggregate amount in excess of 0.75 multiplied by the Initial Purchase Price plus any Earnout Payments that are paid.

 

Section 8.4 Procedure for Indemnification Claims.

 

(a) Notice of Loss or Asserted Liability. Promptly after (i) becoming aware of circumstances that have resulted in a Loss for which a party entitled to indemnification pursuant to Section 8.2 or Section 8.3 intends to seek indemnification (the “Indemnified Party”) or (ii) receipt by the Indemnified Party of written notice of any demand, claim or circumstances which, with the lapse of time, the giving of notice or both, would give rise to a claim or the commencement of any litigation that may result in a Loss (an “Asserted Liability”), the Indemnified Party shall give notice thereof (the “Claims Notice”) to the party obligated to provide indemnification (the “Indemnifying Party”). The Claims Notice shall describe the Loss or the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss or Asserted Liability that has been or may be suffered by the Indemnified Party. If a Claims Notice is not provided promptly as required by this Section 8.4, the Indemnified Party nonetheless shall be entitled to indemnification by the Indemnifying Party except to the extent that the Indemnifying Party is prejudiced or suffer losses by such late receipt of the Claims Notice.

 

(b) Opportunity to Defend or Contest Asserted Liability. The Indemnifying Party may elect to assume the defense of or contest, at its own expense, any Asserted Liability. If the Indemnifying Party elects to defend or contest such Asserted Liability, it shall within thirty calendar days (or sooner, if the nature of the Asserted Liability so requires) notify the Indemnified Party of its intent to do so by sending a notice to the Indemnified Party (the “Contest Notice”), and the Indemnified Party shall cooperate, at the expense of the Indemnifying Party, in the defense or contest of such Asserted Liability. Counsel for the Indemnifying Party who shall conduct the defense or contest of the Asserted Liability shall be reasonably satisfactory to the Indemnified Party. If the Indemnifying Party elects not to defend or contest the Asserted Liability, fails to notify the Indemnified Party of its election as herein provided, or contests its obligation to indemnify under this Agreement, the Indemnified Party (upon further notice to the Indemnifying Party) shall have the right to pay, defend or contest such Asserted Liability on behalf of and for the account and risk of the Indemnifying Party. In any event, each of the Indemnified Party and the Indemnifying Party may participate, at such party’s own expense, in the defense or contest of such Asserted Liability.

 

(c) Cooperation With Respect to Asserted Liabilities. Seller Indemnitors and Buyer shall cooperate fully with the other as to all Asserted Liabilities, shall make available to each other as reasonably requested all information, records and documents relating to all Asserted Liabilities and shall preserve all such information, records and documents until the termination

 

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of any Asserted Liability. Seller Indemnitors and Buyer also shall make available to the other, as reasonably requested, its personnel, agents, and other representatives who are responsible for preparing or maintaining information, records or other documents, or who may have particular knowledge with respect to any Asserted Liability.

 

(d) Settlement of Asserted Liabilities. If the Indemnifying Party assumes the defense of an Asserted Liability, (i) no compromise or settlement thereof may be effected by the Indemnifying Party without the Indemnified Party’s consent unless (1) there is no finding or admission of any violation of Law on the part of Indemnified Party and no effect on any other claim that may be made against the Indemnified Party, (2) the sole relief provided is monetary damages that are paid in full by the Indemnifying Party, and (3) the compromise or settlement includes, as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party of a release, in form and substance reasonably satisfactory to the Indemnified Party, from all liability in respect of such Asserted Liability, and (ii) the Indemnified Party shall have no liability with respect to any compromise or settlement thereof effected without its consent.

 

(e) Losses Not Involving Asserted Liabilities. Upon receipt of a Claims Notice relating to a Loss that does not involve an Asserted Liability, the Indemnifying Party shall provide a written response to the Indemnified Party within thirty calendar days stating the Indemnifying Party’s position with respect to its obligations under this Article 8. The Indemnifying Party and the Indemnified Party shall then attempt in good faith to resolve all disputes regarding such Loss within thirty calendar days from the date the Indemnified Party receives such written response from the Indemnifying Party and, if the parties cannot reach agreement on all such disputes within such thirty calendar day period (or such longer period as they may mutually agree), then either party shall be entitled to request arbitration of the matter pursuant to Section 9.1.

 

(f) Payment. Upon determination of the amount of a Loss or Asserted Liability that is binding on both the Indemnifying Party and the Indemnified Party, the Indemnifying Party shall pay the amount of such Loss or Asserted Liability by wire transfer of immediately available funds within five Business Days of the date such amount is determined.

 

Section 8.5 Insurance; Subrogation.

 

(a) Insurance. Any indemnity payment made by an Indemnifying Party pursuant to this Article 8 shall be reduced by an amount equal to (i) any third party insurance proceeds realized by and paid to the Indemnified Party minus (ii) any related costs and expenses, including the aggregate cost of pursuing any related insurance claims. The Indemnified Party shall use all commercially reasonable efforts to make insurance claims relating to any claim for which it is seeking indemnification pursuant to this Article 8; provided, that (1) the Indemnified Party shall not be obligated to make such an insurance claim if the Indemnified Party in its reasonable judgment believes that the cost of pursuing such an insurance claim together with any correspondent increase in insurance premiums or other chargebacks to the Indemnified Party would exceed the value of the claim for which the Indemnified Party is seeking indemnification pursuant to this Article 8, and (2) no Indemnified Party shall be required to keep or maintain any particular level of insurance.

 

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(b) Subrogation. Upon the Indemnifying Party’s payment in full of an indemnification claim under this Article 8, such Indemnifying Party shall be subrogated to all rights of the Indemnified Party with respect to the Loss to which such indemnification relates; provided, however, that the Indemnifying Party shall only be subrogated to the extent of any amount paid by it pursuant to this Article 8 in connection with such Loss.

 

Section 8.6 Buyer’s Rights of Setoff. To the extent that Seller Indemnitors owe any amount to the Buyer Indemnitees under this Article 8, and such amount is not paid in accordance with Section 8.4(f), Buyer shall have the right to setoff such amount at Buyer’s election: (a) against any Earnout Payment due to Sellers pursuant to Section 2.3 hereof; (b) the Existing A/R LOC and the Future Claims LOC; or (c) during the twelve months immediately following the Closing Date, against any Buyer Shares that are delivered to Sellers at Closing by canceling such Buyer Shares on Buyer’s stock records (applying the per share price of Buyer Common Stock in effect on the last date that payment was due to Buyer under Section 8.4(f)), in which event Sellers shall return to Buyer the original stock certificate and Buyer shall issue a new certificate for any remaining Buyer Shares not canceled pursuant to the setoff.

 

Section 8.7 Sole Remedy. The indemnity provided for in this Article 8 shall be the sole and exclusive remedy of the parties hereto after the Closing, provided that nothing herein shall limit in any way any such party’s remedies in respect of fraud by the other party in connection herewith or the transactions contemplated hereby or the rights of such party to such equitable remedies as may be available in respect of fraud.

 

ARTICLE 9

MISCELLANEOUS

 

Section 9.1 Arbitration.

 

(a) The parties shall negotiate in good faith to resolve any dispute arising under this Agreement. Any such dispute that remains outstanding after thirty calendar days (which shall be the same thirty days required under Sections 2.3 and 2.5 if the dispute has arisen with respect to either such Section) shall be submitted for decision to a single arbitrator (the “Umpire”) who is an independent accountant, actuary or lawyer and who has not, and whose firm has not, provided material services to either party within the three years immediately preceding the date of the notice requesting arbitration. Notice requesting arbitration, as well as all other notices required or permitted under this Section 9.1, must be in writing and sent in accordance with Section 9.6. For purposes of this Section 9.1, Buyer shall be considered one party, and Sellers (represented by Sellers Representative) shall be considered one party. This Section 9.1 shall not apply to Buyer’s right to seek injunctive relief under Section 5.14.

 

(b) The parties shall undertake in good faith to agree on the Umpire. If the parties cannot so agree within thirty calendar days after either party has given the notice of arbitration as provided above, either party may request the American Arbitration Association in Atlanta, Georgia to designate an Umpire with the qualifications set forth above, who shall preside over the arbitration.

 

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(c) The arbitration shall be conducted expeditiously and confidentially in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as such rules shall be in effect on the date of delivery of the notice requesting arbitration, except to the extent such rules are inconsistent with the express provisions of this Section 9.1.

 

(d) Within thirty calendar days after notice of appointment of the Umpire, the Umpire shall commence the arbitration, and the Umpire and the parties hereto shall use commercially reasonable efforts to conclude the arbitration hearings with such thirty calendar day period. The Umpire shall be relieved of all judicial formality and shall not be bound by the strict rules of procedure and evidence, provided, however, that each party shall be entitled to reasonable discovery in preparing its evidence and arguments. The arbitration shall take place in Atlanta, Georgia. Insofar as the Umpire looks to substantive Law, the Law of Tennessee shall govern. The decision of the Umpire when rendered in writing shall be final and binding. The Umpire is empowered to grant interim relief as he or she may deem appropriate.

 

(e) The Umpire shall render his or her decision, which shall be in writing and state the reasons therefor, within thirty calendar days following the termination of hearings. Judgment upon the award may be entered in any court having jurisdiction thereof. Each party shall jointly and equally bear with the other party the cost of the Umpire. The remaining costs of the arbitration shall be allocated by the Umpire. The Umpire may, at his or her discretion, award such further costs and expenses as he or she considers appropriate, including but not limited to interest and attorneys’ fees. The Umpire shall not award punitive damages under any circumstances.

 

Section 9.2 Entire Agreement; No Third Party Beneficiaries. Except as otherwise expressly provided herein, this Agreement (including Sellers Disclosure Memorandum and the other documents and instruments referred to herein) constitutes the entire agreement between the parties with respect to the transactions contemplated hereby and supersedes all prior arrangements or understandings with respect thereto, written or oral. Nothing in this Agreement, expressed or implied, is intended to confer upon any Person, other than the parties or their respective successors, any rights, remedies, obligations, or liabilities under or by reason of this Agreement.

 

Section 9.3 Amendments. This Agreement may be amended only by a subsequent writing signed by all parties. No course of performance by any party hereto shall be deemed to modify or amend this Agreement unless the same shall be consented to in a writing signed by all parties.

 

Section 9.4 Waivers.

 

(a) Prior to or at the Closing, Buyer shall have the right to waive any default in the performance of any term of this Agreement by Sellers, to waive or extend the time for the compliance or fulfillment by Sellers of any and all of their obligations under this Agreement, and

 

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to waive any or all of the conditions precedent to the obligations of Buyer under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by a duly authorized officer of Buyer.

 

(b) Prior to or at the Closing, Sellers shall have the right to waive any default in the performance of any term of this Agreement by Buyer, to waive or extend the time for the compliance or fulfillment by Buyer of any and all of its obligations under this Agreement, and to waive any or all of the conditions precedent to the obligations of Sellers under this Agreement, except any condition which, if not satisfied, would result in the violation of any Law. No such waiver shall be effective unless in writing signed by Sellers.

 

(c) The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same or any other provision of this Agreement. No waiver of any condition or of the breach of any term contained in this Agreement in one or more instances shall be deemed to be or construed as a further or continuing waiver of such condition or breach or a waiver of any other condition or of the breach of any other term of this Agreement.

 

Section 9.5 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto (whether by operation of Law or otherwise), in whole or in part, without the prior written consent of the other party; provided, however, that Buyer may assign its rights and obligations under this Agreement, in whole or in part, to any wholly owned subsidiary of Buyer without obtaining the prior written consent of Sellers, and provided further that (i) Buyer gives Sellers notice of such assignment, (ii) any such assignment shall not delay the Closing or materially increase the cost to Sellers of consummating the transactions contemplated hereby, and (iii) any such assignment shall not relieve Buyer of its obligations hereunder. Notwithstanding the foregoing, a Seller may assign such Seller’s rights to the Earnout Payments without the consent of Buyer if the assignee is an immediate family member of such Seller, or a trust established for the benefit of an immediate family member of Seller, if such Seller provides Buyer with written notice of the assignment within a reasonable time after the assignment, and if the assignee is bound by the terms of this Agreement, including Section 9.12 below. Subject to the preceding two sentences, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and permitted assigns.

 

Section 9.6 Notices. All notices or other communications that are required or permitted hereunder shall be in writing and shall be delivered by hand, by commercial courier, or by certified mail, postage pre-paid, to the Persons at the addresses set forth below (or at such other address as may be provided from time to time hereunder). Any such notice shall be deemed given when delivered by hand, when delivered by commercial courier, or three Business Days after mailing when sent by certified mail.

 

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If to Vision to:

 

The Vision Insurance Group, LLC

210 Westwood Place, Suite 200

Brentwood, Tennessee 37024-1324

Attention: John C. Russell

Telephone:     (615) 312-2101

Facsimile:       (615) 661-6629

 

with a copy (which shall not constitute notice for purposes of this Agreement) to:

 

Christopher C. Whitson, Esq.

Sherrard & Roe, PLC

424 Church Street, Suite 2000

Nashville, Tennessee 37219-3304

Telephone:     (615) 742-4200

Facsimile:       (615) 742-4539

 

If to Sellers to:

 

John C. Russell

5205 Shaw Court

Brentwood, Tennessee 37027

Telephone:     (615) 377-9954

Facsimile:       (615) 312-2151

 

with a copy (which shall not constitute notice for purposes of this Agreement) to:

 

Christopher C. Whitson, Esq.

Sherrard & Roe, PLC

424 Church Street, Suite 2000

Nashville, Tennessee 37219-3304

Telephone:     (615) 742-4200

Facsimile:       (615) 742-4539

 

If to Buyer:

 

Alfa Corporation

2108 East South Boulevard

Montgomery, Alabama 36191-0001

Attention: Angela Cooner, Esq.

Telephone:     334-613-4508

Facsimile:       334-288-0905

 

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with a copy (which shall not constitute notice for purposes of this Agreement) to:

 

Alston & Bird LLP

1201 West Peachtree Street

Atlanta, Georgia 30309-3424

Attention: Susan J. Wilson

Telephone:     (404) 881-7974

Facsimile:        (404) 881-4777

 

Section 9.7 Governing Law. Notwithstanding the place where this Agreement may be executed by any of the parties, the parties expressly agree that this Agreement shall in all respects be governed by, and construed in accordance with, the internal Laws of the State of Tennessee, without regard for its conflicts of laws principles.

 

Section 9.8 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument.

 

Section 9.9 Captions. The captions contained in this Agreement are for reference purposes only and are not part of this Agreement. All references herein to articles, sections and exhibits shall be deemed references to such parts of this Agreement, unless the context shall otherwise require.

 

Section 9.10 Interpretations.

 

(a) For purposes of this Agreement, the words “hereof,” “herein,” “hereby” and other words of similar import refer to this Agreement as a whole unless otherwise indicated. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation.” Whenever the singular is used herein, the same shall include the plural, and whenever the plural is used herein, the same shall include the singular, where appropriate. All dollar references in this Agreement are to the currency of the United States.

 

(b) No uncertainty or ambiguity herein shall be construed or resolved against any party, whether under any rule of construction or otherwise. No party to this Agreement shall be considered the draftsman. The parties acknowledge and agree that this Agreement has been reviewed, negotiated and accepted by all parties and their attorneys and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto.

 

Section 9.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable.

 

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Section 9.12 Sellers Representative. Sellers Representative shall represent the interests of all Sellers hereunder and shall handle all issues pursuant to this Agreement on behalf of all Sellers, including acting on behalf of all Sellers in any disputes with Buyer, and no Seller shall have any right to bring an action against Buyer unless such action is pursued through Sellers Representative.

 

[Signatures Begin on Next Page]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

 

ALFA CORPORATION

 

By:  

/s/ Jerry A. Newby


Name:   Jerry A. Newby
Title:   President and Chief Executive Officer

JOHN CHARLES RUSSELL

   

/s/ John Charles Russell


CAROL LYNN RUSSELL

   

/s/ Carol Lynn Russell


JOHN CHARLES RUSSELL, TRUSTEE OF THE JOHN CHARLES RUSSELL 2004 ANNUITY TRUST NO. 1
   

/s/ John Charles Russell, Trustee


JOHN CHARLES RUSSELL, TRUSTEE OF THE JOHN CHARLES RUSSELL 2004 ANNUITY TRUST NO. 2
   

/s/ John Charles Russell, Trustee


 

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JOHN CHARLES RUSSELL, TRUSTEE OF THE JOHN CHARLES RUSSELL 2004 ANNUITY TRUST NO. 3
   

/s/ John Charles Russell, Trustee


THE COMMUNITY FOUNDATION OF MIDDLE TENNESSEE, INC.
By:  

/s/ Robin Satyshur


Name:   Robin Satyshur
Title:   Professional Svcs Liaison
THE VISION INSURANCE GROUP, LLC
By:  

/s/ John Charles Russell


    John Charles Russell
    President

 

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EX-10.2 3 dex102.htm STOCK OPTION AGREEMENT Stock Option Agreement

Exhibit 10.2

 

STOCK OPTION AGREEMENT

 

UNDER

 

THE ALFA CORPORATION

 

STOCK INCENTIVE PLAN

 


 

***

 

TO:

 

Name of Optionee

 

On                     , The Board of Directors of Alfa (the “Board”) approved the issuance to you of options (“Options”) to purchase shares of ALFA Common Stock under the ALFA CORPORATION 1993 STOCK INCENTIVE PLAN, as said Plan may be subsequently amended and restated, (the “Plan”).

 

The Options are granted subject to all terms and conditions of the Plan (a copy of the Plan is on file in the Alfa Human Resource Department and can be reviewed or obtained upon request) and the following additional terms and conditions:

 

1. Nonqualified Stock Options. The options granted to you hereby are Nonqualified Stock Options as defined in the Plan. Under the terms of the grant, you may purchase such shares at the times and for the price specified below.

 

2. Number of Shares Subject to Option. You are granted under this Agreement Options to purchase shares of ALFA Common Stock (subject to adjustment as provided in Section 8 of the Plan).

 

3. Price. The option price for the ALFA Common Stock is the closing bid price quoted on the NASDAQ National Market System on the date of the approval of the grant by the Board of Directors, i.e.,                     per share.


4. Three-Year Accrual of Rights to Exercise Options: Options Exercisable only as to Accrued Rights of Exercise. The Options granted to you and evidenced by this Agreement may not be exercised until the right to exercise accrues hereunder. The right to exercise shall accrue in three annual, cumulative installments, as follows:

 

(a) The number of Options granted hereby shall be divided by three to determine the maximum number of shares as to which the right of exercise shall accrue annually. If such division should result in fractional shares, such fractions shall be accumulated into a whole share and assigned to the first annual accrual amount.

 

(b) The right to purchase one-third (1/3) of the optioned shares shall accrue on                             , and the Option may be exercised as to any or all of such shares at any time on or after that date until the expiration date of the Options as specified herein.

 

(c) The right to purchase an additional one-third (1/3) of the optioned shares shall accrue on                             , and the Option may be exercised as to any or all of such shares at any time on or after that date until the expiration date of the Options as specified herein.

 

(d) The right to purchase the remaining one-third (1/3) of the optioned shares shall accrue on                             , and the Option may be exercised as to any or all of such shares at any time on or after that date until the expiration date of the Options as specified herein.

 

After                             , all or any Options evidenced by this Agreement may be exercised in full until date of expiration as provided herein. Not withstanding the above, all options shall vest immediately upon the death of the Grantee.

 

5. Expiration Date of Options. Your unexercised Options will expire at the earlier of (a) the close of business on                               , or (b) the date determined under Section 6(h) of the Plan. Upon expiration of your Options, your right to exercise will terminate, and you will have no rights in any of the shares reserved for such Options.

 

6. Manner of Exercise of Options. Options must be exercised in the manner provided in Section 6(e) of the Plan. Appropriate forms for exercise of Options may be obtained from the Senior Vice President of Human Resources of ALFA.


7. Payment of Shares upon Exercise of Options. No shares will be issued to you upon exercise until the shares are fully paid and ALFA’s withholding tax obligations have been provided for as required herein and in Section 6(g) of the Plan, as more fully provided in Paragraph 8 below. Payment for the shares of Stock purchased upon exercise of Options may be made by any of the methods specified in Section 6(f) of the Plan, provided, however, that if shares of previously owned Stock shall be anticipated to be used as a medium of payment, the use of such previously owned shares for that purpose shall be subject to limitations on the use of previously owned stock as ALFA shall deem necessary or appropriate. If you should anticipate the use of previously owned shares as a medium of payment, contact the Senior Vice President of Human Resources of ALFA prior to exercise for applicable restrictions and prohibitions.

 

8. Withholding Taxes. Any applicable federal or state withholding taxes required to be withheld and paid by ALFA under federal, state or local laws shall be paid or otherwise provided for in the manner provided in Section 6(g) of the plan. If you desire to pay or provide for all or a part of your withholding tax obligation by the surrender and cancellation of Options or the delivery of previously owned shares of Stock, you must notify The Senior Vice President of Human Resources of ALFA prior to your exercise for instructions upon making the appropriate election provided therein (which election is subject to the approval of the Compensation Committee of the Board of Directors of ALFA).

 

9. Options Nontransferable. The Options granted hereby are nontransferable except as provided in Section 6(i) of the Plan.

 

10. Miscellaneous.

 

(a) Options Subject to All Other Applicable Terms and Conditions of the Plan.

 

The Options evidenced hereby are subject to all other stated terms and conditions of the Plan unless those terms and conditions which are discretionary to the Board of Directors or Committee (as said term is defined in the Plan) are specifically addressed in this Agreement.

 

(b) Reserved Right of Interpretation and Administration. This Agreement and the Options evidenced hereby, as well as the Plan, are subject to the reserved rights of administration and interpretation contained in the Plan.


IN WITNESS WHEREOF the undersigned Grantee of Options under the PLAN and ALFA CORPORATION have entered into this Stock Option Agreement on and as of the date set forth opposite the Grantee’s name and signature below.

 

   

 


                Signature of Grantee
Date:                    , 200      

 


                Printed or Typed Name of Grantee
    ALFA CORPORATION
Date:                    , 200            
Attest:   By:  

 


        Jerry A. Newby
        Chairman and Chief Executive Officer

 


       

H. Al Scott

Secretary

       
EX-11 4 dex11.htm STATEMENT OF COMPUTATION OF PER SHARE EARNINGS Statement of Computation of Per Share Earnings

Exhibit 11

 

ALFA CORPORATION

STATEMENT OF COMPUTATION OF PER SHARE EARNINGS

 

The following computations set forth the calculation of basic and diluted net income per common share and common share equivalents for the nine-month and three-month periods ended September 30, 2004 and 2003:

 

    

Nine Months Ended

September 30,


   Three Months Ended
September 30,


     2004

   2003

   2004

   2003

Net income

   $ 66,763,267    $ 56,698,505    $ 20,720,249    $ 18,781,056
    

  

  

  

Weighted average number of common shares outstanding

     80,024,581      79,645,126      79,938,616      79,991,986
    

  

  

  

Net income per common share - Basic

   $ 0.83    $ 0.71    $ 0.26    $ 0.23
    

  

  

  

    

Nine Months Ended

September 30,


   Three Months Ended
September 30,


     2004

   2003

   2004

   2003

Net income

   $ 66,763,267    $ 56,698,505    $ 20,720,249    $ 18,781,056
    

  

  

  

Weighted average number of common shares outstanding

     80,024,581      79,645,126      79,938,616      79,991,986

Common share equivalents resulting from:

                           

Dilutive stock options

     501,422      596,708      458,736      595,739
    

  

  

  

Adjusted weighted average number of common and common equivalent shares outstanding

     80,526,003      80,241,834      80,397,352      80,587,725
    

  

  

  

Net income per common share - Diluted

   $ 0.83    $ 0.71    $ 0.26    $ 0.23
    

  

  

  

EX-15 5 dex15.htm LETTER RE. UNAUDITED INTERIM FINANCIAL INFORMATION Letter re. Unaudited Interim Financial Information

Exhibit 15

 

Letter Regarding Unaudited

Interim Financial Information

 

Alfa Corporation

Montgomery, Alabama

 

Ladies and Gentlemen:

 

Re: Registration Statement No. 33-83134 on Form S-3 and 33-77916 and 33-76460 on Form S-8

 

With respect to the subject registration statements, we acknowledge our awareness of the use therein of our report dated October 20, 2004, related to our review of interim financial information.

 

Pursuant to Rule 436 under the Securities Act of 1933 (the Act), our report dated October 20, 2004 related to our review of interim financial information is not considered part of a registration statement prepared or certified by an accountant, or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.

 

KPMG LLP

 

Birmingham, Alabama

November 9, 2004

EX-31.1 6 dex311.htm 302 CERTIFICATION, CEO 302 Certification, CEO

Exhibit 31.1

 

CERTIFICATION

 

I, Jerry A. Newby certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Alfa Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004

 

/S/ Jerry A. Newby


Jerry A. Newby

Chief Executive Officer

EX-31.2 7 dex312.htm 302 CERTIFICATION, CFO 302 Certification, CFO

Exhibit 31.2

 

CERTIFICATION

 

I, Stephen G. Rutledge, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Alfa Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2004

 

/S/ Stephen G. Rutledge


Stephen G. Rutledge
Chief Financial Officer
EX-32.1 8 dex321.htm 906 CERTIFICATION, CEO 906 Certification, CEO

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Exhibit 32.1 Certification of Chief Executive Officer

 

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Alfa Corporation (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: 11/9/04      

/S/ Jerry A. Newby


    Name:   Jerry A. Newby
    Title:   Chief Executive Officer
EX-32.2 9 dex322.htm 906 CERTIFICATION, CFO 906 Certification, CFO

EXHIBIT 32.2

 

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

Exhibit 32.2 Certification of Chief Financial Officer

 

Pursuant to 18 U.S.C. § 1350, the undersigned officer of Alfa Corporation (the “Company”), hereby certifies, to such officer’s knowledge, that the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2004 (the “Report”) fully complies with the requirements of Section 13(a) or 15 (d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: 11/9/04      

/S/ Stephen G. Rutledge


    Name:   Stephen G. Rutledge
    Title:   Chief Financial Officer
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