-----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, A0Xp+22yQIOHuI5eEnmbHrSBOHsBH38+uj+JTg+FKqJ9jgKhwSwbbjfaHZKJtV2T 6xF8kwrLE9bwMiHfhrQqyg== 0000950144-03-011793.txt : 20031024 0000950144-03-011793.hdr.sgml : 20031024 20031024164755 ACCESSION NUMBER: 0000950144-03-011793 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20031024 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROASSURANCE CORP CENTRAL INDEX KEY: 0001127703 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 631261433 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-109972 FILM NUMBER: 03956845 BUSINESS ADDRESS: STREET 1: 100 BROOKWOOD PLACE CITY: BIRMINGHAM STATE: AL ZIP: 35209 BUSINESS PHONE: 2058774400 S-3 1 g85376sv3.txt PROASSURANCE CORPORATION - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- PROASSURANCE CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 6631 63-1261433 (State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer Incorporation or Organization) Classification Code Number) Identification No.)
100 BROOKWOOD PLACE BIRMINGHAM, ALABAMA 35209 (205) 877-4400 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) A. DERRILL CROWE 100 BROOKWOOD PLACE BIRMINGHAM, ALABAMA 35209 (205) 877-4400 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) COPIES TO: JACK P. STEPHENSON, JR., ESQ. BRICE T. VORAN, ESQ. BRUCE A. PARSONS, ESQ. PAUL RIVETT, ESQ. BURR & FORMAN LLP SHEARMAN & STERLING LLP 420 NORTH 20TH STREET, SUITE 3100 COMMERCE COURT WEST BIRMINGHAM, ALABAMA 35203 199 BAY STREET, SUITE 4405 (205) 458-5201 TORONTO, ONTARIO M5L 1E8 (416) 360-8484
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITY TO THE PUBLIC: From time to time after the effective date of this Registration Statement as determined by market conditions. If the only securities being registered on this form are being registered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, please check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE - --------------------------------------------------------------------------------------------------------------------------------- 3.9% Convertible Senior Debentures due 2023..................................... $107,600,000(1) $1,023.75(2) $110,155,500 $8,911.94(3) - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value per share.... 2,572,038 shares(4) $--(5) $--(5) $--(5) - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
(1) Amount represents the aggregate principal amount of Debentures that were originally issued by the Registrant on July 7, 2003 and July 16, 2003. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(c) under the Securities Act, based upon the average of the bid and asked prices for the Debentures on October 21, 2003. This estimate excludes accrued interest and distributions, if any. (3) Pursuant to Rule 457(p), the filing fee has been offset against the filing fee previously paid by the registrant in the amount of $20,747.23 (net after prior offsets under Rule 457(p)) with respect to unsold shares of common stock registered under the registrant's registration statement on Form S-4 (file no. 333-49378) as originally filed on November 6, 2000, as amended by Post-Effective Amendment No. 2, filed on January 23, 2002, to reflect the unsold shares. (4) Reflects the number of shares of common stock currently issuable upon conversion of the Debentures being registered hereunder at the initial conversion rate of 23.9037 shares of common stock per $1,000 principle amount at maturity of the Debentures. In addition, pursuant to Rule 416 under the Securities Act of 1933, as amended, this registration statement also registers such additional number of shares of the Registrant's common stock as may become deliverable upon conversion of the Debentures to prevent dilution resulting from stock splits, stock dividends and similar transactions. (5) No separate consideration will be received for the shares of common stock issuable upon conversion of the Debentures; therefore, no registration fee is required pursuant to Rule 457(i) under the Securities Act. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT NOTICE. THE SELLING SECURITYHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND THE SELLING SECURITYHOLDERS ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE OF THESE SECURITIES IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED OCTOBER 24, 2003. PROSPECTUS $107,600,000 (PROASSURANCE LOGO) PROASSURANCE CORPORATION 3.9% CONVERTIBLE SENIOR DEBENTURES DUE 2023 AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE CONVERTIBLE SENIOR DEBENTURES --------------------- This prospectus relates to $107,600,000 aggregate principal amount of 3.9% Convertible Senior Debentures due 2023 of ProAssurance Corporation which includes $100,000,000 aggregate principal amount of Debentures issued in a private placement on July 7, 2003 and $7,600,000 aggregate principal amount of Debentures that were issued pursuant to the exercise of an overallotment option on July 16, 2003. The Debentures may be sold from time to time by or on behalf of the selling security holders named in this prospectus or in supplements to this prospectus. This prospectus also relates to 2,572,038 shares of our common stock, par value $0.01 per share, issuable upon conversion of the Debentures held by certain selling securityholders, plus such additional indeterminate number of shares as may become issuable upon conversion of the Debentures by reason of adjustment to the conversion rate in certain circumstances. The selling securityholders may sell all or a portion of the Debentures in market transactions, negotiated transactions or otherwise and at prices which will be determined by the prevailing market price for the Debentures or in negotiated transactions. The selling securityholders also may sell all or a portion of the shares of common stock from time to time on the New York Stock Exchange, in negotiated transactions or otherwise, and at prices which will be determined by the prevailing market price for the shares or in negotiated transactions. The selling securityholders will receive all of the proceeds from the sale of the Debentures and the common stock. We will not receive any proceeds from the sale of Debentures or common stock by the selling securityholders. We will pay interest on the Debentures on June 30 and December 30 of each year, beginning December 30, 2003. In addition, we will pay contingent interest during any six-month period from June 30 to December 29 and from December 30 to June 29, commencing with the six-month period beginning June 30, 2008, if the average market price of a Debenture for the five trading days ending on the second trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the Debentures. The Debentures are our senior unsecured obligations and will rank equally with our other existing and future obligations that are unsecured and unsubordinated. Each $1,000 principal amount of the Debentures will be convertible at your option, into 23.9037 shares of our common stock, par value $0.01 per share (subject to adjustment as described in this prospectus), at any time prior to stated maturity, if (i) the sale price of our common stock reaches specified thresholds, (ii) the Debentures are called for redemption, or (iii) specified corporate transactions have occurred. Upon conversion, we will have the right to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock. The initial conversion rate of 23.9037 shares for each $1,000 principal amount of Debentures is equivalent to an initial conversion price of $41.83 per share of our common stock. Shares of our common stock are listed on the New York Stock Exchange under the symbol "PRA." The last reported sale price of our common stock on October 21, 2003 was $29.48 per share. The Debentures were initially sold to qualified institutional buyers and are currently trading in the PORTAL market. The Debentures sold by means of this prospectus will not be eligible for trading in the PORTAL market. We do not intend to list the Debentures for trading on any national or other securities exchange or on the Nasdaq National Market. We may redeem some or all of the Debentures on or after July 7, 2008. You may require us to repurchase all or a portion of your Debentures on June 30, 2008, June 30, 2013 and June 30, 2018 or, subject to specified exceptions, upon our change of control (as described in this prospectus). In either event, we may choose to pay the repurchase price in cash or shares of our common stock or a combination of cash and shares of our common stock. Under the terms of the indenture, we and each holder of the Debentures agree, for U.S. federal income tax purposes, to treat the Debentures as indebtedness that is subject to the regulations governing contingent payment debt instruments. See "Certain U.S. Federal Income Tax Consequences." --------------------- INVESTING IN THE DEBENTURES INVOLVES RISKS, SOME OF WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 15 OF THIS PROSPECTUS. --------------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. --------------------- The date of this prospectus is [ ], 2003. TABLE OF CONTENTS WHERE YOU CAN FIND MORE INFORMATION......................... ii INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. iii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... iii SUMMARY..................................................... 1 RISK FACTORS................................................ 15 CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES............. 24 USE OF PROCEEDS............................................. 24 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY............. 25 CAPITALIZATION.............................................. 26 DESCRIPTION OF THE DEBENTURES............................... 27 DESCRIPTION OF CAPITAL STOCK................................ 48 CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES................ 49 CONSEQUENCES TO U.S. HOLDERS................................ 50 CONSEQUENCES TO NON-U.S. HOLDERS............................ 54 SELLING SECURITYHOLDERS..................................... 57 PLAN OF DISTRIBUTION........................................ 59 LEGAL MATTERS............................................... 62 EXPERTS..................................................... 62
--------------------- You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any documents incorporated by reference is accurate only as of the date on the front cover of the applicable document. Our business, financial condition, results of operations and prospects may have changed since that date. This prospectus is based on information provided by us and by other sources that we believe are reliable. We cannot assure you that any information provided by other sources is accurate or complete. This prospectus summarizes certain documents and other information and we refer you to them for a more complete understanding of what we discuss in this prospectus. In making an investment decision, you must rely on your own examination of our company and the terms of this offering and the Debentures, including the merits and risks involved. We are not making any representation to any purchaser of the Debentures regarding the legality of an investment in the Debentures by such purchaser under any legal investment or similar laws or regulations. You should not consider any information in this prospectus to be legal, business or tax advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the Debentures. References in this prospectus to "ProAssurance," "we," "us" and "our" refer to ProAssurance Corporation, an insurance holding company incorporated in Delaware, and its subsidiaries, unless the context otherwise requires. WHERE YOU CAN FIND MORE INFORMATION We are subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended, under which we file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy this information at ii the Public Reference Room of the SEC, at 450 Fifth Street, N.W., Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information about the Public Reference Room. The SEC also maintains an internet website that contains reports, proxy statements and other information about issuers that file electronically with the SEC. The address of that site is www.sec.gov. We also maintain copies of our recent SEC reports and other current information regarding ProAssurance at our website at www.proassurance.com. You can also inspect reports, proxy statements and other information about ProAssurance at the offices of the New York Stock Exchange, 20 Broad Street, New York, NY 10005. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE We are "incorporating by reference" into this prospectus certain information that we file with the SEC, which means that we are disclosing important information to you by referring you to those documents. The information incorporated by reference is deemed to be part of this prospectus, except for any information superseded by information contained directly in this prospectus and superseded by information in subsequent reports. This prospectus incorporates by reference the documents set forth below that we have previously filed with the SEC. These documents contain important information about us and our finances.
PROASSURANCE SEC FILINGS (FILE NO. 001-16533) PERIOD - --------------------------------------------- ------ Annual Report on Form 10-K................. Year Ended December 31, 2002 2003 Quarterly Reports on Form 10-Q........ Quarterly Periods Ended March 31, 2003, and June 30, 2003
All documents that we file with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act from the date of this prospectus to the end of the offering (other than current reports forwarded to the SEC) under this prospectus shall also be deemed to be incorporated herein by reference and will automatically update information included in or previously incorporated by reference in this prospectus. You may request a copy of these filings, at no cost, by writing or calling us at the following address or telephone number: Frank B. O'Neil Senior Vice President of Corporate Communications and Investor Relations ProAssurance Corporation 100 Brookwood Place Birmingham, Alabama 35209 Tel: (205) 877-4400 Exhibits to the filings will not be sent, however, unless those exhibits have specifically been incorporated by reference in that filing. Information contained on our website at www.proassurance.com is not intended to be incorporated by reference in this prospectus and you should not consider that information a part of this prospectus. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus and the documents incorporated by reference herein contain statements concerning our future results and performance and other matters that are "forward-looking" statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions are intended, but are not the exclusive means, to identify these forward-looking statements. These forward-looking statements include among other things statements concerning: liquidity and capital requirements, return on iii equity, financial ratios, net income, premiums, losses and loss reserves, premium rates and retention of current business, competition and market conditions, the expansion of product lines, the development or acquisition of business in new geographical areas, the availability of acceptable reinsurance, actions by regulators and rating agencies, compliance with our credit agreement, payment of dividends, and other matters. These forward-looking statements are based upon our estimates and anticipation of future events that are subject to certain risks and uncertainties that could cause actual results to vary materially from historical or expected results described in the forward-looking statements. These risks and uncertainties include, but are not limited to those listed in this prospectus under the heading "Risk Factors." Due to such risks and uncertainties, you are urged not to place undue reliance on forward-looking statements. Risks that could adversely affect our operations or cause actual results to differ materially from anticipated results include, but are not limited to, the following: - underwriting losses on the risks we insure are higher or lower than expected; - unexpected changes in loss trends and reserving assumptions which might require the reevaluation of the liability for loss and loss adjustment expenses, thus resulting in an increase or decrease in the liability and a corresponding adjustment to earnings; - our ability to retain current business, acquire new business, expand product lines and a variety of other factors affecting daily operations such as, but not limited to, economic, legal, competitive and market conditions which may be beyond our control and are thus difficult or impossible to predict; - changes in the interest rate environment and/or the securities markets that adversely impact the fair value of our investments or our income; - inability on our part to achieve continued growth through expansion into other states or through acquisitions or business combinations; - general economic conditions that are worse than anticipated; - inability on our part to obtain regulatory approval of, or to implement, premium rate increases; - the effects of weather-related events; - changes in the legal system, including retroactively applied decisions that affect the frequency or severity of claims; - a verdict against one of our insureds that is in excess of policy limits could expose us to bad faith litigation by the insured; - significantly increased competition among insurance providers and related pricing weaknesses in some markets; - the loss of an agent or agents who produce a significant portion of our business; - changes in the availability, cost, quality or collectibility of reinsurance; - changes to our ratings by rating agencies; - regulatory and legislative actions or decisions that adversely affect us; and - our ability to utilize loss carryforwards and other deferred tax assets. All forward-looking statements included in this document are based upon information available to us on the date hereof, and we undertake no obligation, other than as may be required under the federal securities laws, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We do not assume responsibility for the accuracy and completeness of the forward-looking statements. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under "Risk Factors." iv We caution you that these risk factors may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors, nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in Section 27A of the Securities Act. You should carefully read this prospectus and the documents incorporated by reference in their entirety. They contain information that you should consider when making your investment decision. v SUMMARY This summary highlights information contained in other parts of this prospectus or incorporated by reference herein. Because this is a summary, it may not contain all the information that may be important to you. You should read this summary together with the more detailed information in our financial statements and accompanying notes contained elsewhere in this prospectus and the other information incorporated by reference herein. Figures presented in this prospectus include the results of Professionals Group from June 27, 2001, the date of the consolidation with Medical Assurance, and, prior to that date, of Medical Assurance, unless otherwise expressly stated, which limits the comparability of certain financial information. Unless otherwise indicated, all information in this prospectus gives no effect to the exercise of outstanding options to purchase shares of our common stock and assumes all share numbers are as of June 30, 2003. PROASSURANCE CORPORATION OVERVIEW We are a holding company for specialty property and casualty insurance companies focused on the professional liability and the personal automobile insurance markets. We have a regional orientation, applying a focused underwriting strategy to local markets where we have built a strong reputation among our customers and producers. We are the fourth largest writer of medical professional liability insurance in the United States based on direct premiums written in 2002. We were formed to effect the consolidation of Medical Assurance, Inc. and Professionals Group, Inc. in June 2001, but our predecessor company, Medical Assurance, has been in operation since 1977. We conduct our business through two operating segments, each of which maintains a strong position in its local markets: - Our professional liability segment, which represents our commercial lines business, primarily focuses on providing medical professional liability insurance. We provide protection against claims arising out of the death, injury or disablement of a person resulting from the negligence or other misconduct of medical and other healthcare professionals. - Our personal lines segment primarily offers personal automobile, and to a lesser extent, homeowners, boat and umbrella insurance to teachers, administrators, college professors and other members of the educational community and their families in Michigan. Our professional liability segment represented 72.6% of our gross premiums written for the year ended December 31, 2002, while our personal lines represented 27.4% for the same year. Approximately 95.7% of our business related to casualty coverages, including professional liability and automobile coverages, and 4.3% to property coverages primarily through homeowners insurance, as measured by gross premiums written for the year ended December 31, 2002. We believe we do not have any exposure to asbestos claims which are currently prevalent in the insurance industry. By concentrating on specialty markets where customers have specialized needs, we seek to provide value added solutions through our underwriting expertise and our emphasis on strong customer service. Our regional presence allows us to maintain active relationships with our customers and be more responsive to their needs. We seek to maintain a strong financial position to protect our customers. We believe these factors have allowed us to establish a leading position in our markets, enabling us to compete on a basis other than just price. Professional liability insurance is generally referred to as a "long tail" line of business. This means there is typically a long period of time between collecting the premium for insuring a risk and the ultimate payment of losses, typically exceeding five years. This allows us to invest the premiums we collect until we pay losses which results in a higher level of invested assets and investment income as compared to other lines of property and casualty business. This is in contrast to personal lines insurance, which is generally 1 referred to as "short tail," due to shorter time periods between insuring the risk and the ultimate payment of claims. As a result, there is less time to invest premiums collected. Professional Liability. Our customers include physicians, hospitals, dentists and other healthcare providers. We distinguish ourselves through individual risk selection by applying a rigorous and analytical underwriting process. We focus on physicians who are sole practitioners or who practice in small groups, who we believe exhibit greater customer loyalty and provide us a better opportunity to achieve an underwriting profit. We estimate that physicians and dentists represented approximately 89% of our gross professional liability premiums written in 2002. On a limited basis, we provide coverage for hospitals, primarily in Alabama and Indiana where we have a strong understanding of the liability and operating environment. While we are licensed in 45 states, we currently write insurance primarily in 19 states, mainly in the southeast and midwest, with Alabama, Florida, Ohio, Indiana and Michigan representing our five largest states based on gross premiums written in 2002. We conduct our professional liability business through our insurance subsidiaries, The Medical Assurance Company, ProNational Insurance Company, Medical Assurance of West Virginia, and Red Mountain Casualty Insurance Company. We operate through our home office and 12 regional offices, allowing us to better control our underwriting and claims process, respond to local market conditions and more effectively serve our customers and producers. In Alabama, we rely solely on direct marketing, and in Florida and Missouri direct marketing accounts for a majority of our business. We use independent agents to market our professional liability insurance products in other states. We believe our size, financial strength and flexibility of distribution differentiates us from our competitors. Personal Lines. We conduct our personal lines business through our insurance subsidiary, MEEMIC Insurance Company. We believe our focus on the educational community provides better than average risk-selection, which contributes to our historically profitable underwriting results. We distribute our products directly to insureds through a network of captive agents who are primarily current and former teachers, administrators and other educational employees. For the year ended December 31, 2002, MEEMIC reported a statutory combined ratio of 90.3% as compared to 104.8% for the personal lines insurance industry over the same period, according to data published by A.M. Best. For the five years ended December 31, 2002, MEEMIC reported an average statutory combined ratio of 92.4% versus an average of 106.3% for the personal lines insurance industry over the same period, according to information reported by A.M. Best. For the year ended December 31, 2002, MEEMIC reported gross premiums written of $174.4 million, which represented a compounded annual growth rate of 10.4% for the five years then ended. Our senior management team is led by A. Derrill Crowe, M.D., our Chairman and Chief Executive Officer, and Victor T. Adamo, Esq., our President and Chief Operating Officer. Dr. Crowe has acted as the Chief Executive Officer of Medical Assurance since its founding in 1977. He has applied a hands-on management style in developing our underwriting and claims strategies and was instrumental in establishing us as a leading professional liability specialist. Mr. Adamo has held various positions with Professionals Group since 1985 and as its president was largely responsible for building it into a successful regional professional liability company. Dr. Crowe practiced medicine as his principal occupation for more than 25 years and Mr. Adamo was in the private practice of law for 10 years, providing them with knowledge of medical and legal issues that are critical to our insurance operations. We also have a knowledgeable and experienced management team with established track records in building and managing successful insurance operations. In total, our senior management team has average experience in the insurance industry of 23 years. ProAssurance Corporation was formed as a holding company for Medical Assurance, Inc., in connection with its acquisition of Professionals Group, Inc. in June 2001. Medical Assurance was founded by physicians as a mutual company in Alabama in 1977 and demutualized into a public company in 1991. From its initial public offering in September 1991, to June 27, 2001, Medical Assurance produced a compounded annual return of 14.6% for its common stockholders. Professionals Group was founded as Physicians Insurance Company of Michigan in 1980 to assume the business of the Brown-McNeeley 2 Fund, which was founded by the State of Michigan in 1975. From the first date of trading on NASDAQ in June 1993 through June 27, 2001, Professionals Group produced a compounded annual return of 15.1% for its common stockholders. MEEMIC's insurance subsidiary was founded as a mutual company by Michigan teachers in 1950. Professionals Group became affiliated with MEEMIC in 1997 and acquired majority ownership through transactions relating to MEEMIC's demutualization in July 1999. Our executive offices are located at 100 Brookwood Place, Birmingham, Alabama 35209, and our telephone number is (205) 877-4400. CORPORATE STRATEGY Our objective is to build value for our stockholders through superior underwriting of classes of business in which we have a comprehensive understanding and which offer us the opportunity to generate competitive returns on capital. We target an average return on equity of 12% to 14% over the long term. Over the five years ending December 31, 2002, however, we achieved an average return on equity of 8.6%, with a high of 15.9% in 1998 and a low of 2.3% in 2002. The major elements of our strategy are: ADHERE TO A STRICT UNDERWRITING PHILOSOPHY. We emphasize disciplined underwriting and do not manage our business to achieve a certain level of premium growth or market share. In our professional liability business, we apply our local knowledge to individual risk selection to determine the appropriate price based on our assessment of the specific characteristics of each risk. We seek to obtain our principal objective of attracting and retaining high quality business by focusing on small groups and sole practitioners who we believe are more receptive to our service intensive approach and are more likely to remain with us in times of price based competition. In our personal lines business, we target the educational community, which we believe provides a stable and predictable group of risks. We apply our underwriting expertise through our regional offices while adhering to a centrally controlled underwriting philosophy. We continually monitor market conditions to identify potentially negative trends that may require corrective action in our prices and underwriting criteria. AGGRESSIVELY MANAGE POLICYHOLDER CLAIMS. In addition to prudent risk selection, we seek to control our underwriting results through effective claims management. We investigate each professional liability claim and have fostered a strong culture of aggressively defending those claims that we believe have no merit. We manage these claims at the local level, tailoring claims handling to the legal climate of each state, which we believe differentiates us from national writers. Although this approach contributes to higher expenses in managing our claims compared to other insurers, we believe it contributes to lower overall costs, and results in greater customer loyalty. In our personal lines business, we seek to quickly and efficiently settle claims through an established network of auto repair shops and other repair facilities, focusing on minimizing the cost of handling each claim. OPERATE THROUGH REGIONAL OFFICES IN LOCAL MARKETS. By concentrating on specialty markets where customers have specialized needs, we seek to provide value added solutions through our underwriting expertise and our emphasis on strong customer service. Through our regional underwriting and claims office structure, we are able to gain a strong understanding of local market conditions and efficiently adapt our underwriting and claims strategies to regional conditions. Our regional presence allows us to maintain active relationships with our customers and be more responsive to their needs. It also allows us to maintain a comprehensive understanding of the legal environment and skills of the attorneys in each region, allowing us to better pursue our aggressive claims handling philosophy. Our local offices increase our visibility within the community and among our customers and producers, enhancing our ability to make better risk selection through informed underwriting. We believe these factors have allowed us to establish a leading position in our markets, enabling us to compete on a basis other than just price. 3 EXPAND OUR POSITION IN REGIONAL MARKETS. Our goal is to build upon our position as a leading writer of professional liability and personal lines insurance and expand within a defined geographic area, while maintaining our commitment to disciplined underwriting and aggressive claims management. The withdrawal and reduced capacity of several competitors in the medical professional liability market has provided significant new business opportunities. We believe that our strong reputation in our regional markets, combined with our financial strength, strong customer service and proven ability to manage claims, should enable us to profitably expand our position in select states. In our personal lines business, we estimate that we currently insure approximately 23% of educational professionals in Michigan. Through the appointment of additional agents and broadening our relationships with educational institutions, we intend to increase our penetration of the educational community. PURSUE CONSOLIDATING ACQUISITIONS. We have successfully acquired and integrated companies and books of business in the past and believe our financial size and strength make us an attractive acquirer. We continually evaluate opportunities to acquire professional liability companies or books of business that leverage our core underwriting and claims expertise. We believe that higher claims costs on historical business and capacity constraints may create disruption among professional liability writers, thereby providing acquisition opportunities. MAINTAIN OUR FINANCIAL STRENGTH AND SECURITY. We have sustained our financial stability during difficult market conditions through responsible pricing and loss reserving practices. We are committed to maintaining prudent operating and financial leverage and conservatively investing our assets. We recognize the importance of our "A-" (Excellent) A.M. Best rating to our customers and producers and intend to manage our business to protect our financial security. GROWTH OPPORTUNITIES AND OUTLOOK We expect to achieve our growth primarily through (i) the withdrawal of competition from actively writing business in certain states, (ii) increased prices in our professional liability business, and (iii) expansion of our personal lines business in Michigan. We believe we are viewed as a market leader because of our financial strength and stability, and our ability to deliver excellent service at the local level. This reputation allows us to take advantage of marketing conditions that are improving as price increases are implemented and earned. Our stability also makes us an attractive insurer in light of the highly publicized insolvencies in our industry, as well as regulatory actions taken against several former competitors. We expect the growth of our professional liability business will be primarily generated through increased pricing across our portfolio. In 2002, we achieved average gross price increases of approximately 28% on renewal business across our professional liability business (weighted by premium volume). We have implemented and we plan to continue to implement rate increases based on loss trends, but our ability to implement rate increases is subject to regulatory approval. Further, we do not expect our premium growth to reflect the full amount of rate increases because retention of our insureds may be reduced by higher rates and because we are in the process of converting occurrence coverage to claims made coverage in certain states and first year claims made coverage has a significantly lower premium than occurrence coverage due to lower loss exposure. We expect our future growth will also be supported by controlled expansion in states where we have recently commenced writing business but have little or no presence. These states include Arkansas and Virginia, where The St. Paul Companies, Inc. was a leading writer prior to its departure from the market and which we believe have favorable medical and legal climates. In addition, when the Reciprocal of America was placed in receivership in January 2003, we were presented the opportunity to expand our professional liability business in Virginia and in Alabama where we currently write business. We anticipate 4 there will be additional opportunities for profitable expansion as a number of insurers are experiencing financial difficulties, requiring them to reduce their business or completely exit the marketplace. In October 2002, we started offering professional liability insurance to medical and other healthcare professionals who generally do not qualify for standard coverage because of their claim history or other factors. We write this business on an excess and surplus lines basis, which provides us with greater flexibility in establishing prices and terms of coverage. While we do not expect this class of insureds to become a major portion of our business, we believe this provides profitable opportunities to expand our business. This portion of our business produced $3.0 million and $9.4 million in gross written premiums in 2002 and the first six months of 2003, respectively. This business is written primarily through our subsidiary, Red Mountain Casualty Insurance Company, Inc. We continually evaluate opportunities to acquire other professional liability companies or books of business. We believe such acquisition opportunities can be an attractive incremental source of profitable expansion. In our personal lines business our objective is to achieve an underwriting profit, targeting a combined ratio of 96% or lower, which is in line with our historical financial results. Consistent with our focus on the educational community, we have increased our marketing efforts to colleges and universities in Michigan, where we currently have little penetration. Growth of our personal lines business will be supported by the expansion of our previously introduced boat and umbrella coverages. In addition, the productivity of our agents has increased, having increased average gross premiums per sales agent from $1.3 million in 1999 to $1.9 million in 2002, an increase of 46%. In 2002, we achieved average gross price increases of approximately 2% on renewal business for our personal auto line and 20% on renewal business for our homeowners' line, for an overall average increase of 4%. We have demonstrated our willingness to reduce or terminate business where there is unacceptable pricing. We may later return to a given market based on improved market conditions. Our ability to achieve future growth is contingent on several factors, including the amount of competition, availability of capital, availability and price of reinsurance, whether or not we can identify attractive markets, the regulatory and legal environment in which we operate, and rating agency considerations. INDUSTRY TRENDS Throughout the 1990's and into 2000, the overall property and casualty insurance and reinsurance industry was overcapitalized, which resulted in highly competitive market conditions as evidenced by declining premium rates and poor underwriting results. By mid-2000, capacity was reduced by significant losses experienced throughout the industry, which led companies to tighten underwriting guidelines, cease writing selected lines of business or withdraw from the market completely. In response to these market conditions, insurers began to seek and achieve significant price increases, in addition to improved terms and conditions. This has affected all major lines of business with a more significant impact in selected lines, particularly medical professional liability insurance. Professional Liability Industry Trends. The medical malpractice, or medical professional liability, market totaled $8.9 billion in direct premiums written for the year ended December 31, 2002, which represented 4.4% of the total commercial premiums in the property and casualty industry, according to data provided by A.M. Best. Since 1999, insurance companies focused on medical professional liability coverage have experienced higher claims costs on business written in prior years than they had reserved for initially. This has resulted in significant losses, reduced capital to support current and future business, and higher premium rates to meet expected higher claims costs. We believe that these factors have contributed to significant price increases for medical professional liability insurance. These price increases have varied across the types of insured and geographic region with some states experiencing increases as high as 100%. We believe price increases have continued in 2003 at levels generally consistent with those reported in 2002, which is consistent with our own experience. 5 Reduced profitability, reductions in surplus and capacity constraints have led many professional liability carriers focused on medical professional liability coverage to withdraw from, or limit new business in, one or more markets. For example, The St. Paul Companies, Inc., previously the second largest writer of medical professional liability insurance in the United States, announced in December 2001, that it would exit the medical professional liability market due to poor profitability. In March 2002, the MIIX Group, Inc. announced its intention to stop writing business due to financial difficulties and has sponsored the formation of a new mutual company to write business solely in New Jersey. That same month, SCPIE Holdings, Inc. announced the termination of a national brokerage agreement in order to refocus on its home market of Southern California. More recently, in September 2003, Farmer's Insurance Group announced that it would cease writing medical liability insurance. Other companies have encountered regulatory difficulties due to financial problems. In February 2002, Pennsylvania-based PHICO Insurance Company was placed into state-ordered liquidation, and in January 2003, the Reciprocal of America, which insured physicians in many southern states including Alabama, was placed in receivership by the Commonwealth of Virginia. This reduction in capacity comes at a time when many medical professional liability insurers are raising prices, eliminating policy credits and discounts and tightening policy terms. We believe the effect of lower capacity and higher pricing is to focus buying decisions on more traditional insurance factors such as balance sheet strength, ratings and long-term commitment to a particular market. We also believe that concern over the long-term viability of some insurers is also forcing independent agents to focus more on these traditional factors. Given the continued reduction in capacity and the uncertainty surrounding several writers in the medical professional liability market, we believe the current favorable market environment will continue at least until 2004. The improvements in pricing to some degree, however, will be offset by the impact of loss cost trends and the increased cost of reinsurance. Personal Lines Industry Trends. After a number of years of competitive pricing, underwriting discipline has returned to the personal lines market. In the late 1990s and 2000, strong investment returns created excess surplus in the personal lines industry. This buildup of capital led to a declining rate environment for both automobile and homeowners lines of business as personal lines competitors sought to grow market share. A combination of poor underwriting and investments have helped to reverse the declining pricing trends in the industry. According to A.M. Best, direct premiums written for automobile policies increased 9.0% nationally in 2002. 6 THE DEBENTURES Issuer........................ ProAssurance Corporation Debentures.................... $107,600,000 aggregate principal amount of 3.90% Convertible Senior Debentures Due June 30, 2023. Maturity Date................. June 30, 2023. Ranking....................... The Debentures are our senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The Debentures are not guaranteed by any of our subsidiaries and, accordingly, the Debentures are effectively subordinated to the indebtedness and other liabilities of our subsidiaries, including insurance policy-related liabilities. As of June 30, 2003, our subsidiaries had no outstanding indebtedness (excluding intercompany indebtedness) and had other liabilities (including insurance policy-related liabilities) of $2.14 billion. Interest...................... We will pay accrued and unpaid interest on the Debentures on June 30 and December 30 of each year, beginning December 30, 2003, at an annual rate of 3.90% from July 7, 2003. In addition, we may be required to pay contingent interest, as set forth below under "Contingent Interest." Contingent Interest........... We will also pay contingent interest to the holders of the Debentures during any six-month period from June 30 to December 29 and from December 30 to June 29 commencing with the six-month period beginning June 30, 2008, if the average market price of a Debenture for the five trading days ending on the second trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the Debentures. The amount of contingent interest payable in respect of any six-month period will equal 0.1875% of the average market price of a Debenture for the five trading day period referred to above. Conversion Rights............. You may convert your Debentures at any time prior to stated maturity from and after the date of the following events: - if the sale price of our common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price on that 30th trading day; - if we have called the Debentures for redemption; or - upon the occurrence of the specified corporate transactions, described under "Description of the Debentures -- Conversion Rights." For each $1,000 principal amount of Debentures surrendered for conversion, you initially will receive 23.9037 shares of our common stock. This represents an initial conversion price of approximately $41.83 per share of common stock. The conversion rate may be adjusted for certain reasons, but will not be adjusted for accrued interest or contingent interest, if any. Upon 7 conversion, you will generally not receive any cash payment representing accrued interest or contingent interest, if any. Instead, accrued interest and contingent interest will be deemed paid by the common stock received by you on conversion. Debentures called for redemption may be surrendered for conversion until the close of business two business days prior to the redemption date. Upon conversion, we have the right to deliver, in lieu of our common stock, cash or a combination of cash and shares of our common stock. Payment at Maturity........... Each holder of $1,000 principal amount of the Debentures shall be entitled to receive $1,000 at maturity, plus accrued interest, including contingent interest, if any. Sinking Fund.................. None. Optional Redemption........... We may not redeem the Debentures prior to July 7, 2008. We may redeem some or all of the Debentures for cash on or after July 7, 2008, upon at least 30 days but not more than 60 days notice by mail to holders of Debentures at par as described under "Description of the Debentures -- Optional Redemption by Us." Repurchase Right of Holders... Each holder of the Debentures may require us to repurchase all or a portion of the holder's Debentures on June 30, 2008, June 30, 2013 and June 30, 2018 at a purchase price equal to the principal amount of the Debentures plus accrued and unpaid interest, including contingent interest, if any, to the date of repurchase. We may choose to pay the purchase price in cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to pay the repurchase price with shares of our common stock or a combination of cash and shares of our common stock, we must notify holders not less than 20 business days prior to the repurchase date. If we elect to pay all or a portion of the repurchase price in common stock, the shares of common stock will be valued at 97.5% of the average sale price for the 20 trading days immediately preceding and including the third day prior to the repurchase date. We may in the future, without your consent, amend or supplement the indenture to eliminate our ability to pay the purchase price for the Debentures in common stock on any purchase date after the date of such amendment or supplement. Change of Control Put......... Upon a change of control of ProAssurance, you may require us, subject to conditions, to repurchase all or a portion of your Debentures. We will pay the following purchase prices expressed as a percentage of the principal amount of such Debentures plus 8 accrued and unpaid interest, including contingent interest and additional amounts, if any, to the repurchase date:
REDEMPTION PERIOD PRICE ------ ---------- Beginning on July 7, 2003 and ending on June 29, 2004........................... 110.0% Beginning on June 30, 2004 and ending on June 29, 2005........................... 108.0% Beginning on June 30, 2005 and ending on June 29, 2006........................... 104.0% Beginning on June 30, 2006 and ending on June 29, 2008........................... 102.0% June 30, 2008 and thereafter.............. 100.0%
See "Description of the Debentures -- Change of Control Put." We may choose to pay the repurchase price in cash, shares of our common stock, shares of common stock of the surviving corporation or a combination of cash and shares of the applicable common stock. If we elect to pay all or a portion of the repurchase price in shares of common stock, the shares of the applicable common stock will be valued at 97.5% of the average sale price of the applicable common stock for 20 trading days commencing after the third trading day following notice of the occurrence of a change of control. We may in the future, without your consent, amend or supplement the indenture to eliminate our ability to pay the purchase price for the Debentures in common stock on any purchase date after the date of such amendment or supplement. Events of Default............. If there is an event of default under the Debentures, the principal amount of the Debentures, plus accrued interest, including contingent interest, if any, may be declared immediately due and payable. These amounts automatically become due and payable if an event of default relating to certain events of bankruptcy, insolvency or reorganization occurs. Use of Proceeds............... The selling securityholders will receive all of the net proceeds from the sale of the Debentures or the shares of common stock sold under this prospectus. We will not receive any of the proceeds from sales by the selling securityholders of the Debentures or the underlying common stock sold under this prospectus. We received approximately $104.3 million of net proceeds from the sale of the Debentures to the initial purchasers. We used approximately $67.5 million of such proceeds to repay our outstanding bank indebtedness, and intend to use the remaining portion of such proceeds for general corporate purposes. See "Use of Proceeds." Book-Entry, Delivery and Form.......................... The Debentures were issued in fully registered form. The Debentures were issued in denominations of $1,000 principal amount and integral multiples thereof. The Debentures are represented by one or more global Debentures, deposited with the Trustee as custodian for The Depository Trust Company (DTC) and registered in the name of Cede & Co., DTC's nominee. Beneficial interests in the global Debentures will be shown on, and any transfers will be effected only through, 9 records maintained by DTC and its participants. See "Description of the Debentures -- Book-Entry Delivery and Settlement." Registration Rights........... We agreed to file this registration statement with respect to the resale of the Debentures and the shares of our common stock issuable upon conversion of the Debentures. We have agreed to keep this shelf registration statement effective until the earliest of: - two years after the last date of original issuance of any of the Debentures; - the date when the holders of the Debentures and common stock issuable upon conversion of the Debentures are able to sell all such securities immediately pursuant to Rule 144 under the Securities Act; - the date when all of the Debentures and common stock issuable upon conversion of the Debentures are registered upon the shelf registration statement and sold in accordance with it; or - the date when all of the Debentures and common stock issuable upon conversion of the Debentures have ceased to be outstanding. We will be required to pay additional amounts if we fail to comply with our obligations to register the Debentures and the shares of our common stock issuable upon conversion of the Debentures within the specified time periods. Transfer Restrictions......... All of the Debentures sold in this offering and the shares of common stock issued upon their conversion will be tradable without restriction or further registration under the Securities Act of 1933 unless these securities are purchased by our affiliates. Absence of a Public Market.... We do not intend to list the Debentures on any national securities exchange. The Debentures are new securities for which there is currently no public market. We cannot assure you that any active or liquid market will develop for the Debentures. New York Stock Exchange Symbol for our Common Stock.......... Our common stock is listed on the New York Stock Exchange under the symbol "PRA". Certain U.S. Federal Income Tax Consequences.............. We and each holder and beneficial owner of a Debenture agree in the indenture to treat the Debentures as contingent payment debt instruments for U.S. federal income tax purposes. By purchasing the Debentures, you will agree in the indenture to accrue original issue discount on a constant yield to maturity basis at a rate comparable to the rate at which we would borrow in a non-contingent, non-convertible borrowing, which we have determined to be 8.75%, compounded semi-annually, even though the Debentures will have a lower stated yield to maturity. A U.S. holder will recognize taxable income in each year significantly in excess of interest payments (whether fixed or contingent) actually received in that year. Additionally, a U.S. holder will generally be required to recognize ordinary income on the gain, if any, realized on a sale, exchange, conversion, redemption or repurchase of the Debentures. In computing such 10 gain, the amount realized by a U.S. holder will include, in the case of a conversion, the amount of cash and the fair market value of the shares received. The application of the contingent payment debt rules is uncertain, and no ruling will be sought from the Internal Revenue Service concerning the application of these rules to the Debentures. You should consult your own tax advisor concerning the tax consequences of owning the Debentures and our common stock issuable upon conversion of the Debentures. See "Certain U.S. Federal Income Tax Consequences." Indenture and Trustee......... The Debentures were issued under an Indenture dated as of July 7, 2003 between us and SouthTrust Bank. 11 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The table shown below presents our selected financial data for the five years ended December 31, 2002. We derived the GAAP statement of operations data and balance sheet data relating to each of the years 1998 through 2002 from our audited consolidated financial statements. The statutory combined financial information is derived from the financial statements included in the combined annual statements of Medical Assurance Company and ProNational and their affiliated property and casualty insurers filed with the Insurance Departments of the States of Alabama and Michigan for the years ended December 31, 2002 and 2001, and from the combined annual statements of Medical Assurance Company (formerly Mutual Assurance, Inc.) and its affiliated property and casualty insurers filed with the Insurance Department of the State of Alabama for the years ended December 31, 2000, 1999 and 1998. The statutory combined financial statements are prepared in accordance with statutory accounting principles (SAP) rather than generally accepted accounting principles (GAAP). The statutory financial information and ratios are based on the amounts set forth in the referenced annual statements without any adjustments or eliminations. Such amounts and ratios are not "Non-GAAP Financial Measures" because they are financial measures required to be disclosed by a system of regulation of a government or governmental authority that is applicable to our insurance subsidiaries. SAP differs from GAAP insofar as SAP focuses on an insurer's ability to pay claims in the future, whereas GAAP stresses the measurement of a business' emerging earnings from period to period. As a result, SAP financial analysis tends to focus on the balance sheet, whereas GAAP financial analysis tends to focus on income statement. The most significant specific differences between SAP and GAAP relate the calculation of acquisition costs, the valuation of bonds and redeemable preferred stocks, the concept of admitted and non-admitted assets, the calculation of income taxes, goodwill and surplus and accounting treatment for reinsurance from reinsurers that are not authorized to do business in the state of domicile of the ceding company. The financial data as of June 30, 2003 and 2002 and for the six month periods ended June 30, 2003 and 2002 are derived from our unaudited consolidated financial statements. The unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the six-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003. The selected financial data presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and accompanying notes for the year ended December 31, 2002 and for the six month period ended June 30, 2003, all of which are incorporated by reference in this prospectus. Our results for the period from January 1, 1998 through June 27, 2001 reflect the historical results of Medical Assurance prior to the consolidation with Professionals Group. Our results for the year ended December 31, 2001 include the operations of Professionals Group from June 27, 2001, the date of consolidation.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------- ------------------------- 2002 2001 2000 1999 1998 2003 2002 ---------- ---------- ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) GAAP STATEMENT OF INCOME DATA: Gross premiums written.............. $ 636,156 $ 388,983 $ 223,871 $ 201,593 $ 192,479 $ 360,466 $ 304,188 Net premiums written... 537,123 310,291 194,279 156,923 141,787 317,214 255,653 Net premiums earned.... $ 477,408 $ 313,345 $ 177,596 $ 164,424 $ 141,316 $ 285,880 $ 224,083 Net investment income............... 76,918 59,782 41,450 39,273 39,402 35,092 38,954 Net realized investment gains (losses)....... (5,306) 5,441 913 1,787 11,281 2,713 (3,778) Other income........... 6,747 3,987 2,630 2,545 1,604 3,550 3,624 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total revenues....... 555,767 382,555 222,589 208,029 193,603 327,235 262,883 ---------- ---------- ---------- ---------- ---------- ---------- ----------
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YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------- ------------------------- 2002 2001 2000 1999 1998 2003 2002 ---------- ---------- ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net losses and loss adjustment expenses............. 448,029 298,558 155,710 104,657 93,893 256,348 214,263 Underwriting, acquisition, and insurance expenses... 91,253 70,437 38,579 40,212 33,508 50,656 44,482 Interest expense....... 2,875 2,591 -- -- -- 1,069 1,514 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total expenses....... 542,157 371,586 194,289 144,869 127,401 308,073 260,259 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before income taxes, minority interest and cumulative effect.... 13,610 10,969 28,300 63,160 66,202 19,162 2,624 Provision for income taxes................ (188) (2,847) 4,000 16,460 17,679 3,840 (1,866) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before minority interest and cumulative effect.... 13,798 13,816 24,300 46,700 48,523 15,322 4,490 Minority interest...... 3,285 1,366 -- -- -- 181 1,428 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before cumulative effect of account change....... $ 10,513 $ 12,450 $ 24,300 $ 46,700 $ 48,523 $15,141.00 $ 3,062.00 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income(1)(2)....... $ 12,207 $ 12,450 $ 24,300 $ 46,700 $ 47,400 $15,141.00 $ 4,756.00 ========== ========== ========== ========== ========== ========== ========== Income per share before cumulative effect of accounting change(1)(2)(3) Basic.................. $ 0.40 $ 0.51 $ 1.04 $ 1.95 $ 1.96 $ 0.52 $ 0.12 Diluted.............. 0.39 0.51 1.04 1.95 1.96 0.52 0.12 Net income per share(1)(2)(3) Basic.................. $ 0.47 $ 0.51 $ 1.04 $ 1.95 $ 1.92 $ 0.52 $ 0.18 Diluted.............. 0.46 0.51 1.04 1.95 1.92 0.52 0.18 Weighted average number of shares outstanding:(3) Basic.................. 26,231 24,263 23,291 23,992 24,729 28,919 25,842 Diluted................ 26,254 24,267 23,291 24,008 24,731 29,079 25,864 GAAP BALANCE SHEET DATA: Total cash and investments.......... $1,822,803 $1,574,442 $ 805,076 $ 781,327 $ 800,601 $1,941,229 $1,682,523 Total assets........... 2,586,650 2,238,325 1,122,836 1,117,668 1,132,239 2,749,176 2,371,885 Reserve for losses and loss adjustment expenses............. 1,622,468 1,442,341 659,659 665,792 660,640 1,748,580 1,507,401 Unearned premiums...... 248,371 188,630 78,495 70,925 76,229 279,394 224,285 Debt................... 72,500 82,500 -- -- -- 67,500 77,500 Stockholders' equity... 505,194 413,231 345,167 325,724 324,180 538,208 426,831 Total cash and investments per share(3)............. $ 63.12 $ 60.86 $ 35.49 $ 33.39 $ 32.71 $ 67.02 $ 65.09 Stockholders' equity per share(3)......... $ 17.49 $ 16.02 $ 15.22 $ 13.92 $ 13.24 $ 18.58 $ 16.51 Common stock outstanding(3)....... 28,877 25,789 22,682 23,401 24,477 28,963 25,851
13
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, -------------------------------------------------------------- ------------------------- 2002 2001 2000 1999 1998 2003 2002 ---------- ---------- ---------- ---------- ---------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED GAAP FINANCIAL RATIOS: Net loss and loss adjustment expense ratio................ 93.9% 95.3% 87.7% 63.7% 66.4% 89.70% 95.60% Underwriting expense ratio................ 19.1 22.5 21.7 24.5 23.7 17.7 19.9 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Combined Ratio....... 113.0% 117.8% 109.4% 88.2% 90.1% 107.40% 115.50% ========== ========== ========== ========== ========== ========== ========== SELECTED STATUTORY COMBINED DATA:(4) Losses and loss expenses incurred to premiums earned...... 94.2% 102.0% 87.4% 63.0% 70.5% Other underwriting expenses to net premiums written..... 17.7 22.2 22.3 24.0 28.8 ---------- ---------- ---------- ---------- ---------- Combined ratio....... 111.9% 124.2% 109.7% 87.0% 99.3% ========== ========== ========== ========== ========== Statutory Surplus...... $ 400,288 $ 359,016 $ 216,812 $ 260,885 $ 239,878 Ratio of cash and invested assets to statutory surplus.... 4.25x 4.27x 3.42x 3.02x 3.23x Ratio of net premiums written to statutory surplus.............. 1.34x 1.24x 0.89x 0.62x 0.59x
- --------------- (1) Net income for 1998 was reduced by $1.1 million, which represents the cumulative effect (net of tax) of an accounting change for guaranty fund assessments due to the adoption of the American Institute of Certified Public Accountants' Statement of Position 97-3. (2) Net income for the year ended December 31, 2002 was increased by $1.7 million due to the adoption of SFAS 141 and 142. In accordance with SFAS 142, we wrote off the unamortized balance of deferred credits that related to business combinations completed prior to July 1, 2001. (3) The board of directors declared special stock dividends in December 1999 (5%) and 1998 (10%). All net income per share and total capital per share data on this page has been restated as if the dividends had been declared on January 1, 1998. Additionally, our treasury stock is excluded from the date of acquisition for purposes of determining the weighted average number of shares of common stock outstanding used in the computation of net income per share of our common stock. (4) Combined statutory financial information is unavailable for the six month periods ended June 30, 2003 and 2002 because combined statutory financial statements are prepared and published only on an annual basis. 14 RISK FACTORS You should carefully consider the risks described below as well as the other information contained in this prospectus, before investing in the Debentures. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected. In that case, the value of the Debentures and our common stock could decline substantially. RISKS RELATING TO THE DEBENTURES AND THE COMMON STOCK THE DEBENTURES ARE EFFECTIVELY SUBORDINATED TO ALL LIABILITIES OF OUR SUBSIDIARIES. We operate through our subsidiaries and, as a result, the Debentures will effectively be subordinated to the liabilities of our subsidiaries. Because we operate through our subsidiaries and our primary assets are our equity interests in those subsidiaries, our obligations, including the Debentures, are effectively subordinated to all existing and future indebtedness and other liabilities, including insurance policy-related liabilities, of our subsidiaries. At June 30, 2003, our subsidiaries had no outstanding indebtedness (excluding intercompany indebtedness) but have other liabilities (including insurance policy-related liabilities) totaling approximately $2.14 billion. At the date of this filing, our subsidiaries had no indebtedness, but may incur indebtedness in the future. The Debentures are exclusively obligations of ProAssurance Corporation. Our subsidiaries have no obligation to pay any amounts due on the Debentures. Our subsidiaries are not required to provide us with funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans or advances by our subsidiaries to us is subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. The Debentures are unsecured. We and our subsidiaries may incur additional indebtedness that may adversely affect our ability to meet our financial obligations under the Debentures. The terms of the indenture and the Debentures do not limit the incurrence by us or our subsidiaries of indebtedness. See "Description of the Debentures." We and our subsidiaries may incur additional indebtedness in the future, which could have important consequences to holders of the Debentures. For example, we may have insufficient cash to meet our financial obligations, including our obligations under the Debentures. Furthermore, our ability to obtain additional financing for working capital, capital expenditures or general corporate purposes could be impaired. A significant amount of debt could make us more vulnerable to changes in general economic conditions and also could effect the financial strength rating of our insurance subsidiaries. WE MAY BE UNABLE TO REPAY OR REPURCHASE THE DEBENTURES IN CASH IF OUR SUBSIDIARIES ARE UNABLE TO PAY DIVIDENDS OR MAKE ADVANCES TO US OR IF AGREEMENTS WE ENTER INTO IN THE FUTURE RESTRICT THESE PREPAYMENTS OR REPURCHASES. At maturity, the entire outstanding principal amount of the Debentures will become due and payable by us on June 30, 2023. In addition, each holder of the Debentures may require us to repurchase all or a portion of that holder's Debentures on June 30, 2008, June 30, 2013, June 30, 2018 or upon our "change of control" (as described in this prospectus under the caption "Description of the Debentures -- Repurchase of Debentures at the Option of Holders"). Under the terms of the indenture, we may elect, if we meet certain conditions, to pay all or part of the repurchase price due on those dates or on a change in control in shares of our common stock. At maturity or upon a repurchase request, we may not have sufficient funds to pay the principal amount or the repurchase price due. If we do not have sufficient funds on hand or available through existing borrowing facilities or through the declaration and payment of dividends by our subsidiaries and, in the case of a repurchase, if we are unable to pay the repurchase price in shares of our common stock, we will need to seek additional financing. Additional financing may not be available to us in the amounts 15 necessary. We, as a holding company, are dependent upon dividends from our subsidiaries to enable us to service our outstanding debt, including the Debentures. We have paid all of our outstanding indebtedness under our current credit facility with a portion of the proceeds we received from the initial sale of the Debentures to the initial purchasers. However, in the future we may renew or replace this credit facility with a new bank facility. Any future borrowing, arrangements or agreements, to which we become a party may contain restrictions on our repayment or repurchase of the Debentures under certain conditions. Such restrictions may limit our ability to call the Debentures prior to maturity. OUR STOCK PRICE, AND THEREFORE THE PRICE OF THE DEBENTURES, MAY BE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND VOLATILITY. Fluctuations in the market price of our common stock could cause fluctuations in the price of the Debentures. Among the factors that could affect our common stock price are those discussed above and beginning on page 18 of this prospectus under "Risk Factors -- Risks Related to Our Business" as well as: - interest rate volatility; - actual or anticipated quarterly variations in our operating results; - changes in revenue or earnings estimates or publication of research reports by analysts; - speculation in the press or investment community; - strategic actions by us or our competitors, including the introduction of new innovations, new services or products or significant price reductions; - general market conditions; and - domestic and international economic factors unrelated to our performance, such as the occurrence of catastrophic events. The financial markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock and of the Debentures. YOU SHOULD CONSIDER THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF OWNING THE DEBENTURES AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE DEBENTURES. We and each holder and beneficial owner of a Debenture agree in the indenture to treat the Debentures as contingent payment debt instruments for U.S. federal income tax purposes. The following discussion assumes that the Debentures will be so treated even though we cannot assure you that the Internal Revenue Service will not assert that the Debentures should be treated differently. Under the contingent payment debt regulations, a holder or beneficial owner of a Debenture will be required to accrue income, as original issue discount, in advance of cash it receives on a Debenture, on a constant yield to maturity basis, at a rate comparable to the rate at which we would borrow in a non-contingent, non-convertible borrowing, which we determine to be 8.75% compounded semi-annually, even though the Debentures will have a significantly lower stated yield to maturity. A U.S. holder will recognize taxable income in each year significantly in excess of interest payments (whether fixed or contingent) actually received in that year while the Debentures are outstanding. Additionally, a U.S. holder will generally be required to recognize ordinary income on the gain, if any, realized on a sale, exchange, conversion, redemption or repurchase of the Debentures. In computing such gain, the amount realized by a U.S. holder will include, in the case of a conversion, the amount of cash and the fair market value of the common stock received. A U.S. holder may be deemed to have received a distribution subject to U.S. federal income tax if we make a taxable distribution to holders of common stock that results in an adjustment to the conversion rate. A U.S. holder would be subject to U.S. federal income tax on such a deemed distribution even though a U.S. holder would not receive any cash or property as a result of the 16 adjustment to the conversion rate. Holders and beneficial owners of the Debentures are urged to consult their own tax advisors concerning the tax consequences of owning the Debentures and our common stock issuable upon conversion of the Debentures. For more information, see "Certain U.S. Federal Income Tax Consequences." A DOWNGRADE, SUSPENSION OR WITHDRAWAL OF THE RATING ASSIGNED BY A RATING AGENCY TO THE DEBENTURES, IF ANY, WOULD CAUSE THE LIQUIDITY OR MARKET VALUE OF THE DEBENTURES TO DECLINE SIGNIFICANTLY. The Debentures were rated BBB- by Standard & Poor's at the time of their issuance. There can be no assurance that this rating will remain for any given period of time or that this rating will not be lowered or withdrawn entirely if in Standard & Poor's judgment future circumstances relating to the basis of the rating, such as adverse changes in our company, so warrant. THERE MAY BE NO PUBLIC MARKET FOR THE DEBENTURES. We do not intend to apply for listing of the Debentures on any securities exchange or any automated quotation system. We cannot be sure that any market for the Debentures will develop, or if one does develop, that it will be maintained. If an active market for the Debentures fails to develop or be sustained, the trading price and liquidity of the Debentures could be adversely affected. We have made only limited covenants in the indenture, which may not protect your investment if we experience significant adverse changes in our financial condition or results of operations. THE INDENTURE GOVERNING THE DEBENTURES DOES NOT: - require us to maintain any financial ratios or specified levels of net worth, revenues, income, cash flow or liquidity, and therefore, does not protect holders of the Debentures in the event that we experience significant adverse changes in our financial condition or results of operations; - limit our ability or the ability of any of our subsidiaries to incur additional indebtedness that is senior to or equal in right of payment to the Debentures; - restrict our ability or that of our subsidiaries to issue securities that would be senior to the common stock of such subsidiary held by us; - restrict our ability to pledge our assets or those of our subsidiaries; or - restrict our ability to contribute our assets to our insurance subsidiaries. Therefore, you should consider the absence of these provisions in evaluating whether we will be able to comply with our obligations under the Debentures. WE MAY NOT HAVE THE ABILITY TO REPURCHASE THE DEBENTURES IN CASH IF A HOLDER EXERCISES ITS REPURCHASE RIGHT ON THE DATES SPECIFIED HEREIN OR UPON THE OCCURRENCE OF A CHANGE OF CONTROL. Holders of the Debentures have the right to require us to repurchase the Debentures on specified dates or upon the occurrence of a change of control prior to maturity as described under the heading "Description of the Debentures -- Repurchase of Debentures at the Option of Holders." We may not have sufficient funds to make the required repurchase in cash at such time or the ability to arrange necessary financing on acceptable terms. In addition, our ability to repurchase the Debentures in cash may be limited by law or the terms of other agreements relating to our indebtedness outstanding at the time. We have the ability under the terms of the Debentures to pay the repurchase price in shares of our common stock, regardless of whether we have cash available. THE CONDITIONAL CONVERSION FEATURE OF THE DEBENTURES COULD RESULT IN YOU RECEIVING LESS THAN THE VALUE OF THE COMMON STOCK INTO WHICH A DEBENTURE IS CONVERTIBLE. The Debentures are convertible into shares of our common stock only if specified conditions are met. If the specific conditions for conversion are not met, you will not be able to convert your Debentures, and 17 you may not be able to receive the value of the common stock into which the Debentures would otherwise be convertible. RISKS RELATING TO OUR BUSINESS OUR RESULTS MAY BE AFFECTED IF ACTUAL INSURED LOSSES DIFFER FROM OUR LOSS RESERVES. Significant periods of time often elapse between the occurrence of an insured loss, the reporting of the loss to us and our payment of that loss. To recognize liabilities for unpaid losses, we establish reserves as balance sheet liabilities representing estimates of amounts needed to pay reported and unreported losses and the related loss adjustment expense. The process of estimating loss reserves is a difficult and complex exercise involving many variables and subjective judgments. As part of the reserving process, we review historical data and consider the impact of various factors such as: - trends in claim frequency and severity; - changes in operations; - emerging economic and social trends; - inflation; and - changes in the regulatory and litigation environments. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate, but not necessarily accurate, basis for predicting future events. There is no precise method for evaluating the impact of any specific factor on the adequacy of reserves, and actual results are likely to differ from original estimates. The loss reserves of our insurance subsidiaries also may be affected by court decisions that expand liability on our policies after they have been issued and priced. In addition, a significant jury award, or series of awards, against one or more of our insureds could require us to pay large sums of money in excess of our reserved amounts. Our policy to aggressively litigate claims against our insureds may increase the risk that we may be required to make such payments. To the extent loss reserves prove to be inadequate in the future, we would need to increase our loss reserves and incur a charge to earnings in the period the reserves are increased, which could have a material adverse impact on our financial condition and results of operation. IF WE ARE UNABLE TO MAINTAIN A FAVORABLE FINANCIAL STRENGTH RATING, IT MAY BE MORE DIFFICULT FOR US TO WRITE NEW BUSINESS OR RENEW OUR EXISTING BUSINESS. Third party rating agencies assess and rate the claims-paying ability of insurers based upon criteria established by the agencies. Periodically, the rating agencies evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. The financial strength ratings assigned by rating agencies to insurance companies represent independent opinions of financial strength and ability to meet policyholder obligations and are not directed toward the protection of investors. Ratings by rating agencies are not ratings of securities or recommendations to buy, hold or sell any security and are not applicable to the securities being offered by this prospectus. Our operating subsidiaries hold a financial strength rating of "A-" (Excellent) by A.M. Best with a stable outlook and "A-" (Strong) with a negative outlook by Standard & Poor's. Financial strength ratings are used by agents and customers as an important means of assessing the financial strength and quality of insurers. If our financial position deteriorates, we may not maintain our favorable financial strength ratings from the rating agencies. A downgrade or withdrawal of any such rating could severely limit or prevent us from writing desirable business. 18 WE OPERATE IN A HIGHLY COMPETITIVE ENVIRONMENT. The property and casualty insurance business is highly competitive. We compete with large national property and casualty insurance companies as well as specialty insurers and self-insurance entities whose activities are limited to regional and local markets. Our competitors include companies with substantially greater financial resources than we have as well as companies that may have lower return on equity objectives than we have, particularly competitors that are mutual and not owned by stockholders. Competition in the property and casualty insurance business is based on many factors, including premiums charged and other terms and conditions of coverage, services provided, financial ratings assigned by independent rating agencies, claims services, reputation, perceived financial strength and the experience of the insurance company in the line of insurance to be written. Increased competition could cause us to charge lower premium rates, adversely affect our ability to attract and retain business and reduce the profits that would otherwise arise from operations. OUR REVENUES MAY FLUCTUATE WITH INSURANCE BUSINESS CYCLES. The supply of property and casualty insurance and reinsurance, or the industry's underwriting capacity, is determined principally by the industry's level of capitalization, historical underwriting results, returns on investment and perceived premium rate adequacy. Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns characterized by periods of greater competition in pricing and underwriting terms and conditions (a soft insurance market) followed by periods of capital shortage and lesser competition (a hard insurance market). In a soft insurance market, competitive conditions could result in premium rates and underwriting terms and conditions which may have an adverse effect on our operating profitability. We derive a significant portion of our insurance premium revenue from medical malpractice risks. For several years, the medical malpractice insurance industry has faced a soft insurance market that has generally resulted in lower premiums. More recently, loss costs have begun to rise beyond normal inflationary levels. We are endeavoring to compete in this market through premium rate increases and more selective underwriting practices, but these practices may not be successful. Moreover, we cannot predict whether, when or how market conditions will change, or the manner in which, or the extent to which any such changes may adversely impact our results and operations. OUR REVENUES MAY FLUCTUATE WITH INTEREST RATES AND INVESTMENT RESULTS. We generally rely on the positive performance of our investment portfolio to offset insurance losses and to contribute to our profitability. As our investment portfolio is primarily comprised of interest-earning assets, prevailing economic conditions, particularly changes in market interest rates, may significantly affect our operating results. Changes in interest rates also can affect the value of our interest-earning assets, which are principally comprised of fixed and adjustable-rate investment securities. Generally, the value of fixed-rate investment securities fluctuate inversely with changes in interest rates. Interest rate fluctuations could adversely affect our GAAP stockholders' equity, total comprehensive income and/or our cash flows. Our total investments at June 30, 2003 were $1.89 billion, of which $1.67 billion was invested in fixed maturities. Unrealized pre-tax net investment gains on investments in fixed maturities were $75.1 million at June 30, 2003. Our investment portfolio is subject to prepayment risk primarily due to our investments in mortgage-backed and other asset-backed securities. An investment has prepayment risk when there is a risk that the timing of cash flows that result from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates. We are subject to reinvestment risk to the extent that we are not able to reinvest prepayments at rates comparable to the rates on the maturing investments. At June 30, 2003, approximately 4% of our total investments were invested in equity securities, the value of which fluctuates depending on company specific and general market conditions. The broad 19 investment environment in the U.S. has negatively affected the value of certain of these securities and may continue to do so in the future. If the value of our equity investments falls, the value of our investment portfolio will be reduced as a result. Any decline in value may also reduce our net income to the extent that we determine that the decline in market value is other than a temporary decline in value. We incurred a non-cash expense of $18.2 million for other than temporary declines in our equity securities in the year ended December 31, 2002. At June 30, 2003 and December 31, 2002, the fair value of our equity securities was $77.9 million and $80.2 million, respectively, which included pre-tax net unrealized gains of $5.1 million and $2.6 million, respectively. CHANGES IN HEALTHCARE COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS. We derive substantially all of our medical professional liability insurance premiums from physicians and other individual healthcare providers, physician groups and smaller healthcare facilities. Significant attention has recently been focused on reforming the healthcare industry at both the federal and state levels. A broad range of healthcare reform measures have been suggested, and public discussion of such measures will likely continue in the future. Proposals have included, among others, spending limits, price controls, limiting increases in insurance premiums, limiting the liability of doctors and hospitals for tort claims, imposing liability on institutions rather than physicians and restructuring the healthcare insurance system. We cannot predict which, if any, reform proposals will be adopted, when they may be adopted or what impact they may have on us. The adoption of certain of these proposals could materially adversely affect our financial condition or results of operations. In addition to regulatory and legislative efforts, there have been significant market driven changes in the healthcare environment. In recent years, a number of factors related to the emergence of managed care have negatively impacted or threatened to impact the medical practice and economic independence of medical professionals. Medical professionals have found it more difficult to conduct a traditional fee-for-service practice and many have been driven to join or contractually affiliate with provider-supported organizations. Such change and consolidation may result in the elimination of, or a significant decrease in, the role of the physician in the medical malpractice insurance purchasing decision. It could also result in greater emphasis on the role of professional managers, who may seek to purchase insurance on a price competitive basis, and who may favor insurance companies that are larger and more highly rated than we are. In addition, such changes and consolidations could reduce the amount of our medical professional liability premiums since group purchases are more likely than individual purchases to retain a portion of their risk through the use of deductibles, self-insured retentions, captive insurance entities or other self-insurance mechanisms. The movement from traditional fee-for-service practice to the managed care environment may also result in an increase in the liability profile of our insureds. The majority of our insured physicians practice in primary care specialties such as internal medicine, family practice, general practice and pediatrics. In the managed care environment, these primary care physicians are being required to take on the role of "gatekeeper" and restrain the use of specialty care by controlling access to specialists and by performing certain procedures that would customarily be performed by specialists in a fee-for-service setting. These practice changes are resulting in an increase in the claims frequency and severity experienced by primary care physicians and by us as their insurance carrier. WE ARE A HOLDING COMPANY AND ARE DEPENDENT ON DIVIDENDS AND OTHER PAYMENTS FROM OUR OPERATING SUBSIDIARIES, WHICH ARE SUBJECT TO DIVIDEND RESTRICTIONS. We are a holding company whose principal source of funds is cash dividends and other permitted payments from our operating subsidiaries, principally The Medical Assurance Company and ProNational. If our subsidiaries are unable to make payments to us, or are able to pay only limited amounts, we may be unable to pay dividends or make payments on our indebtedness, including our indebtedness under the Debentures. The payment of dividends by these operating subsidiaries is subject to restrictions set forth in the insurance laws and regulations of Alabama and Michigan, their respective states of domicile. 20 REGULATORY CHANGES COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS. Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which we operate. Regulation is intended for the benefit of policyholders rather than stockholders. In addition to the amount of dividends and other payments that can be made by our insurance subsidiaries, these regulatory authorities have broad administrative and supervisory power relating to: - licensing requirements; - trade practices; - capital and surplus requirements; - investment practices; and - rates charged to insurance customers. These regulations may impede or impose burdensome conditions on rate increases or other actions that we may want to take to enhance our operating results, and could affect the ability of our subsidiaries to pay dividends. In addition, we may incur significant costs in the course of complying with regulatory requirements. Most states also regulate insurance holding companies like us in a variety of matters such as acquisitions, changes of control and the terms of affiliated transactions. Future legislative or regulatory changes may adversely affect our business operations. THE UNPREDICTABILITY OF COURT DECISIONS COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS. The financial position of our insurance subsidiaries may also be affected by court decisions that expand insurance coverage beyond the intention of the insurer at the time it originally issued an insurance policy. In addition, a significant jury award, or series of awards, against one or more of our insureds could require us to pay large sums of money in excess of our reserve amount. THE POSSIBLE PASSAGE OF TORT REFORM, AND THE SUBSEQUENT REVIEW OF SUCH LAWS BY THE COURTS COULD HAVE A MATERIAL IMPACT ON OUR OPERATIONS. Tort reforms generally restrict the ability of a plaintiff to recover damages by, among other limitations, eliminating certain claims that may be heard in a court, limiting the amount or types of damages, changing statutes of limitation or the period of time to make a claim, and limiting venue or court selection. A number of states in which we do business have enacted, or are considering, tort reform legislation. Federal tort reform legislation has been proposed by President Bush, and passed several times by the House of Representatives. However, the Senate has either voted down or refused to consider federal tort reform proposals. While the effects of tort reform would appear to be beneficial to our business generally, there can be no assurance that such reforms will be effective or ultimately upheld by the courts in the various states. Further, if tort reforms are effective, the business of providing professional and other liability insurance may become more attractive, thereby causing an increase in competition for our business. In addition, there can be no assurance that the benefits of tort reform will not be accompanied by regulatory actions by state insurance authorities that may be detrimental to our business such as expanded coverage requirements and premium rate limitations and rollbacks. OUR GEOGRAPHIC CONCENTRATION TIES OUR PERFORMANCE TO THE ECONOMIC, REGULATORY AND DEMOGRAPHIC CONDITIONS OF THE MIDWESTERN AND SOUTHERN STATES. Our revenues and profitability are subject to prevailing economic, regulatory, demographic and other conditions in the states in which we write insurance. We write our professional liability insurance primarily in 19 states located in the midwestern and southern United States, with approximately 73% of gross premiums written in five states, Alabama, Ohio, Florida, Indiana and Michigan in 2002, and we write our personal lines insurance only in Michigan. Because our business is concentrated in a limited number of 21 markets, adverse developments that are limited to a geographic area in which we do business may have a disproportionately greater affect on us than they would have if we did business in markets outside that particular geographic area. Our personal lines of property and casualty insurance business provide coverage for personal auto, homeowners, boat and umbrella insurance for residents of Michigan. Property and casualty insurance companies frequently experience losses from both man-made and natural catastrophes. Catastrophes may have a material adverse effect on our operations. Catastrophes include windstorms, hurricanes, earthquakes, tornadoes, hail, severe winter weather, fires and may include terrorist and other unforeseen events. The extent of losses from catastrophes is a function of the total amount of losses incurred, the number of insureds affected, the frequency of the events, the severity of the particular catastrophe and the amount of available reinsurance. Most catastrophes occur in small geographic areas. The concentration of our personal lines business in Michigan leaves us vulnerable to catastrophes and severe weather specific to that state. OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE LOSS OF INDEPENDENT AGENTS. We depend in part on the services of independent agents and brokers in the marketing of our insurance products. We face competition from other insurance companies for the services and allegiance of independent agents and brokers. These agents and brokers may choose to direct business to competing insurance companies or may direct less desirable risks to us. IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING COMMITMENTS. As part of our overall risk and capacity management strategy, we purchase reinsurance for significant amounts of risk underwritten by our insurance company subsidiaries. Market conditions beyond our control determine the availability and cost of the reinsurance we purchase, which may affect the level of our business and profitability. We may be unable to maintain our current reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring coverage or to obtain new reinsurance coverage, either our net exposure to risk would increase or, if we are unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we underwrite. WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL, AND, AS A RESULT, WE COULD EXPERIENCE LOSSES. We transfer some of the risk we have assumed to reinsurance companies in exchange for part of the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable to us to the extent the risk is transferred, it does not relieve us of our liability to our policyholders. If our reinsurers fail to pay us or fail to pay us on a timely basis, our financial results would be adversely affected. At December 31, 2002, we had reinsurance recoverables on paid and unpaid losses and loss adjustment expenses of approximately $462 million. Of that amount, a total of approximately $290 million was due from ten reinsurers. We do not believe that we have any reinsurance recoverables that are uncollectible. Should future events lead us to believe that any reinsurer is unable to meet its obligations to us, adjustments to the amounts recoverable would be reflected in the results of then current operations. THE GUARANTY FUND ASSESSMENTS THAT WE ARE REQUIRED TO PAY TO STATE GUARANTEE ASSOCIATIONS MAY INCREASE AND OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER AS A RESULT. Each state in which we operate has separate insurance guaranty fund laws requiring property and casualty insurance companies doing business within their respective jurisdictions to be members of their guaranty associations. These associations are organized to pay covered claims (as defined and limited by the various guaranty association statutes) under insurance policies issued by insolvent insurance companies. Most guaranty association laws enable the associations to make assessments against member insurers to 22 obtain funds to pay covered claims after a member insurer becomes insolvent. These associations levy assessments (up to prescribed limits) on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the covered lines of business in that state. Maximum assessments permitted by law in any one year generally vary between 1% and 2% of annual premiums written by a member in that state. Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process. Property and casualty guaranty fund assessments incurred by us totaled $2.2 million and $1.3 million for 2002 and 2001, respectively. Our policy is to accrue the insurance insolvencies when notified of assessments. We are not able to reasonably estimate the insolvent insurer's liabilities or develop a meaningful range of the insolvent insurer's liabilities because of inadequate financial data with respect to the estate of the insolvent company as supplied by the guaranty funds. OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE LOSS OF ONE OR MORE EMPLOYEES. We are heavily dependent upon our senior management and the loss of services of our senior executives could adversely affect our business. Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key employees and to attract and retain additional qualified personnel in the future. The loss of the services of any of our senior management or any other key employee, or the inability to identify, hire and retain other highly qualified personnel in the future, could adversely affect the quality and profitability of our business operations. Our board of directors is in the process of considering succession planning relating to our Chief Executive Officer and is consulting with outside professional advisors in its planning. Dr. Crowe, our current Chairman and Chief Executive Officer, has indicated to us that he is committed to remaining with ProAssurance for three to five years. PROVISIONS IN OUR CHARTER DOCUMENTS, DELAWARE LAW AND STATE INSURANCE LAW MAY IMPEDE ATTEMPTS TO REPLACE OR REMOVE OUR MANAGEMENT OR IMPEDE A TAKEOVER, WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK. Our certificate of incorporation and by-laws and Delaware law contain provisions that may have the effect of inhibiting a non-negotiated merger or other business combination. Additionally, the board of directors may issue preferred stock, which could be used as an anti-takeover device, without a further vote of our stockholders. No shares of our preferred stock are currently outstanding, and we have no present intention to issue any shares of preferred stock. However, because the rights and preferences of any series of preferred stock may be set by our board of directors in its sole discretion, the rights and preferences of any such preferred stock may be superior to those of our common stock and thus may adversely affect the rights of the holders of our common stock. The voting structure of our common stock and other provisions of the certificate of incorporation are intended to encourage a person interested in acquiring us to negotiate with, and to obtain the approval of, our board of directors in connection with a transaction. However, certain of these provisions may discourage our future acquisition, including an acquisition in which stockholders might otherwise receive a premium for their shares. As a result, stockholders who might desire to participate in such a transaction may not have the opportunity to do so. In addition, state insurance laws provide that no person or entity may directly or indirectly acquire control of an insurance company unless that person or entity has received approval from the insurance regulator. An acquisition of control of our insurance operating subsidiaries generally would be presumed if any person or entity acquires 10% (5% in Alabama) or more of our outstanding common stock, unless the applicable insurance regulator determines otherwise. These provisions apply even if the offer may be considered beneficial by some of our stockholders. If a change in management or a change of control is delayed or prevented, the market price of our common stock could decline. 23 IF WE ARE UNABLE TO ACCESS DOCUMENTS STORED ON OUR COMPUTER SYSTEMS, OUR ABILITY TO PROCESS NEW POLICIES, REVISE EXISTING POLICIES AND HANDLE REPORTED CLAIMS COULD BE IMPEDED. We use computer-based retention methods to store certain of our information and documentation relating to coverage, policyholder information and the processing of claims. Our computer systems enable us to update and review this information efficiently in order to maintain our records and respond to the needs of our agents and policyholders. Our computer systems are located in our offices in Okemos and Auburn Hills, Michigan and Birmingham, Alabama and can be accessed from certain remote sites via telephone or internet connections. Our ability to access information stored on our computer systems could be negatively affected by numerous factors, including disruptions in electric power, telephone service or the computer systems in each of our main offices. Less than full and immediate access to this information could prevent us from issuing new policies and maintaining an up to date record of existing policies, in addition to hindering our ability to respond to claims. This could damage our reputation for efficiency and could cause us to lose the business of present and future customers. CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES Our ratio of earnings to fixed charges for each of the periods indicated is as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------- 2003 2002 2001 2000 1999 1998 ---------- ---- ---- ------ ------ ------ Earnings to fixed charges.......... 12.06 4.17 4.04 100.94 191.19 279.57
For purposes of determining this ratio, earnings represent pre-tax income (loss), which consists of income (loss) before income taxes and minority interest, plus fixed charges. Fixed charges include interest expense and the interest portion of rent expense. We have used approximately $67.5 million of the proceeds we received from the initial sale of the Debentures to the initial purchasers to repay our outstanding indebtedness. We have estimated the earnings to fixed charge ratio on a pro forma basis for the periods shown below, assuming that this refinancing took place on January 1, 2002 using the proceeds from the sale of the Debentures and that the only effect of the refinancing was to increase interest expense.
PRO FORMA RATIO ------------------------- SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, 2003 2002 ---------- ------------ Earnings to fixed charges................................... 7.11 2.99
USE OF PROCEEDS The selling securityholders will receive all of the net proceeds from the sale of the Debentures or the shares of common stock sold under this prospectus. We will not receive any of the proceeds from sales by the selling securityholders of the Debentures or the underlying common stock. We received approximately $104.6 million from the original sale of the Debentures. We used approximately $67.5 million of the proceeds we received from the initial sale of the Debentures to the initial purchasers to repay our outstanding indebtedness and currently intend to use the balance of such proceeds for general corporate purposes, which may include contributions to the capital and surplus of our insurance subsidiaries to support expected growth in our insurance operations. 24 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Our common stock is traded on the New York Stock Exchange under the symbol "PRA." The following table sets forth the per share high and low closing sale prices for our common stock as reported on the New York Stock Exchange for the periods presented. Our stock began trading on the New York Stock Exchange on June 28, 2001. Prior to that date, the quotations reflect prices for Medical Assurance (NYSE: MAI) common stock because the New York Stock Exchange treated the consolidation of Professionals Group with Medical Assurance as a name change by Medical Assurance.
HIGH LOW ------ ------ 2003: Fourth Quarter(1)......................................... $29.48 $26.86 Third Quarter............................................. 28.90 24.50 Second Quarter............................................ 30.50 23.40 First Quarter............................................. 23.92 20.69 2002: Fourth Quarter............................................ $21.11 $15.78 Third Quarter............................................. 18.00 14.20 Second Quarter............................................ 19.70 16.01 First Quarter............................................. 18.22 15.99 2001: Fourth Quarter............................................ $17.99 $13.49 Third Quarter............................................. 19.13 14.50 Second Quarter............................................ 16.49 12.30 First Quarter............................................. 18.06 12.00 2000: Fourth Quarter............................................ $15.88 $12.25 Third Quarter............................................. 12.50 10.56 Second Quarter............................................ 20.81 10.19 First Quarter............................................. 22.88 16.88
- --------------- (1) For the period October 1, 2003 through October 21, 2003. The closing price of our common stock on October 21, 2003, as reported on the New York Stock Exchange was $29.48 per share. As of October 15, 2003, there were 3,671 stockholders of record of our common stock. Neither Medical Assurance nor ProAssurance paid any cash dividends on its common stock in any of the periods reflected in the table. We do not currently pay dividends on our common stock and do not intend to pay any dividends in the foreseeable future. We intend to retain earnings to support the future growth of our business. If our board of directors elects at some point in the future to pay dividends on our common stock, subject to the dividend preference of any of our preferred stock that may be outstanding, none of which is currently outstanding, the holders of our common stock will be entitled to receive any dividends declared by our board of directors from funds legally available for the payment of dividends. As a holding company with no direct operations, our ability to pay dividends is dependent upon, among other things, the availability of cash dividends and other permitted payments from our insurance company subsidiaries. State insurance laws limit the amounts that may be paid to us by our insurance subsidiaries. 25 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2003, on an actual basis and on an adjusted basis to give effect to the issuance of the Debentures and the application of the net proceeds therefrom and described under "Use of Proceeds." You should read this table in conjunction with our unaudited condensed consolidated financial statements and related notes for the six months ended June 30, 2003 included herein and "Management's Discussion and Analysis of Financial Condition and Results of Operation" incorporated by reference in this prospectus.
AT JUNE 30, 2003 ------------------------ ACTUAL AS ADJUSTED --------- ------------ ($ IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS) DEBT: Line of Credit(1)......................................... 67,500 $ -- Convertible Senior Debentures............................. -- 104,641(2) -------- -------- Total Debt............................................. $ 67,500 $104,641(2) STOCKHOLDERS' EQUITY: Preferred stock, 50,000,000 shares authorized and none issued and outstanding (actual and as adjusted)........ -- -- Common stock, par value $0.01 per share, 100,000,000 shares authorized; 29,084,795 issued(3)................ 291 291 Additional paid-in capital................................ 309,818 309,818 Accumulated other comprehensive gain (loss), net of deferred tax expense of $19,515........................ 52,100 52,100 Retained earnings...................................... 176,055 176,055 Less treasury stock, at cost, 121,765 shares........... (56) (56) -------- -------- Total Stockholders' Equity............................. 538,208 538,208 -------- -------- Total Capitalization................................. $605,708 $642,849 RATIOS: Book value per common share............................... $ 18.58 $ 18.58 ======== ======== Ratio of debt to total capitalization..................... 11.14% 16.28% ======== ========
- --------------- (1) As of June 30, 2003, our outstanding balance under the line of credit was approximately $67.5 million. We paid the entire outstanding balance of the line of credit on July 23, 2003. (2) Reflects net proceeds from the sale of $107.6 million of Convertible Senior Debentures less underwriting discounts and commissions of approximately 2.75% or $2,959,000. (3) Excludes 1,250,863 shares issuable upon the exercise of options granted by us, of which approximately 622,263 shares were exercisable at June 30, 2003, and an additional 657,889 shares reserved for future issuance of options under our equity incentive compensation plan. 26 DESCRIPTION OF THE DEBENTURES We have summarized provisions of the Debentures below. It is important for you to consider all of the information contained in this prospectus before making your decision to invest in the Debentures. We issued the Debentures under an indenture, dated as of July 7, 2003, between us and SouthTrust Bank, as trustee. The Debentures mature on June 30, 2023. Currently, the trustee will also act as paying agent, conversion agent, transfer agent, and bid solicitation agent for the Debentures. The following description is only a summary of the material provisions of the Debentures. We urge you to read the indenture and the Debenture in their entirety because they, and not this description, define the rights of holders of the Debentures. A copy of the indenture has been filed with the SEC and has been filed as an exhibit to the registration statement of which this prospectus is a part. See "Where You Can Find More Information" for information on how to obtain a copy of the indenture or the Debenture. When we refer to "ProAssurance," "we," "our," or "us" in this section, we refer only to ProAssurance Corporation, a Delaware corporation, and not its subsidiaries. BRIEF DESCRIPTION OF THE DEBENTURES The Debentures offered hereby: - bear interest at a per annum rate of 3.90% payable semi-annually on each June 30 and December 30, beginning December 30, 2003; - accrue contingent cash interest, which may be payable as set forth below under "Contingent Interest;" - are issued only in denominations of $1,000 principal amount and integral multiples thereof; - are senior unsecured obligations of ProAssurance, and rank equally with all of our other existing and future unsecured and unsubordinated indebtedness and senior to any of our subordinated indebtedness; as our indebtedness, the Debentures are effectively subordinated to all indebtedness and liabilities of our subsidiaries; as of June 30, 2003, our subsidiaries had no outstanding indebtedness (excluding intercompany indebtedness) and had other liabilities (including insurance policy-related liabilities) of $2.14 billion. - are convertible into shares of our common stock initially at a conversion rate of 23.9037 shares per $1,000 principal amount of Debentures (equivalent to an initial conversion price of $41.83 per share), or, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock, in each case under the conditions and subject to such adjustments as are described under "Conversion Rights;" - are redeemable by us for cash at our option in whole or in part beginning on July 7, 2008 at the redemption price equal to the principal amount of the Debentures as described under "Optional Redemption by Us;" - are subject to repurchase by us at the option of the holders on June 30, 2008, June 30, 2013, and June 30, 2018, or upon a change of control of ProAssurance, upon the terms and at the repurchase prices set forth below under "Repurchase of Debentures at the Option of Holders -- Optional Put;" and - are due on June 30, 2023, unless earlier converted, redeemed by us at our option or repurchased by us at the option of the holders. The indenture does not contain any financial covenants and does not prohibit us from paying dividends, incurring additional indebtedness or issuing or repurchasing our other securities. The indenture also does not protect the holders in the event of a highly leveraged transaction or a change of control of ProAssurance, except to the extent described under "Repurchase of Debentures at the Option of Holders -- Change of Control Put" below. 27 No sinking fund is provided for the Debentures and the Debentures are not subject to defeasance. The Debentures are issued only in registered form, without coupons, in denominations of $1,000 principal amount and integral multiples thereof. Holders may present definitive Debentures for conversion, registration of transfer and exchange at our office or agency in Birmingham, Alabama, which is currently the office of the trustee currently located at SouthTrust Bank, Corporate Trust Department, Mail Code: A-001-0B-0201, 110 Office Park Drive, Second Floor, Birmingham, Alabama 35223. For information regarding conversion, registration of transfer and exchange of global Debentures, see "Book-Entry Delivery and Settlement." No service charge is required for any registration of transfer or exchange of Debentures, but we may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. INTEREST The Debentures bear interest at a rate of 3.90% per annum from July 7, 2003. We also will pay contingent interest on the Debentures in the circumstances described under "Contingent Interest." We will pay interest semi-annually on June 30 and December 30 of each year beginning December 30, 2003, to the holders of record at the close of business on the preceding June 15 and December 15, respectively. There are two exceptions to the preceding sentence: - in general, we will not pay accrued interest on any Debentures that are converted into shares of our common stock. See "Conversion Rights." If a holder of Debentures converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder on the record date will receive on that interest payment date accrued interest on those Debentures, notwithstanding the conversion of those Debentures prior to that interest payment date, because that holder will have been the holder of record on the corresponding record date. However, at the time that the holder surrenders Debentures for conversion, the holder must pay to us an amount equal to the interest that has accrued and that will be paid on the related interest payment date. The preceding sentence does not apply, however, to a holder that converts Debentures that are called by us for redemption after a record date for an interest payment but prior to the corresponding interest payment date. Accordingly, if we elect to redeem Debentures on a date that is after a record date for the payment of interest on Debentures of any holder, and such holder chooses to convert those Debentures, the holder will not be required to pay us, at the time that holder surrenders those Debentures for conversion, the amount of interest it will receive on the interest payment date; and - we will pay interest to a person other than the holder of record on the record date if we elect to redeem the Debentures on a date that is after a record date but on, or prior to, the corresponding interest payment date. In this instance, we will pay accrued interest on the Debentures being redeemed to, but not including, the redemption date to the same person to whom we will pay the principal of those Debentures. Except as provided below, we will pay interest on: - the global Debenture to The Depository Trust Company (which we refer to as DTC) in immediately available funds; and - any definitive Debentures by check mailed to the holders of those Debentures. At maturity, interest on the definitive Debentures will be payable at the office of the trustee (currently located at SouthTrust Bank, Corporate Trust, 110 Office Park Drive, Second Floor, Mail Code: A-001-OB-0201, Birmingham, Alabama 35223). Interest generally will be computed on the basis of a 360-day year comprised of twelve 30-day months. 28 CONVERSION RIGHTS GENERAL Holders may convert any outstanding Debentures into shares of our common stock, subject to the conditions described below, initially at a conversion rate of 23.9037 shares per $1,000 principal amount of the Debentures (equal to an initial conversion price of $41.83 per share). The conversion rate is subject to adjustment as described below. We will not issue fractional shares of common stock upon conversion of the Debentures. Instead, we will pay the cash value of such fractional shares based upon the sale price of our common stock on the business day immediately preceding the conversion date. Holders may convert Debentures only in denominations of $1,000 principal amount and integral multiples thereof. Holders may surrender Debentures for conversion into shares of our common stock prior to the stated maturity from and after the date of the following events: - during any fiscal quarter if the sale price of our common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price on that 30th trading day; - if we have called the Debentures for redemption; or - upon the occurrence of the specified corporate transactions discussed below. As used herein, the "sale price" of our common stock on any date means the closing per share sale price (or if no closing sale price is reported, the average of the bid and ask prices or, if there is more than one bid or ask price, the average of the average bid and the average ask prices) as reported in composite transactions for the principal U.S. securities exchange on which the common stock is traded or, if the common stock is not listed on a U.S. national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation system or by the National Quotation Bureau Incorporated. In the absence of such a quotation, our board of directors will make a good faith determination of the sale price. The "conversion price" of a Debenture as of any day will equal $1,000, the principal amount of the Debenture, divided by the number of shares of common stock issuable upon conversion of $1,000 principal amount of Debentures on that day. If a holder exercises its right to require us to repurchase its Debentures as described under "Repurchase of Debentures at the Option of Holders," such holder may convert its Debentures into shares of our common stock only if it withdraws its repurchase or change of control repurchase notice and converts its Debentures prior to the close of business on the business day immediately preceding the applicable repurchase date. CONVERSION UPON SATISFACTION OF MARKET PRICE CONDITIONS A holder may surrender any of its Debentures for conversion into shares of our common stock during any fiscal quarter if the sale price of our common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price on that 30th trading day. CONVERSION UPON NOTICE OF REDEMPTION A holder may surrender for conversion any Debentures we call for redemption at any time prior to the close of business on the day that is two business days prior to the redemption date, even if the Debentures are not otherwise convertible at that time. However, if a holder already has delivered a repurchase notice or a change of control repurchase notice with respect to a Debenture, the holder may not surrender that Debenture for conversion until the holder has withdrawn the notice in accordance with the indenture. 29 CONVERSION UPON SPECIFIED CORPORATE TRANSACTIONS In the event: - we distribute to all holders of our common stock certain rights entitling them to purchase, for a period expiring within 60 days, common stock at less than the average sale price of the common stock for the 10 trading days preceding the declaration date for such distribution; - we elect to distribute to all holders of our common stock, cash or other assets, debt securities or certain rights to purchase our securities, which distribution has a per share value exceeding 15% of the sale price of the common stock on the business day preceding the declaration date for the distribution; or - a change of control as described under "Repurchase of Debentures at the Option of Holders -- Change of Control Put" occurs but holders of Debentures do not have the right to require us to repurchase their Debentures as a result of such change of control because the consideration received in such change of control consists of freely tradeable stock and the Debentures become convertible into that stock (each as more fully described under "Repurchase of Debentures at the Option of Holders -- Change of Control Put"); then at least 20 days prior to the ex-dividend date for the distribution or within 30 days of the occurrence of the change of control, as the case may be, we must notify the holders of the Debentures in writing of the occurrence of such event. Once we have given that notice, holders may surrender their Debentures for conversion at any time (1) until the earlier of close of business on the business day immediately prior to the ex-dividend date or the date of our announcement that the distribution will not take place, in the case of a distribution, or (2) within 30 days of the change of control notice or the date of our announcement that change of control will not take place, in the case of a change of control. In the case of a distribution, no adjustment to the conversion price or the ability of a holder of Debentures to convert will be made if the holder will otherwise participate in the distribution without conversion or in certain other cases. In addition, if we are party to a consolidation, merger or binding share exchange pursuant to which our common stock would be converted into cash, securities or other property, a holder may surrender Debentures for conversion at any time from and after the date which is 15 days prior to the anticipated effective date of the transaction until 15 days after the actual date of the transaction. If we are a party to a consolidation, merger or binding share exchange pursuant to which our common stock is converted into cash, securities or other property, then at the effective time of the transaction, the right to convert a Debenture into common stock will be changed into a right to convert a Debenture into the kind and amount of cash, securities or other property which the holder would have received if the holder had converted such Debentures immediately prior to the transaction. If the transaction also constitutes a "change of control," as defined below, the holder may require us to repurchase all or a portion of its Debentures as described under "Repurchase of Debentures at the Option of Holders -- Change of Control Put." PAYMENT UPON CONVERSION Upon conversion, we may choose to deliver, in lieu of shares of our common stock, cash or a combination of cash and shares of our common stock as described below. CONVERSION ON OR PRIOR TO THE FINAL NOTICE DATE In the event that we receive a notice of conversion from a holder of the Debentures on or prior to the day that is 20 days prior to the redemption date, if any, or maturity (the "final notice date"), and we choose to satisfy all or any portion of our obligation upon conversion (the "conversion obligation") in cash, we will notify the holder electing to convert through the trustee of the dollar amount to be satisfied in cash (which must be expressed either as 100% of the conversion obligation or as a fixed dollar amount) at any time on or before the date that is two business days following receipt of the holder's notice of conversion ("cash settlement notice period"). If we timely elect to pay cash for any portion of the shares of common 30 stock otherwise issuable to the holder, the holder may retract the conversion notice at any time during the two business day period beginning on the day after the final day of the cash settlement notice period ("conversion retraction period"); no such retraction can be made (and a conversion notice shall be irrevocable) if we do not elect to deliver cash in lieu of shares of our common stock (other than cash in lieu of fractional shares). If the conversion notice has not been retracted, then settlement (in cash and/or shares) will occur on the business day following the final trading day of the 20 trading-day period beginning on the first trading day after the final day of the conversion retraction period (the "cash settlement averaging period"). Settlement amounts will be computed as follows: - if we elect to satisfy the entire conversion obligation in shares of common stock, we will deliver to the holder a number of shares of common stock equal to (i) the aggregate principal amount of Debentures to be converted divided by 1,000 multiplied by (ii) the conversion rate. - if we elect to satisfy the entire conversion obligation in cash, we will deliver to the holder cash in an amount equal to the product of: - a number equal to (i) the aggregate principal amount of Debentures to be converted divided by 1,000, multiplied by (ii) the conversion rate, and - the average sale price of our shares of common stock during the cash settlement averaging period. - if we elect to satisfy a fixed portion (other than 100%) of the conversion obligation in cash, we will deliver to the holder such cash amount ("cash amount") and a number of shares equal to the greater of (1) zero and (2) the excess, if any, of the number of shares of common stock calculated as set forth in the first bullet of this paragraph minus the number of shares equal to the sum, for each trading day of the cash settlement averaging period, of (a) the pro-rated portion of the cash amount for such day (e.g., 1/20 based on 20 trading days in the period) divided by (b) the sale price of our common stock on such trading day. In addition, we will pay cash for all fractional shares of common stock. If a holder exercises its right to require us to repurchase its Debentures as described under "Repurchase of Debentures at the Option of Holders," such holder may convert its Debentures as provided above only if it withdraws its repurchase or change of control repurchase notice and converts its Debentures prior to the close of business on the business day immediately preceding the applicable repurchase date. CONVERSION AFTER THE FINAL NOTICE DATE In the event that we receive a holder's notice of conversion after the final notice date, and we choose to satisfy all or any portion of the conversion obligation in cash, we will notify the holder electing to convert through the trustee of the dollar amount to be satisfied in cash (which must be expressed either as 100% of the conversion obligation or as a fixed dollar amount) at any time on or before the final notice date. Settlement amounts will be computed and settlement dates will be determined in the same manner as set forth above under "Conversion On or Prior to the Final Notice Date" except that the "cash settlement averaging period" shall be the 20 trading-day period beginning on the first trading day after the maturity date or redemption date as the case may be. Settlement, in cash or shares, will occur on the business day following the final day of such cash settlement averaging period. CONVERSION PROCEDURES By delivering to the holder the number of shares issuable upon conversion, together with a cash payment in lieu of any fractional shares, we will satisfy our obligation with respect to the Debentures. That is, accrued interest will be deemed to be paid in full rather than canceled, extinguished or forfeited. We will not adjust the conversion rate to account for any accrued interest or, except as described below, any contingent interest. 31 If the holder converts after a record date for an interest payment but prior to the corresponding interest payment date, such holder will receive on the interest payment date interest accrued on those Debentures, notwithstanding the conversion of Debentures prior to the interest payment date, assuming the holder was the holder of record on the corresponding record date. However, each holder agrees, by accepting a Debenture, that at the time the holder surrenders any Debentures for conversion, such holder must pay us an amount equal to the interest that has accrued and that will be paid on the Debentures being converted on the interest payment date. The preceding sentence does not apply to Debentures that are converted after being called by us for redemption after a record date for an interest payment date. If in such case prior to the redemption date the holder chooses to convert its Debentures, such holder will not be required to pay us at the time it surrenders its Debentures for conversion the amount of interest on the Debentures it will receive on the date that has been fixed for redemption. Holders of the Debentures are not required to pay any taxes or duties relating to the issuance or delivery of our common stock upon exercise of conversion rights, but they are required to pay any tax or duty which may be payable relating to any transfer involved in the issuance or delivery of the common stock in a name other than the name of the holder of the Debenture. Certificates representing shares of our common stock will be issued or delivered only after all applicable taxes and duties, if any, payable by the holder have been paid. We and each holder of a Debenture also agree that delivery to the holder of the full number of shares of common stock into which the Debenture is convertible, together with any cash payment for such holder's fractional shares, will be treated as a payment (in an amount equal to the sum of the then fair market value of such shares and such cash payment, if any) on the Debenture for purposes of the regulations governing contingent payment debt instruments. See "Certain U.S. Federal Income Tax Consequences." To convert interests in a global Debenture, the holder must deliver to DTC the appropriate instruction form for conversion pursuant to DTC's conversion program. To convert a definitive Debenture, the holder must: - complete and manually sign the conversion notice on the back of the Debenture (or a facsimile thereof); - deliver the completed conversion notice and the Debenture to be converted to the specified office of the conversion agent; - pay all funds required, if any, relating to interest including contingent interest, on the Debenture to be converted to which the holder is not entitled, as described in the second preceding paragraph and below in "Contingent Interest;" and - pay all taxes or duties, if any, as described in the preceding paragraph. The conversion date will be the date on which all of the foregoing requirements have been satisfied. The Debentures will be deemed to have been converted immediately prior to the close of business on the conversion date. Settlement of our obligation to deliver shares and cash (if any) with respect to a conversion will occur on the dates described above. Delivery of shares will be accomplished by delivery to the conversion agent of certificates for the relevant number of shares, other than in the case of holders of Debentures in book-entry form with DTC, which shares shall be delivered in accordance with DTC customary practices. In addition, we will make any cash payment, including in lieu of any fractional shares, as described above. A holder will not be entitled to any rights as a holder of our common stock, including, among other things, the right to vote and receive dividends and notices of stockholder meetings, until the conversion date. 32 CONVERSION RATE ADJUSTMENTS We will adjust the conversion rate if any of the following events occur: (1) we issue common stock as a dividend or distribution to all holders of our common stock. (2) we issue to all holders of our common stock rights or warrants to purchase our common stock or securities convertible into or exchangeable or exercisable for our common stock, which rights or warrants are exercisable for not more than 60 days, at less than the sale price of our common stock on the business day immediately preceding the time of announcement of such issuance. (3) we subdivide or combine our common stock. (4) we distribute to all holders of our common stock shares of our capital stock, evidences of our indebtedness or assets, including securities, but excluding: - rights or warrants listed in (2) above; - dividends or distributions listed in (1) above; - dividends and distributions in connection with any reclassification, consolidation, merger, exchange, combination, sale or conveyance resulting in a change in the conversion consideration pursuant to the third succeeding paragraph; and - any dividends or distributions paid exclusively in cash (except as provided below). (5) we make distributions or pay dividends consisting exclusively of cash to all holders of our common stock to the extent that the aggregate amount of any such cash distributions and dividends exceed: - during the period from the date of initial issuance of the Debentures to June 30, 2008, $0.025 per share of our common stock for any fiscal quarter or $0.10 per share of our common stock for any fiscal year; and - at any time subsequent to June 30, 2008, 0.625% of our market capitalization for any fiscal quarter or 2.5% of our market capitalization for any fiscal year, in each case as determined on the record date for such distribution or dividend; our "market capitalization", as of any date, is the product of the sale price of our common stock on such date multiplied by the number of shares of our common stock then outstanding. If an adjustment is required in respect of a distribution or dividend of cash, then the conversion rate shall be increased so that it equals the rate determined by multiplying the conversion rate in effect on the applicable record date by a fraction, (1) the numerator of which shall be the current market price (as defined below) of a share of common stock on the record date and (2) the denominator of which shall be such current market price less the amount of the excess distribution or dividend as defined above. "Current market price" shall mean the average of the daily closing sale prices per share of common stock for the three consecutive trading days ending on the earlier of the date of determination and the day before the "ex" date with respect to the distribution or dividend requiring such computation. For purposes of this paragraph, the term "ex" date, when used with respect to any distribution or dividend, means the first date on which the common stock trades, regular way, on the relevant exchange or in the relevant market from which the closing sale price was obtained without the right to receive such distribution or dividend. (6) we or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer for our common stock to the extent that the cash and value of any other consideration included in the payment per share of common stock exceeds the closing sale price per share of common stock on the trading day before the date such tender offer or exchange offer is publicly announced. 33 To the extent that we have a rights plan in effect upon conversion of the Debentures into common stock, the holder will receive, in addition to the common stock, the rights under the rights plan whether or not the rights have separated from the common stock at the time of conversion, subject to limited exceptions, and no adjustments to the conversion price will be made, except in limited circumstances. We will not make any adjustment if holders of Debentures may participate in the transactions described above. In the event of: - any reclassification of our common stock; - a consolidation, merger, binding share exchange or combination involving us; or - a sale or conveyance to another person or entity of all or substantially all of our property or assets; in which holders of our common stock would be entitled to receive stock, other securities, other property, assets or cash for their common stock upon conversion of Debentures, the holder will be entitled to receive the same type of consideration which it would have been entitled to receive if it had converted the Debentures into our common stock immediately prior to any of these events. In the event that we distribute shares of capital stock of a subsidiary of ours, the conversion rate will be adjusted, if at all, based on the market value of the subsidiary stock so distributed relative to the market value of our common stock, in each case over a measurement period following the distribution. In the event we elect to make a distribution described in (2) or (4) above, which, in the case of (4) above, has a per share value equal to more than 15% of the sale price of our shares of common stock on the business day preceding the declaration date for the distribution, then, if the distribution would also trigger a conversion right under "Conversion Upon Specified Corporate Transactions," or if the Debentures are otherwise convertible, we will be required to give notice to the holders of Debentures at least 20 days prior to the ex-dividend date for the distribution and, upon the giving of notice, the Debentures may be surrendered for conversion at any time until the close of business on the business day immediately prior to the ex-dividend date or until we announce that the distribution will not take place. No adjustment to the conversion price or the ability of a holder of a Debenture to convert will be made if the holder will otherwise participate in the distribution without conversion or in certain other cases. Holders may in certain situations be deemed to have received a distribution subject to U.S. federal income tax as a dividend in the event of any taxable distribution to holders of common stock or in certain other situations requiring a conversion rate adjustment. See "Certain U.S. Federal Income Tax Consequences -- Constructive Dividends." To the extent permitted by law, we may, from time to time, increase the conversion rate for a period of at least 20 days if our board of directors has made a determination that this increase would be in our best interests. Any such determination by our board will be conclusive. We would give holders at least 15 days notice of any increase in the conversion rate. In addition, we may increase the conversion rate if our board of directors deems it advisable to avoid or diminish any income tax to holders of common stock resulting from any stock distribution. We will not be required to make an adjustment in the conversion rate unless the adjustment would require a change of at least one percent in the conversion rate. However, we will carry forward any adjustments that are less than one percent of the conversion rate. Except as described above in this section, we will not adjust the conversion rate for any issuance of our common stock or convertible or exchangeable securities or rights to purchase our common stock or convertible or exchangeable securities. CONTINGENT INTEREST Subject to the accrual and record date provisions described below, we will pay contingent cash interest to the holders of Debentures during any six-month period from June 30 to December 29 and from December 30 to June 29, commencing with the six-month period beginning on June 30, 2008 if the 34 average market price of a Debenture for the five consecutive trading days ending on the second trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the Debenture. The amount of contingent cash interest payable per Debenture in respect of any six-month period will equal 0.1875% of the average market price of a Debenture for the five trading day period referred to above. We will pay contingent interest, if any, in the same manner as we will pay interest described above under "Interest." The market price of a Debenture on any date of determination means the average of the secondary market bid quotations per $1,000 principal amount of Debenture obtained by the bid solicitation agent for $5.0 million principal amount of Debentures at approximately 4:00 p.m., New York City time, on such determination date from three unaffiliated securities dealers we select, which may include any of the initial purchasers, provided that if: - the bid solicitation agent, through the exercise of reasonable efforts, is unable to obtain a bid from the securities dealers, or - in our reasonable judgment, the bid quotations are not indicative of the secondary market value of the Debentures, then the market price of the Debentures will equal (a) the then applicable conversion rate of the Debentures multiplied by (b) the average sale prices of our common stock on the five trading days ending on such determination date, appropriately adjusted. The bid solicitation agent shall not be required to determine the market price of the Debentures unless requested in writing by us. The bid solicitation agent will initially be SouthTrust Bank. We may change the bid solicitation agent, but the bid solicitation agent will not be our affiliate. The bid solicitation agent will solicit bids from securities dealers that are believed by us to be willing to bid for the Debentures. Upon determination that holders of Debentures will be entitled to receive contingent interest which may become payable during a relevant six-month period, on or prior to the start of such six-month period, we will provide notice to the trustee setting forth the amount of contingent interest per $1,000 principal amount of Debentures and disseminate a press release through a public medium that is customary for such press release. PAYMENT AT MATURITY Each holder of $1,000 principal amount of the Debentures shall be entitled to receive $1,000, and accrued and unpaid interest, including contingent interest and additional amounts, if any, at maturity. OPTIONAL REDEMPTION BY US Prior to July 7, 2008, the Debentures will not be redeemable at our option. Beginning on July 7, 2008, we may redeem the Debentures for cash at any time as a whole, or from time to time in part, at a redemption price equal to 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest, including contingent interest and additional amounts, if any, to the redemption date. We will give at least 30 days but not more than 60 days notice of redemption by mail to holders of Debentures. Debentures or portions of Debentures called for redemption are convertible by the holder until the close of business on the second business day prior to the redemption date. If we do not redeem all of the Debentures, the trustee will select the Debentures to be redeemed in principal amounts of $1,000 or integral multiples thereof, by lot or on a pro rata basis. If any Debentures are to be redeemed in part only, we will issue a new Debenture or Debentures with a principal amount equal to the unredeemed principal portion thereof. If a portion of a holder's Debentures is selected for 35 partial redemption and the holder converts a portion of its Debentures, the converted portion will be deemed to be taken from the portion selected for redemption. REPURCHASE OF DEBENTURES AT THE OPTION OF HOLDERS OPTIONAL PUT On each of June 30, 2008, June 30, 2013 and June 30, 2018, a holder may require us to repurchase any outstanding Debentures for which the holder has properly delivered and not withdrawn a written repurchase notice, subject to certain additional conditions, at a purchase price equal to 100% of the principal amount of those Debentures plus accrued and unpaid interest, including contingent interest and additional amounts, if any, to the repurchase date. Holders may submit their Debentures for repurchase to the paying agent at any time from the opening of business on the date that is 20 business days prior to the repurchase date until the close of business on the business day immediately preceding the repurchase date. Instead of paying the purchase price in cash, we may elect to pay the purchase price in shares of our common stock or a combination of shares of our common stock and cash, at our option. The number of shares of common stock a holder will receive will equal the relevant amount of the purchase price divided by 97.5% of the average of the sale price of our common stock for the 20 trading days immediately preceding and including the third business day immediately preceding the repurchase date. However, we may not pay the purchase price in shares of our common stock or a combination of shares of our common stock and cash, unless we satisfy certain conditions prior to the repurchase date as provided in the indenture, including: - registration of the shares of our common stock to be issued upon repurchase under the Securities Act and the Exchange Act, if required; - qualification of the shares of our common stock to be issued upon repurchase under applicable state securities laws, if necessary, or the availability of an exemption therefrom; and - listing of our common stock on a U.S. national securities exchange or quotation thereof in an inter-dealer quotation system of any registered U.S. national securities association. We are required to give notice at least 20 business days prior to each repurchase date to all holders at their addresses shown in the register of the registrar and to beneficial owners as required by applicable law stating, among other things, the procedures that holders must follow to require us to repurchase their Debentures as described below and whether the purchase price will be paid in cash or shares of our common stock, or a combination with a portion payable in cash or shares of our common stock. Because the sale price of our common stock will be determined prior to the applicable repurchase date, holders of Debentures bear the market risk that our common stock will decline in value between the date the sale price is calculated and the repurchase date. The repurchase notice given by each holder electing to require us to repurchase Debentures shall be given so as to be received by the paying agent no later than the close of business on the business day immediately preceding the repurchase date and must state: - the certificate numbers of the holder's Debentures to be delivered for repurchase; - the portion of the principal amount of Debentures to be repurchased, which must be $1,000 or an integral multiple thereof; and - that the Debentures are to be repurchased by us pursuant to the applicable provisions of the Debentures. 36 A holder may withdraw any repurchase notice by delivering a written notice of withdrawal to the paying agent prior to the close of business on the business day immediately preceding the repurchase date. The notice of withdrawal shall state: - the principal amount of Debentures being withdrawn; - the certificate numbers of the Debentures being withdrawn; and - the principal amount, if any, of the Debentures that remain subject to the repurchase notice. In connection with any repurchase, we will, to the extent applicable: - comply with the provisions of Rule 13e-4, Rule 14e-1 and any other tender offer rules under the Exchange Act which may then be applicable; and - file Schedule TO or any other required schedule under the Exchange Act. Our obligation to pay the purchase price for Debentures for which a repurchase notice has been delivered and not validly withdrawn is conditioned upon the holder delivering the Debentures, together with necessary endorsements, to the paying agent at any time after delivery of the repurchase notice. We will cause the purchase price for the Debentures to be paid promptly following the later of the repurchase date or the time of delivery of the Debentures, together with such endorsements. If the paying agent holds money or shares of our common stock sufficient to pay the purchase price of the Debentures for which a repurchase notice has been given on the business day immediately following the repurchase date in accordance with the terms of the indenture, then, immediately after the repurchase date, the Debentures will cease to be outstanding and interest, including contingent interest, if any, on the Debentures will cease to accrue, whether or not the Debentures are delivered to the paying agent. Thereafter, all other rights of the holder shall terminate, other than the right to receive the purchase price upon delivery of the Debentures. Our ability to repurchase Debentures for cash may be limited by restrictions on the ability of ProAssurance to obtain funds for such repurchase through dividends from our subsidiaries and the terms of our then existing borrowing agreements. We cannot assure you that we would have the financial resources, or would be able to arrange financing, to pay the purchase price in cash for all the Debentures that might be delivered by holders of Debentures seeking to exercise the repurchase right. We may in the future, without your consent amend or supplement the indenture to eliminate our ability to pay the purchase price for the Debentures in common stock on any purchase date after the date of such amendment or supplement. CHANGE OF CONTROL PUT If a change of control, as described below on pages 38-39, occurs, each holder will have the right (subject to certain exceptions set forth below) to require us to repurchase all of its Debentures not previously called for redemption, or any portion of those Debentures that is equal to $1,000 in principal amount or integral multiples thereof, at the following purchase prices expressed as a percentage of the principal amount of all Debentures it requires us to repurchase plus accrued and unpaid interest, including contingent interest and additional amounts, if any, on those Debentures to the repurchase date.
REDEMPTION PERIOD PRICE - ------ ---------- Beginning on July 7, 2003 and ending on June 29, 2004....... 110.0% Beginning on June 30, 2004 and ending on June 29, 2005...... 108.0% Beginning on June 30, 2005 and ending on June 29, 2006...... 104.0% Beginning on June 30, 2006 and ending on June 29, 2008...... 102.0% June 30, 2008 and thereafter................................ 100.0%
37 Notwithstanding the foregoing, we may be required to offer to repurchase any of our other senior debt on a pro rata basis with the Debentures, upon a change of control, if similar change of control offers are or will be required by our other senior debt. Instead of paying the purchase price in cash, we may elect to pay the purchase price in shares of our common stock or, in the case of a merger in which we are not the surviving corporation, common stock, ordinary shares or American Depositary Shares of the surviving corporation or its direct or indirect parent corporation, cash or a combination of the applicable securities and cash, at our option. The number of shares of the applicable common stock or securities a holder will receive will equal the relevant amount of the purchase price divided by 97.5% of the average of the sale prices of the applicable common stock or securities for the 20 trading days commencing after the third trading day following notice of the change of control. However, we may not pay the purchase price in the applicable common stock or securities or a combination of the applicable common stock or securities and cash, unless we satisfy certain conditions prior to the repurchase date as provided in the indenture, including: - registration of the shares of the applicable common stock or securities to be issued upon repurchase under the Securities Act and the Exchange Act, if required; - qualification of the shares of the applicable common stock or securities to be issued upon repurchase under applicable state securities laws, if necessary, or the availability of an exemption therefrom; and - listing of the applicable common stock or securities on a U.S. national securities exchange or quotation thereof in an inter-dealer quotation system of any registered U.S. national securities association. Within 30 days after the occurrence of a change of control, we are required to give each holder notice of the occurrence of the change of control and of its resulting repurchase right and whether the purchase price will be paid in cash, the applicable common stock or securities, or a combination with a portion payable in cash or the applicable common stock or securities. The repurchase date will be within 30 days after the date on which we give notice of a change of control. To exercise the repurchase right, the holder must deliver prior to the close of business on the business day immediately preceding the repurchase date, written notice to the trustee of its exercise of its repurchase right, together with the Debentures with respect to which the right is being exercised. The holder may withdraw this notice by delivering to the paying agent a notice of withdrawal prior to the close of business on the business day immediately preceding the repurchase date. Because the sale price of the applicable common stock or securities is determined prior to the applicable repurchase date, holders of Debentures bear the market risk that the applicable common stock or securities will decline in value between the date the sale price is calculated and the repurchase date. A "change of control" will be deemed to have occurred at such time after the original issuance of the Debentures when any of the following has occurred: - the acquisition by any person, including any syndicate or group deemed to be a "person" under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchase, merger or other acquisition transactions, of shares of our capital stock entitling that person to exercise 50% or more of the total voting power of all shares of our capital stock entitled to vote generally in elections of directors, other than any such acquisition by any of our subsidiaries or any of our employee benefit plans; or - the acquisition by any person of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchase, merger or other acquisition transactions, of shares of our capital stock as a result of which (1) our common stock ceases (or, upon consummation of or immediately following such transaction or event, will cease) to be listed on a United States national securities exchange or approved for quotation on the NASDAQ National Market or any similar United States system for automated dissemination of quotations of 38 securities prices or (2) less than 20% of the outstanding shares of our common stock remain beneficially owned by persons other than affiliates; or - during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors (together with any new directors whose election by such board of directors or whose nomination for election by the shareholders of ProAssurance was approved pursuant to a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the board of directors then in office; or - our consolidation or merger with or into any other person, any merger of another person into us, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of our properties and assets to another person, other than: - any transaction: (1) that does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of our capital stock; and (2) pursuant to which holders of our capital stock immediately prior to the transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in elections of directors of the continuing or surviving person immediately after giving effect to such issuance; and - any merger, share exchange, transfer of assets or similar transaction solely for the purpose of changing our jurisdiction of incorporation and resulting in a reclassification, conversion or exchange of outstanding shares of our common stock, if at all, solely into shares of common stock, ordinary shares or American Depositary Shares of the surviving entity or a direct or indirect parent of the surviving corporation. However, notwithstanding the foregoing, a holder will not have the right to require us to repurchase its Debentures if 100% of the consideration in the transaction or transactions (other than cash payments for fractional shares and cash payments made in respect of dissenters' appraisal rights) constituting a change of control consists of shares of common stock, ordinary shares or American Depositary Shares traded or to be traded immediately following a change of control on a national securities exchange or the NASDAQ Stock Market's National Market, and, as a result of the transaction or transactions, the Debentures become convertible into that common stock, ordinary shares or American Depositary Shares (and any rights attached thereto). For the purposes of the foregoing, "affiliate" shall mean any person beneficially owning shares of our capital stock entitling that person to exercise 10% or more of the total voting power of all shares of our capital stock entitled to vote generally in elections of directors. Beneficial ownership shall be determined in accordance with Rule 13d-3 promulgated by the SEC under the Exchange Act. The term "person" includes any syndicate or group that would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act. Rule 13e-4 under the Exchange Act requires the dissemination of certain information to security holders if an issuer tender offer occurs and may apply if the repurchase option becomes available to holders of the Debentures. We will comply with this rule and file Schedule TO (or any similar schedule) to the extent applicable at that time. The definition of change of control includes a phrase relating to the conveyance, transfer, sale, lease or disposition of "all or substantially all" of our assets. There is no precise, established definition of the phrase "substantially all" under applicable law. Accordingly, a holder's ability to require us to repurchase Debentures as a result of a conveyance, transfer, sale, lease or other disposition of less than all our assets may be uncertain. 39 If the paying agent holds money or common stock sufficient to pay the purchase price of the Debentures which holders have elected to require us to repurchase on the business day following the repurchase date in accordance with the terms of the indenture, then, immediately after the repurchase date, those Debentures will cease to be outstanding and interest, including contingent interest, if any, on the Debentures will cease to accrue, whether or not the Debentures are delivered to the paying agent. Thereafter, all other rights of the holder shall terminate, other than the right to receive the purchase price upon delivery of the Debentures. The foregoing provisions would not necessarily protect holders of the Debentures if highly leveraged or other transactions involving us occur that may affect holders adversely. We could, in the future, enter into certain transactions, including certain recapitalizations, that would not constitute a change of control with respect to the change of control purchase feature of the Debentures but that would increase the amount of our (or our subsidiaries') outstanding indebtedness. Our ability to repurchase Debentures for cash upon the occurrence of a change of control is subject to important limitations. Our ability to repurchase the Debentures for cash may be limited by restrictions on the ability of ProAssurance to obtain funds for such repurchase through dividends from our subsidiaries and the terms of our then existing borrowing agreements. In addition, the occurrence of a change of control could cause an event of default under, or be prohibited or limited by, the terms of our other senior debt. We cannot assure you that we would have the financial resources, or would be able to arrange financing, to pay the purchase price in cash for all the Debentures that might be delivered by holders of Debentures seeking to exercise the repurchase right. The change of control purchase feature of the Debentures may in certain circumstances make more difficult or discourage a takeover of our company. The change of control purchase feature, however, is not the result of our knowledge of any specific effort: - to accumulate shares of our common stock; - to obtain control of us by means of a merger, tender offer solicitation or otherwise; or - by management to adopt a series of anti-takeover provisions. Instead, the change of control purchase feature is a standard term contained in securities similar to the Debentures. We may in the future, without your consent amend or supplement the indenture to eliminate our ability to pay the purchase price for the Debentures in common stock on any purchase date after the date of such amendment or supplement. EVENTS OF DEFAULT Each of the following constitutes an event of default with respect to the Debentures: - default in the payment of any principal amount (or premium, if any), redemption price, purchase price, or change in control purchase price due with respect to the Debentures, when the same become due and payable; - default in payment of any interest (including contingent interest and additional amounts, if any) under the Debentures, which default continues for 30 days; - default in our obligation to satisfy our conversion obligation upon exercise of a holder's conversion right, unless such default is cured within five days after written notice of default is given to us by the trustee or the holder of such Debenture; - our failure to comply with any of our other agreements in the Debentures or the indenture upon our receipt of notice to us of such default from the trustee or to us and the trustee from holders of not less than 25% of aggregate principal amount at maturity of the Debentures, and our failure to cure (or obtain a wavier of) such default within 60 days after we receive such notice; 40 - default in the payment of principal when due or resulting in acceleration of other indebtedness of ours or any significant subsidiary of ours for borrowed money where the aggregate principal amount with respect to which the default or acceleration has occurred exceeds $10 million, and such acceleration has not been rescinded or annulled within a period of 30 days after written notice to us by the trustee or to us and the trustee by the holders of at least 25% in aggregate principal amount at maturity of the Debentures; and - certain events of bankruptcy, insolvency or reorganization affecting us or any of our significant subsidiaries. "Significant subsidiary" shall mean any subsidiary of ProAssurance whose assets constitute 10% or more of our total assets on a consolidated basis or as otherwise defined in Rule 1-02(w) of Regulations S-X. If an event of default shall have happened and be continuing, either the trustee or the holders of not less than 25% in aggregate principal amount at maturity of the Debentures then outstanding may declare the principal amount of the Debentures then outstanding plus any interest (including contingent interest and additional amounts, if any) on the Debentures accrued and unpaid through the date of such declaration to be immediately due and payable. At any time after a declaration of acceleration has been made, but before a judgment or decree for payment of money has been obtained by the trustee, and subject to applicable law and certain other provisions of the indenture, the holders of a majority in aggregate principal amount of the Debentures then outstanding may, under certain circumstances, rescind and annul such acceleration. In the case of certain events of bankruptcy or insolvency, the principal amount of the Debentures then outstanding together with any accrued and unpaid cash interest (including contingent interest and additional amounts, if any) through the occurrence of such event shall automatically become and be immediately due and payable. The indenture provides that, if any event occurs which is, or after notice or lapse of time or both would become, an event of default with respect to the Debentures, the trustee will transmit, within 90 days of the occurrence of a default known to the trustee, notice of such default to the holders of the Debentures unless such default has been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of or any premium on or interest on (including contingent interest and additional amounts, if any) a Debenture, the trustee may withhold such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or responsible officers of the trustee in good faith determine that the withholding of such notice is in the best interest of the holders of the Debentures; and provided, further, that in the case of any default of the character described in the fourth bullet above of the first paragraph of this section, no such notice to holders will be given until at least 30 days after the default occurs. If an event of default occurs and is continuing with respect to the Debentures, the trustee may in its discretion proceed to protect and enforce its rights and the rights of the holders of the Debentures by all appropriate judicial proceedings. The indenture provides that, subject to the duty of the trustee during any default to act with the required standard of care, the trustee will be under no obligation to exercise any of its rights or power under the indenture at the request or direction of any of the holders of the Debentures, unless such holders shall have offered to the trustee indemnity reasonably satisfactory to the trustee. Subject to such provision for the indemnification of the trustee, and subject to applicable law and certain other provisions of the indenture, the holders of a majority in aggregate principal amount of the outstanding Debentures will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or power conferred on the trustee, with respect to the Debentures. Our obligations under the indenture are not intended to provide creditor rights for amounts in excess of par plus accrued and unpaid interest, including, contingent interest and additional amounts, if any. 41 MERGERS AND SALES OF ASSETS The indenture provides that we may not consolidate with or merge into any person or convey, transfer or lease all or substantially all of our assets as an entity to another person as an entity unless: - the resulting, surviving or transferee person is organized and existing under the laws of the United States, any state thereof or the District of Columbia, and such person (if other than us) assumes all our obligations under the Debentures and the indentures; - after giving effect to the transaction no event of default, and no event that, after notice or passage of time, would become an event of default, has occurred and is continuing; and - other conditions described in the indenture are met. Upon the assumption of our obligations by such corporation in such circumstances, subject to certain exceptions, we shall be discharged from all obligations under the Debentures and the indenture. Although such transactions are permitted under the indenture, certain of the foregoing transactions occurring could constitute a change in control of ProAssurance, permitting each holder to require us to purchase the Debentures of such holder as described above. MODIFICATION AND WAIVER We and the trustee may modify or amend the indenture with the consent of the holders of not less than a majority of aggregate principal amount of the outstanding Debentures; provided, however, that no such modification or amendment may, without the written consent or the affirmative vote of the holder of each Debenture affected thereby: - change the stated maturity of the principal of, or any premium due on, or any installment of interest, including contingent interest, if any, on or with respect to the Debentures; - reduce the principal amount, premium amount, redemption price or purchase price (including the change of control purchase price and the price payable upon exercise by a holder of its option to require us to repurchase such holder's Debentures), of, or the rate of interest, including contingent interest, if any, on, any Debenture; - adversely affect the right of holders to convert or require us to repurchase any of the Debentures; - alter the manner of calculation or rate of accrual of contingent interest on any Debenture; - impair the right to institute suit for the enforcement of any repurchase of, payment on or with respect to, or conversion of any Debenture, including any payment on or after the stated maturity of the Debentures, in the case of redemption, on or after the redemption date or, in the case of repayment at the option of any holder, on or after the repayment date; - modify the optional redemption provisions in a manner that adversely affects the holders; - change the place of payment or the coin or currency in which the principal of or any premium or interest with respect to the Debentures is payable; - reduce the percentage in principal amount of the outstanding Debentures, the consent of whose holders is required in order to take specific actions including, but not limited to, the waiver of past defaults; or - modify any of the above provisions. We and the trustee may modify or amend the indenture and the Debentures without the consent of any holder in order to, among other things: - provide for our successor pursuant to a consolidation, merger or sale of assets; - add to our covenants for the benefit of the holders of all or any of the Debentures or to surrender any right or power conferred upon us by the indenture; 42 - provide for a successor trustee with respect to the Debentures; - cure any ambiguity or correct or supplement any provision in the indenture which may be defective or inconsistent with any other provision, or to make any other provisions with respect to matters or questions arising under the indenture which, in each case, will not adversely affect the interests of the holders of the Debentures; - add any additional events of default with respect to all or any of the Debentures; - secure the Debentures; - reduce the conversion price, provided that the reduction is in accordance with the terms of the indenture or will not adversely affect the interests of the holders of the Debentures; - supplement any of the provisions of the indenture to such extent as shall be necessary to permit or facilitate the discharge of the Debentures, provided that such change or modification does not adversely affect the interest of the holders of the Debentures in any material respect; - make any changes or modifications necessary in connection with the registration of the Debentures under the Securities Act as contemplated in the registration rights agreement; provided that such change or modification does not adversely affect the interests of the holders of the Debenture in any material respect; or - add or modify any other provisions with respect to matters or questions arising under the indenture which we and the trustee may deem necessary or desirable and which will not adversely affect the interests of the holders of Debentures in any material respect. The holders of not less than a majority in aggregate principal amount of the outstanding Debentures may, on behalf of the holders of all of the Debentures, waive any past default and its consequences under the indenture, except a default (1) in the payment of the principal of or any premium or interest on or with respect to the Debentures or (2) in the respect of a covenant or provision that cannot be modified without the consent of the holder of each Debenture affected thereby. CALCULATIONS IN RESPECT OF DEBENTURES We or our agents will be responsible for making all calculations called for under the Debentures. These calculations include, but are not limited to, determination of the market price of the Debentures and our common stock, and amounts of contingent interest and additional amount payments, if any, on the Debentures, and the projected payment schedule. See "Certain U.S. Federal Income Tax Consequences." We or our agents will make all these calculations in good faith and, absent manifest error, our and their calculations will be final and binding on holders of Debentures. We or our agents will provide a schedule of these calculations to the trustee, and the trustee is entitled to conclusively rely upon the accuracy of these calculations without independent verification. RANKING The Debentures will be senior unsecured obligations of ProAssurance Corporation and will rank equally in right of payment with all of our other senior unsecured and unsubordinated indebtedness. The Debentures will rank senior to any of our subordinated indebtedness. We are a holding company and will primarily depend on the receipt of dividends from our insurance company subsidiaries to meet our obligations under the Debentures and our other outstanding obligations, including debt obligations. Because the creditors of our subsidiaries, including our insurance subsidiaries' policyholders, generally would have a right to receive payment superior to our right to receive payment from the assets of our subsidiaries, the holders of our Debentures will effectively be subordinated to the creditors of our subsidiaries. If we were to liquidate or reorganize, your right to participate in any distribution of our subsidiaries' assets is necessarily subject to the claims of the subsidiaries' creditors, including their policyholders. As of June 30, 2003, the aggregate amount of liabilities and obligations of 43 our subsidiaries (including insurance policy-related liabilities) that would have effectively ranked senior to the Debentures was approximately $2.14 billion. "Risk Factors -- Risks Relating to our Business -- We are a holding company and are dependent on dividends and other payments from our operating subsidiaries, which are subject to dividend restrictions" and "Risk Factors -- Risks Relating to the Debentures and the Common Stock -- The Debentures are effectively subordinated to all liabilities of our subsidiaries." NOTICES We will mail notices and communications to the holder's address shown on the register of the Debentures. THE TRUSTEE; PAYING AGENTS, TRANSFER AGENTS AND BID SOLICITATION AGENT SouthTrust Bank is the trustee under the indenture. The trustee was the lead arranger, administrative agent and syndication agent for our credit facility that included the term loan which was repaid from a portion of the proceeds we received from the sale of the Debentures to the initial purchasers and the revolving credit facility which recently expired but may be renewed or replaced by a new facility in which the trustee may be a participant. The trustee and its affiliates also performs certain other commercial banking services for us, including providing cash management accounts, checking services, and serving as custodian for our investment securities for which it receives customary fees. The trustee will be the paying agent, conversion agent, transfer agent, and bid solicitation agent for the Debentures. BOOK-ENTRY DELIVERY AND SETTLEMENT We issued the Debentures in the form of one or more permanent global Debentures in definitive, fully registered, book-entry form. The global Debentures were deposited with or on behalf of DTC and registered in the name of Cede & Co., as nominee of DTC. DTC has advised us as follows: - DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code and a "clearing agency" registered under Section 17A of the Securities Exchange Act of 1934. - DTC holds securities that its participants deposit with DTC and facilitates the settlement among participants of securities transactions, such as transfers and pledges, in deposited securities, through electronic computerized book-entry changes in participants' accounts, thereby eliminating the need for physical movement of securities certificates. - Direct participants include securities brokers and dealers, trust companies, clearing corporations and other organizations. - DTC is owned by a number of its direct participants and by the New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. - Access to the DTC system is also available to others, such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a direct participant, either directly or indirectly. - The rules applicable to DTC and its participants are on file with the SEC. We have provided the following descriptions of the operations and procedures of DTC solely as a matter of convenience. These operations and procedures are solely within the control of DTC and are subject to change by them from time to time. None of ProAssurance, the initial purchasers nor the trustee takes any responsibility for these operations or procedures, and you are urged to contact DTC or its participants directly to discuss these matters. 44 We expect that under procedures established by DTC, ownership of the Debentures will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC or its nominee, with respect to interests of direct participants, and the records of direct and indirect participants, with respect to interests of persons other than participants. The laws of some jurisdictions require that purchasers of securities take physical delivery of those securities in definitive form. Accordingly, the ability to transfer interests in the Debentures represented by a global Debenture to those persons may be limited. In addition, because DTC can act only on behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the ability of a person having an interest in Debentures represented by a global Debenture to pledge or transfer those interests to persons or entities that do not participate in DTC's system, or otherwise to take actions in respect of such interest, may be affected by the lack of a physical definitive security in respect of such interest. So long as DTC or its nominee is the registered owner of a global Debenture, DTC or that nominee will be considered the sole owner or holder of the Debentures represented by that global Debenture for all purposes under the indenture and under the Debentures. Except as provided below, owners of beneficial interests in a global Debenture will not be entitled to have Debentures represented by that global Debenture registered in their names, will not receive or be entitled to receive physical delivery of certificated Debentures and will not be considered the owners or holders thereof under the indenture or under the Debentures for any purpose, including with respect to the giving of any direction, instruction or approval to the trustee. Accordingly, each holder owning a beneficial interest in a global Debenture must rely on the procedures of DTC and, if that holder is not a direct or indirect participant, on the procedures of the participant through which that holder owns its interest, to exercise any rights of a holder of Debenture under the indenture or the global Debenture. Debentures represented by a global security will be exchangeable for registered certificated securities with the same terms only if: (1) DTC is unwilling or unable to continue as depositary or if DTC ceases to be clearing agency registered under the Exchange Act and a successor depositary is not appointed by us within 90 days; (2) we decide to discontinue use of the system of book-entry transfer through DTC (or any successor depositary); or (3) a default under the indenture occurs and is continuing. Neither ProAssurance nor the trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of Debentures by DTC, or for maintaining, supervising or reviewing any records of DTC relating to the Debentures. Payments on the Debentures represented by the global Debenture will be made to DTC or its nominee, as the case may be, as the registered owner thereof. We expect that DTC or its nominee, upon receipt of any payment on the Debentures represented by a global Debenture, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the global Debenture as shown in the records of DTC or its nominee. We also expect that payments by participants to owners of beneficial interests in the global Debenture held through such participants will be governed by standing instructions and customary practice as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. The participants will be responsible for those payments. Payments on the Debenture represented by the global Debenture will be made in immediately available funds. Transfers between participants in DTC will be effected in accordance with DTC rules and will be settled in immediately available funds. REGISTRATION RIGHTS At the time of the initial issuance of the Debentures we entered into a registration rights agreement with the initial purchasers for the benefit of the holders of the Debentures. As required under that agreement, we have filed with the SEC, at our expense, a shelf registration statement, of which this 45 prospectus forms a part, covering the resale of the Debentures and the shares of common stock issuable upon conversion of the Debentures. Under the terms of the agreement, we will, at our expense: - use our reasonable best efforts to cause such registration statement to become effective as promptly as is practicable, but in no event later than 180 days after the first date of original issuance of the Debentures; and - use our reasonable best efforts to keep the registration statement effective until the earliest of: - two years after the last date of original issuance of any of the Debentures; - the date when the holders of the Debentures and the shares of our common stock issuable upon conversion of the Debentures are able to sell all such securities immediately without restriction pursuant to the volume limitation provisions of Rule 144 under the Securities Act; - the date when all of the Debentures and the shares of common stock issuable upon conversion of the Debentures are registered under the shelf registration statement and disposed of in accordance with the shelf registration statement; and - the date when all of the Debentures and the shares of our common stock issuable upon conversion of the Debentures have ceased to be outstanding (whether as a result of redemption, repurchase and cancellation, conversion or otherwise). Subsequent to our filing of a shelf registration statement, we will: - provide to each holder named in the shelf registration statement copies of the prospectus that is a part of the shelf registration statement; - notify each such holder when the shelf registration statement has become effective; and - take certain other actions as are required to permit unrestricted resales of the Debentures and the shares of our common stock issuable upon conversion of the Debentures. Each holder who sells securities pursuant to the shelf registrations statement generally will be: - required to be named as a selling holder in the related prospectus; - required to deliver a prospectus to the purchaser; - subject to certain of the civil liability provisions under the Securities Act in connection with the holder's sales; and - bound by the provisions of the registration rights agreement which are applicable to the holder (including certain indemnification rights and obligations). We may suspend the holder's use of the prospectus for a period not to exceed 45 days in any 90-day period, and not to exceed an aggregate of 120 days in any 360-day period under specified circumstances relating to pending corporate developments, public filings with the SEC and similar events. Notwithstanding the foregoing, we may extend the suspension period from 45 days to 60 days under specified circumstances relating to possible acquisitions, financings or other material business transactions. We need not specify the nature of the event giving rise to a suspension in any notice to holders of the Debentures of the existence of such a suspension. Each holder, by its acceptance of the Debentures, agrees to hold any communication by us in response to a notice of a proposed sale in confidence. If, - on or prior to the 120th day after the first date of original issuance of the Debentures, the shelf registration statement has not been filed; or - on or prior to the 180th day after the first date of original issuance of the Debentures, the shelf registration statement has not been declared effective; or 46 - after the shelf registration statement has been declared effective, such shelf registration statement ceases to be effective or fails to be usable in connection with resales of the Debentures and shares of our common stock issuable upon the conversion of the Debentures in accordance with and during the periods specified in the registration rights agreement and we do not cure the shelf registration statement within five business days by filing a post-effective amendment, prospectus supplement or report pursuant to the Exchange Act or, if applicable, we do not terminate the suspension period, described in the preceding paragraph, by the 45th or 60th day, as the case may be, or a suspension period exceeds an aggregate of 120 days in any 360-day period; each such event referred to in the prior bullet points, a "registration default," then additional amounts will accrue on the Debentures, from and including the day following the registration default to but excluding the earlier of (1) the day on which the registration default has been cured and (2) the date the shelf registration statement is no longer required to be kept effective. Additional amounts will be paid semiannually in arrears, with the first semiannual payment due on the first interest payment date following the date on which such additional amounts begin to accrue, and will accrue at a rate per year equal to: - 0.25% of the principal amount of a Debenture to and including the 90th day following such registration default; and - 0.50% of the principal amount of a Debenture from and after the 91st day following such registration default. In no event will additional amounts accrue at a rate per year exceeding 0.50%. If a holder has converted some or all of its Debentures into shares of our common stock, the holder will be entitled to receive equivalent amounts based on the principal amount to the date of calculation of each Debenture converted. We will have no other liabilities for monetary damages with respect to our registration obligations. A holder will not be entitled to these additional amounts unless it has provided all information requested by the questionnaire prior to the deadline. If a shelf registration statement covering the resales of the Debentures and common stock into which the Debentures are convertible is not effective, these securities may not be sold or otherwise transferred except in accordance with the provisions set forth under "Notice to Investors." This summary of certain provisions of the registration rights agreement is subject to, and is qualified in its entirety by reference to, all the provisions of the registration rights agreement, a copy of which has been incorporated by reference as an exhibit to the registration statement of which this prospectus forms a part. 47 DESCRIPTION OF CAPITAL STOCK Our certificate of incorporation authorizes the issuance of up to 100,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share, the rights and preferences of which may be established from time to time by our board of directors. On June 30, 2003, 28,963,030 shares of our common stock and no shares of preferred stock were outstanding. COMMON STOCK Holders of record of common stock are entitled to one vote per share on all matters upon which stockholders have the right to vote. The rights attached to the shares of common stock do not provide for cumulative voting rights or preemptive rights. Therefore, holders of more than 50% of the shares of common stock are able to elect all our directors eligible for election each year. All issued and outstanding shares of our common stock are, and the common stock issuable upon conversion of the Debentures will be, validly issued, fully paid and non-assessable. Holders of our common stock are entitled to such dividends as may be declared from time to time by our board of directors out of funds legally available for that purpose. Upon dissolution, holders of our common stock are entitled to share pro rata in the assets of our company remaining after payment in full of all of our liabilities and obligations, including payment of the liquidation preference, if any, of any preferred stock then outstanding. There are no redemption or sinking fund provisions applicable to the common stock. PREFERRED STOCK Our board may, from time to time, issue up to an aggregate 50,000,000 shares of preferred stock in one or more series without shareholder approval. The board of directors can fix the designation powers, rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions. Issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock. No shares of preferred stock are currently outstanding. We have no present plans to issue any shares of preferred stock. DELAWARE ANTI-TAKEOVER STATUTE AND CHARTER PROVISIONS Under Delaware law, we may not engage in a "business combination," which includes a merger or sale of more than 10% of our assets, with any "interested stockholder," namely, a stockholder who owns 15% or more of our outstanding voting stock, as well as affiliates and associates of any of these persons, for three years following the time that stockholder became an interested stockholder unless: - the transaction in which the stockholder became an interested stockholder is approved by our board of directors prior to the time the interested stockholder attained that status; - upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding those shares owned by persons who are directors and also officers; or - at or after the time the stockholder became an interested stockholder the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. The authorization of undesignated preferred stock in our charter makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of us. 48 LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Our certificate of incorporation limits the liability of directors to the fullest extent permitted by Delaware law. In addition, the certificates of incorporation and bylaws of our companies provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. We believe that the provisions in our certificates of incorporation and bylaws are necessary to attract and retain qualified persons as directors and officers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Mellon Investor Services LLC. Its address is 44 Wall Street, New York, NY 10005. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES The following discussion represents the opinion of Ernst & Young LLP regarding the material U.S. federal income tax consequences (and to the extent set forth below, certain U.S. federal estate tax consequences for non-U.S. holders, as defined below) relevant to the purchase, ownership and disposition of the Debentures and common stock into which the Debentures are convertible, but is not a complete analysis of all potential tax considerations relating thereto that may be relevant to a holder based on its particular situation. This discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed or revoked, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. We have not sought any ruling from the Internal Revenue Service (the "IRS") with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions. This discussion is limited to beneficial owners of Debentures who purchased Debentures upon their initial issuance at their initial issue price (as defined below under "Consequences to U.S. Holders -- Accrual of Interest") and who hold the Debentures and the common stock into which such Debentures are convertible as capital assets. This discussion also does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction. In addition, this discussion does not address tax considerations applicable to an investor's particular circumstances or to investors that may be subject to special tax rules, including, without limitation: - banks, insurance companies or other financial institutions; - persons subject to U.S. federal estate, gift or alternative minimum tax arising from the purchase, ownership or disposition of the Debentures (except to the extent specifically set forth below); - tax-exempt organizations; - dealers in securities or currencies; - traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; - foreign persons or entities (except to the extent specifically set forth below); - persons that own, or are deemed to own, more than 5% of our stock (except to the extent specifically set forth below); - certain former citizens or long-term residents of the United States; - U.S. holders (as defined below) whose functional currency is not the U.S. dollar; 49 - persons who hold the Debentures or common stock as a position in a hedging transaction, "straddle," "conversion transaction" or other risk reduction transaction; or - persons deemed to sell the Debentures or common stock under the constructive sale provisions of the Code. In addition, if a beneficial owner of Debentures is an entity treated as a partnership for U.S. federal income tax purposes, the tax treatment of each partner of such partnership will generally depend upon the status of the partner and upon the activities of the partnership. A beneficial owner of Debentures that is a partnership, and partners in such partnerships, should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of the Debentures and common stock. THIS SUMMARY OF CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. YOU ARE URGED TO CONSULT YOUR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION, AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE DEBENTURES AND COMMON STOCK ARISING UNDER THE FEDERAL ESTATE AND GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY. CLASSIFICATION OF THE DEBENTURES Under the indenture governing the Debentures, we and each holder and beneficial owner of the Debentures agree (in the absence of a change in applicable law requiring a contrary treatment), for U.S. federal income tax purposes, to treat the Debentures as indebtedness that is subject to the Treasury Regulations governing contingent payment debt instruments (the "Contingent Debt Regulations"). The remainder of this discussion assumes that the Debentures will be so treated and does not address any possible differing treatment of the Debentures. In June 2002, the IRS issued a revenue ruling with respect to instruments similar to the Debentures and this ruling supports certain aspects of the treatment described below. However, the application of the Contingent Debt Regulations to instruments such as the Debentures remains uncertain in several other respects, and we have sought no rulings from the IRS with respect to any of the tax consequences discussed below. Accordingly, no assurance can be given that the IRS or a court will agree with the treatment described herein. Any differing treatment could affect the amount, timing and character of income, gain or loss in respect of an investment in the Debentures or with respect to our common stock received on conversion of a Debenture. In particular, a beneficial owner might be required to accrue original issue discount at a higher rate or a lower rate, might not recognize income, gain or loss upon conversion of the Debentures to common stock, and might recognize capital gain or loss upon a taxable disposition of the Debentures. You should consult your tax advisor concerning the tax treatment of ownership and disposition of the Debentures or common stock. CONSEQUENCES TO U.S. HOLDERS The following is a summary of certain material U.S. federal income tax consequences that will apply to you if you are a U.S. holder of the Debentures or common stock. Certain consequences to "non-U.S. holders" of the Debentures or common stock are described under "-- Consequences to Non-U.S. Holders" below. The term "U.S. holder" means a beneficial owner of a Debenture or common stock who or that is: - an individual citizen or resident of the United States; - a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created or organized in the United States or under the laws of the United States, any state thereof, or the District of Columbia; 50 - an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or - a trust that (1) is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. ACCRUAL OF INTEREST Under the Contingent Debt Regulations, actual cash payments on the Debentures, if any, will not be reported separately as taxable income, but will be taken into account under such regulations. As discussed more fully below, the effect of the Contingent Debt Regulations will be to: - require you, regardless of your usual method of tax accounting, to use the accrual method with respect to the Debentures; - require you to accrue and include in taxable income each year original issue discount at the comparable yield (as described below) which will be substantially in excess of interest payments actually received by you; and - generally result in ordinary rather than capital treatment of any gain, and to some extent loss, on the sale, exchange, repurchase or redemption of the Debentures. You will be required to accrue an amount of ordinary interest income as original issue discount for U.S. federal income tax purposes, for each accrual period prior to and including the maturity date of the Debenture, that equals: - the product of (i) the adjusted issue price (as defined below) of the Debentures as of the beginning of the accrual period and (ii) the comparable yield (as defined below) of the Debentures, adjusted for the length of the accrual period; - divided by the number of days in the accrual period; and - multiplied by the number of days during the accrual period that you held the Debentures. The initial issue price of a Debenture was the first price at which a substantial amount of the Debentures were sold to the public, excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers. The adjusted issue price of a Debenture will be its issue price increased by any original issue discount previously accrued, determined without regard to any adjustments to original issue discount accruals described below, and decreased by the amount of any noncontingent payment previously made with respect to the Debenture and the projected amount of any contingent payment previously scheduled to be made with respect to the Debentures under the projected payment schedule described below. Under the Contingent Debt Regulations, you will be required to include original issue discount in income each year, regardless of your usual method of tax accounting, based on the comparable yield of the Debentures. We have determined the comparable yield of the Debentures based on the rate, as of the initial issue date, at which we would have issued a fixed rate nonconvertible debt instrument with no contingent payments but with terms and conditions similar to those of the Debentures. Accordingly, we have determined that the comparable yield is an annual rate of 8.75%, compounded semi-annually. There can be no assurance that the IRS will not challenge our determination of the comparable yield or that any such challenge would not be successful. We are required to furnish to you the comparable yield and, solely for U.S. federal income tax purposes, a projected payment schedule that includes the noncontingent interest payments on the Debentures and estimates of the amount and timing of contingent interest payments and the amount of the payment upon maturity of the Debentures taking into account the fair market value of the common stock that might be paid upon a conversion of the Debentures. You may obtain the projected payment schedule by submitting a written request for it to us at the address set forth on page iii of this prospectus. By purchasing the Debentures, you agree in the indenture to be bound by our determination of the 51 comparable yield and projected payment schedule. For U.S. federal income tax purposes, you must use the comparable yield and the projected payment schedule in determining your original issue discount accruals, and the adjustments thereto described below, in respect of the Debentures. The comparable yield and the projected payment schedule are not provided for any purpose other than the determination of your original issue discount and adjustments thereof in respect of the Debentures for U.S. federal income tax purposes and do not constitute a projection or representation regarding the actual amount or timing of the payments on a Debenture. ADJUSTMENTS TO INTEREST ACCRUALS ON THE DEBENTURES If the actual contingent payments made on the Debentures differ from the projected contingent payments, adjustments will be made for the difference. If, during any taxable year, you receive actual contingent payments with respect to the Debentures for that taxable year that in the aggregate exceed the total amount of projected contingent payments for the taxable year, you will incur a positive adjustment equal to the amount of such excess. Such positive adjustment will be treated as additional original issue discount in such taxable year. For these purposes, the actual contingent payments in a taxable year include the fair market value of property received in that year. If you receive in a taxable year actual contingent payments that in the aggregate are less than the amount of projected contingent payments for the taxable year, you will incur a negative adjustment equal to the amount of such deficit. A negative adjustment will be treated as follows: - first, a negative adjustment will reduce the amount of original issue discount required to be accrued in the current year; - second, any negative adjustments that exceed the amount of original issue discount accrued in the current year will be treated as ordinary loss to the extent of your total prior original issue discount inclusions with respect to the Debentures, reduced to the extent such prior original issue discount inclusions were previously offset by prior negative adjustments; and - third, any excess negative adjustments will be carried forward and will be treated as a regular negative adjustment in the succeeding taxable year or will reduce the amount realized on a sale, exchange, repurchase, redemption or conversion of your Debentures. SALE, EXCHANGE, CONVERSION OR REDEMPTION OF THE DEBENTURES Upon the sale, exchange, repurchase or redemption of a Debenture, as well as upon a conversion of a Debenture, you generally will recognize gain or loss equal to the difference between your amount realized and your adjusted tax basis in the Debenture. By purchasing a Debenture, you agree in the indenture that under the Contingent Debt Regulations, the amount realized would include the fair market value of our common stock that you receive on the conversion or repurchase as a contingent payment. Such gain on a Debenture generally will be treated as interest income. Loss from the disposition of a Debenture will be treated as ordinary loss to the extent of your prior net original issue discount inclusions with respect to the Debentures. Any loss in excess of that amount will be treated as capital loss, which will be long-term if the Debentures were held for more than one year. The deductibility of capital losses is subject to limitations. Special rules apply in determining the tax basis of a Debenture. Your adjusted tax basis in a Debenture is generally equal to your original purchase price for the Debenture, increased by original issue discount (determined without regard to any adjustments to original issue discount accruals described above) you previously accrued on the Debenture, and reduced by the amount of any noncontingent payment previously made with respect to the Debenture and the projected amount of any contingent payment previously scheduled to be made on the Debenture under the projected payment schedule described above. 52 Under this treatment, your tax basis in common stock received upon conversion or repurchase of a Debenture will equal the then current fair market value of such common stock. Your holding period for our common stock will commence on the day after conversion or repurchase. If you convert your Debentures between the record date for an interest payment and the next interest payment date and, as a result, receive a payment of cash interest or contingent cash interest, as described in "Description of Debentures -- Conversion Rights," you should consult your tax advisors concerning the appropriate tax treatment of such payments. CONSTRUCTIVE DIVIDENDS Holders of convertible debt instruments such as the Debentures may, in certain circumstances, be deemed to have received taxable distributions of stock if the conversion price of such instruments is adjusted (for example, an increase in the conversion rate on account of certain cash dividends). However, adjustments to the conversion price made pursuant to a bona fide reasonable adjustment formula, which has the effect of preventing the dilution of the interest of the holders of the debt instruments, will generally not be deemed to result in a constructive taxable distribution of stock. Certain of the possible adjustments provided in the Debentures may not qualify as being pursuant to a bona fide reasonable adjustment formula. If such adjustments are made, you will be deemed to have received constructive distributions includible in your income in the manner described under "-- Dividends" below even though you have not received any cash or property as a result of such adjustments. In certain circumstances, the failure to provide for such an adjustment may also result in a constructive taxable distribution to you. DIVIDENDS If you convert your Debenture into common stock, distributions, if any, made on our common stock generally will be included in your income as ordinary dividend income to the extent of our current and accumulated earnings and profits. Distributions in excess of our current and accumulated earnings and profits will be treated as a return of capital to the extent of your adjusted tax basis in the common stock and thereafter as capital gain from the sale or exchange of such common stock. Dividends received by a corporate U.S. holder may be eligible for a dividend received deduction. Pursuant to recently enacted legislation, dividends on our common stock received by certain non-corporate U.S. holders, including individuals, may qualify for a reduced rate of U.S. federal income tax. SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK Upon the sale, exchange or redemption of our common stock, you generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any property received upon the sale, exchange or redemption and (ii) your adjusted tax basis in the common stock. Such capital gain or loss will be long-term capital gain or loss if your holding period in the common stock is more than one year at the time of the sale, exchange or redemption. Long-term capital gains recognized by certain noncorporate U.S. holders, including individuals, will generally be subject to a reduced rate of U.S. federal income tax. Your adjusted tax basis and holding period in common stock received upon conversion or repurchase of a Debenture are determined as discussed above under "-- Sale, Exchange, Conversion or Redemption of the Debentures." The deductibility of capital losses is subject to limitations. ADDITIONAL PAYMENTS We may be required to pay additional amounts to you if we do not file or cause to be declared effective a registration statement, as described above under "Registration Rights." We intend to take the position for U.S. federal income tax purposes that any such additional amounts should be taxable to you as additional ordinary income when received or accrued, in accordance with your method of tax accounting. This position is based in part on our determination that as of the date of issuance of the Debentures, the possibility that such additional amounts would have to be paid is a "remote" or "incidental" contingency within the meaning of applicable Treasury Regulations. Our determination that such possibility is a remote 53 or incidental contingency is binding on you under the indenture. However, the IRS may take a contrary position from that described above, which could affect the timing and character of your income with respect to such additional amounts. If we do fail to file or cause to be declared effective a registration statement, you should consult your tax advisors concerning the appropriate tax treatment of the payment of such additional amounts to you. BACKUP WITHHOLDING AND INFORMATION REPORTING We are required to furnish to the record holders of the Debentures and common stock, other than corporations and other exempt holders, and to the IRS, information with respect to interest paid or original issue discount accrued on the Debentures and dividends paid on the common stock. You may be subject to backup withholding with respect to interest paid on the Debentures, dividends paid on the common stock or with respect to proceeds received from a disposition of the Debentures or shares of common stock. Certain holders (including, among others, corporations and certain tax-exempt organizations) are generally not subject to backup withholding. You will be subject to backup withholding if you are not otherwise exempt and you: - fail to furnish your taxpayer identification number ("TIN"), which, for an individual, is ordinarily his or her social security number; - furnish an incorrect TIN; - are notified by the IRS that you have failed to properly report payments of interest or dividends; or - fail to certify, under penalties of perjury, that you have furnished a correct TIN and that the IRS has not notified you that you are subject to backup withholding. Backup withholding is not an additional tax but, rather, is a method of tax collection. You generally will be entitled to credit any amounts withheld under the backup withholding rules against your U.S. federal income tax liability provided that the required information is furnished to the IRS in a timely manner. CONSEQUENCES TO NON-U.S. HOLDERS The following is a summary of certain material U.S. federal income tax consequences and estate tax consequences that will apply to you if you are a non-U.S. holder of the Debentures or common stock. For purposes of this discussion, a "non-U.S. holder" means a beneficial owner of Debentures or common stock who or that is not a U.S. holder (as defined below). PAYMENTS OF INTEREST In general, subject to the discussion below concerning backup withholding, you will not be subject to the U.S. federal withholding tax with respect to payments of interest on the Debentures (including amounts taken into income as interest under the accrual rules described above under "-- Consequences to U.S. Holders" and amounts attributable to the shares of our common stock received upon a conversion of the Debentures) provided that: - you do not own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of Section 871(h)(3) of the Code; - you are not a "controlled foreign corporation" with respect to which we are, directly or indirectly, a "related person" as defined in the Code; - our Debentures and common stock are actively traded within the meaning of Section 871(h)(4)(C)(v)(l) and we are not a "United States real property holding corporation;" and 54 - you are not a bank whose receipt of interest (including original issue discount) on a Debenture is described in Section 881(c)(3)(A) of the Code; and - you provide your name and address, and certify, under penalties of perjury, that you are not a U.S. person (which certification may be made on an IRS Form W-8BEN (or successor form)), or you hold your Debentures through certain intermediaries, and you and the intermediaries satisfy the certification requirements of applicable Treasury Regulations. Special certification rules apply to non-U.S. holders that are pass-through entities rather than corporations or individuals. Prospective investors should consult their tax advisors regarding the certification requirements for non-U.S. holders. If you cannot satisfy the requirements described above, you will be subject to the 30% U.S. federal withholding tax with respect to payments of interest on a Debenture, unless you provide us with a properly executed (1) IRS Form W-8BEN (or successor form) claiming an exemption from or reduction in withholding under an applicable U.S. income tax treaty or (2) IRS Form W-8ECI (or successor form) stating that interest paid on the Debenture is not subject to withholding tax because it is effectively connected with the conduct of a U.S. trade or business. If you are engaged in a trade or business in the United States and interest on a Debenture is effectively connected with your conduct of that trade or business, you will be subject to U.S. federal income tax on that interest on a net income basis (although you will be exempt from the 30% withholding tax, provided the certification requirements described above are satisfied) in the same manner as if you were a U.S. person as defined under the Code. In addition, if you are a foreign corporation, you may be subject to a branch profits tax equal to 30% (or such lower rate as may be prescribed under an applicable U.S. income tax treaty) of your earnings and profits for the taxable year, subject to adjustments, that are effectively connected with your conduct of a trade or business in the United States. For this purpose, interest (including original issue discount) will be included in your earnings and profits. Absent further relevant guidance from the IRS, in the event that we do not file or cause to be declared effective a registration statement, as described under "Registration Rights," and we pay additional amounts to you as described therein, we intend to treat such additional payments as subject to U.S. federal withholding tax. Therefore, we intend to withhold on any such payments at a rate of 30% unless we receive an IRS Form W-8BEN or an IRS Form W-8ECI from you claiming, respectively, that such payments are subject to reduction or elimination of withholding under an applicable U.S. income tax treaty or that such payments are effectively connected with the conduct of a U.S. trade or business. You should consult your own tax advisers as to whether you can obtain a refund for the withholding tax imposed on such additional amounts because such amounts represent interest qualifying for an exemption or based on some other rationale. SALE, EXCHANGE, REDEMPTION OR OTHER TAXABLE DISPOSITION OF THE DEBENTURES OR COMMON STOCK Any gain realized by you on the sale, exchange, redemption, conversion or other taxable disposition of a Debenture will generally be treated as interest income generally subject to the rules described above under "-- Payments of Interest." Any gain realized by you on the sale, exchange or other taxable disposition of our common stock generally will not be subject to U.S. federal income tax unless: - the gain is effectively connected with your conduct of a U.S. trade or business; - you are an individual who is present in the United States for 183 days or more in the taxable year of disposition, and certain conditions are met; - you are subject to Code provisions applicable to certain U.S. expatriates; or 55 - we are or have been a "United States real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that you held our common stock. If your gain is described in the first bullet point above, you generally will be subject to U.S. federal income tax on the net gain derived from the sale in the same manner as if you were a U.S. person as defined under the Code, and if you are a corporation, then any such effectively connected gain received by you may also, under certain circumstances, be subject to the branch profits tax at a 30% rate (or such lower rate as may be prescribed under an applicable U.S. income tax treaty). If you are an individual described in the second bullet point above, you will be subject to a flat 30% U.S. federal income tax on the gain derived from the sale, which may be offset by U.S. source capital losses, even though you are not considered a resident of the United States. Such holders are urged to consult their tax advisors regarding the tax consequences of the acquisition, ownership and disposition of the common stock. We do not believe that we are currently, and we do not anticipate becoming, a United States real property holding corporation. Even if we were, or were to become, a United States real property holding corporation, no adverse tax consequences would apply to you if you hold, directly or indirectly, at all times during the applicable period, five percent or less of our common stock, provided that our common stock was regularly traded on an established securities market. DIVIDENDS In general, dividends, if any, received by you with respect to our common stock (and any deemed distributions resulting from certain adjustments, or failures to make certain adjustments, to the conversion price of the Debentures, see "-- Consequences to U.S. Holders -- Constructive Dividends" above) will be subject to withholding of U.S. federal income tax at a 30% rate (which in the case of any deemed distributions generally would be satisfied by withholding from subsequent payments on the Debentures), unless such rate is reduced by an applicable U.S. income tax treaty. Dividends that are effectively connected with your conduct of a trade or business in the United States are generally subject to U.S. federal income tax on a net income basis and are exempt from the 30% withholding tax (assuming compliance with certain certification requirements). Any such effectively connected dividends received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to the branch profits tax at a 30% rate or such lower rate as may be prescribed under an applicable U.S. income tax treaty. In order to claim the benefit of a U.S. income tax treaty or to claim exemption from withholding because dividends paid to you on our common stock are effectively connected with your conduct of a trade or business in the United States, you must provide a properly executed IRS Form W-8BEN for treaty benefits or W-8ECI for effectively connected income (or such successor form as the IRS designates), prior to the payment of dividends. These forms must be periodically updated. You may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund. U.S. FEDERAL ESTATE TAX If you are an individual and are not a citizen or resident of the United States (as specially defined for U.S. federal estate tax purposes) at the time of your death, your Debentures will generally not be subject to the U.S. federal estate tax, unless, at the time of your death: - you own, actually or constructively, 10% or more of the total combined voting power of all classes of our stock entitled to vote within the meaning of section 871(h)(3) of the Code; or - payments with respect to your Debentures are effectively connected with your conduct of a trade or business in the United States. If you are an individual who at the time of death is not a citizen or resident of the United States (as specially defined for U.S. federal estate tax purposes), your common stock will be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise. 56 BACKUP WITHHOLDING AND INFORMATION REPORTING If you are a non-U.S. holder, in general, you will not be subject to backup withholding and information reporting with respect to payments that we make to you provided that we do not have actual knowledge or reason to know that you are a U.S. person and you have given us the statement described above under "-- Consequences to Non-U.S. Holders -- Payments of Interest." In addition, you will not be subject to backup withholding or information reporting with respect to the proceeds of the sale of a Debenture or a share of common stock within the United States or conducted through certain U.S.-related financial intermediaries, if the payor receives the statement described above and does not have actual knowledge or reason to know that you are a U.S. person, as defined under the Code, or you otherwise establish an exemption. However, we may be required to report annually to the IRS and to you the amount of, and the tax withheld with respect to, any interest or dividends paid to you, regardless of whether any tax was actually withheld. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which you reside. You generally will be entitled to credit any amounts withheld under the backup withholding rules against your U.S. federal income tax liability provided that the required information is furnished to the IRS in a timely manner. SELLING SECURITYHOLDERS The Debentures originally were issued by us and sold by Banc of America Securities LLC and Cochran, Caronia Securities LLC, as the initial purchasers, in transactions exempt from the registration requirements of the Securities Act of 1933 to persons reasonably believed by the initial purchasers to be qualified institutional buyers. Selling securityholders, including their transferees, pledgees or donees or their successors, may from time to time offer and sell any or all of the Debentures and the common stock into which the Debentures are convertible pursuant to this prospectus. The selling securityholders may offer all, some or none of the Debentures and the common stock. The table below sets forth the name of each selling securityholder, the principal amounts of Debentures that may be offered by each selling securityholder under this prospectus and the number of shares of common stock into which the Debentures are convertible. The information is based on information provided to us by or on behalf of the selling securityholders on or prior to October 21, 2003. The selling securityholders identified below may have sold, transferred or otherwise disposed of all or a portion of their Debentures or common stock since the date on which they provided this information in transactions exempt from the registration requirements of the Securities Act. Information about the selling securityholders may change from time to time. Any changed information will be set forth in prospectus supplements or post-effective amendments, as required. Because the selling securityholders may offer all or some portion of the Debentures or the common stock into which the Debentures are convertible, we cannot estimate the amount of Debentures or common stock that may be held by the selling securityholders upon the completion of any sales. For information on the procedure for sales by selling securityholders, read the disclosure under the heading "Plan of Distribution" below.
PRINCIPAL AMOUNT NUMBER OF SHARES NUMBER OF SHARES OF DEBENTURES PERCENTAGE OF OF COMMON STOCK OF COMMON STOCK PERCENTAGE OF BENEFICIALLY OWNED DEBENTURES BENEFICIALLY UNDERLYING THE COMMON STOCK NAME OF SELLING SECURITYHOLDER(1) THAT MAY BE SOLD OUTSTANDING OWNED(2) DEBENTURES(3)(4) OUTSTANDING(5) - --------------------------------- ------------------ ------------- ---------------- ---------------- -------------- AIG DKR SoundShore Opportunity Holding Fund Ltd. ........... $ 2,000,000 1.86 0 47,807 * Akanthos Arbitrage Master Fund, L.P. .................. 5,000,000 4.65 0 119,518 * Akela Capital Master Fund, Ltd. ........................ 6,000,000 5.58 0 143,422 *
57
PRINCIPAL AMOUNT NUMBER OF SHARES NUMBER OF SHARES OF DEBENTURES PERCENTAGE OF OF COMMON STOCK OF COMMON STOCK PERCENTAGE OF BENEFICIALLY OWNED DEBENTURES BENEFICIALLY UNDERLYING THE COMMON STOCK NAME OF SELLING SECURITYHOLDER(1) THAT MAY BE SOLD OUTSTANDING OWNED(2) DEBENTURES(3)(4) OUTSTANDING(5) - --------------------------------- ------------------ ------------- ---------------- ---------------- -------------- Barclays Global Investors Diversified Alpha Plus Funds c/o Forest Investment Mngt. LLC.................... 216,000 * 0 5,163 * Bear, Stearns & Co., Inc. ..... 1,500,000 1.39 0 35,855 * CNH CA Master Account, L.P. ... 3,000,000 2.79 0 71,711 * Coda Capital Management, LLC... 100,000 * 0 2,390 * Forest Fulcrum Fund LP......... 789,000 * 0 18,860 * Forest Global Convertible Fund, Ltd., Class A-5.............. 2,222,000 2.07 0 53,114 * Forest Multi-Strategy Master Fund SPC, on behalf of its Multi-Strategy Segregated Portfolio.................... 546,000 * 0 13,051 * KBC Financial Products USA Inc. .................... 500,000 * 0 11,951 * Lyxor/Forest Fund Ltd. c/o Forest Investment Mngt. LLC......... 1,255,000 1.17 0 29,999 * McMahan Securities Co. L.P. ... 250,000 * 0 5,975 * MLQA Convertible Arbitrage Ltd. ........................ 5,000,000 4.65 0 119,518 * RBC Alternative Assets L.P. ... 250,000 * 2,800 5,975 * Relay 11 Holdings Co. c/o Forest Investment Mngt. LLC......... 144,000 * 0 3,442 * Sage Capital................... 3,000,000 2.79 0 71,711 * SAM Investments LDC............ 25,000,000 23.23 0 597,592 2.05 SGCowen Securities -- Convertible Arbitrage.................... 3,000,000 2.79 0 71,711 * Sphinx Convertible Arbitrage SPC c/o Forest Investment Mngt. LLC.......................... 72,000 * 0 1,721 * Sunrise Partners Limited Partnership.................. 3,750,000 3.49 0 89,638 * Univest Convertible Arbitrage Fund Ltd. c/o Forest Investment Mngt. LLC.................... 108,000 * 0 2,581 * White River Securities L.L.C. ... 1,500,000 1.39 0 35,855 * Xavex Convertible Arbitrage 4 Fund c/o Forest Investment Mngt. LLC.................... 108,000 * 0 2,581 * Zurich Institutional Benchmarks Master Fund Ltd., c/o Forest Investment Mngt. LLC......... 336,000 * 0 8,031 * ----------- ----- ----- ----------- ---- TOTAL.......................... 65,646,000 61.01 2,800 1,569,182(6) 5.41
- --------------- * Less than 1% (1) Also includes any sale of the Debentures and the underlying common stock by pledgees, donees, transferees or other successors in interest that receive such securities by pledge, gift, distribution or other non-sale related transfer from the named selling securityholders. Information about other selling securityholders will be set forth in prospectus supplements or in other documents that we file from time to time with the Securities and Exchange Commission that are incorporated by reference in this prospectus, if required. See "Where You Can Find More Information." 58 (2) Excludes common stock issuable upon conversion of the selling securityholder's Debentures. (3) Assumes conversion of all of the selling securityholder's Debentures at a conversion rate of 23.9037 shares of common stock per Debenture and a cash payment in lieu of the issuance of any fractional share interest. However, this conversion rate is subject to adjustment as described under "Description of the Debentures -- Conversion Rights." As a result, the number of shares of common stock issuable upon conversion of the Debentures may increase or decrease in the future. (4) Reflects rounding down of fractional common stock issuable to each selling securityholder upon conversion of the Debentures. (5) Calculated using 29,084,795 shares of common stock outstanding as of June 30, 2003, which excludes shares issuable upon exercise of options granted by us as described in note 3 under "Capitalization." In calculating this amount, we did not treat as outstanding the common stock issuable upon conversion of Debentures. (6) Column does not add up correctly because the fractional shares to which the holders would be entitled have been disregarded. None of the selling securityholders listed above has, or within the past three years had, any position, office or any material relationship with us or any of our affiliates. To the extent that any of the selling securityholders identified above are broker-dealers, they are deemed to be, under interpretations of the Securities and Exchange Commission, "underwriters" within the meaning of the Securities Act. With respect to selling securityholders that are affiliates of broker-dealers, we believe that such entities acquired their Debentures or underlying common stock in the ordinary course of business and, at the time of the purchase of the Debentures or the underlying common stock, such selling securityholders had no agreements or understandings, directly or indirectly, with any person to distribute the Debentures or underlying common stock. To the extent that we become aware that such entities did not acquire their Debentures or underlying common stock in the ordinary course of business or did have such an agreement or understanding, we will file a post-effective amendment to the registration statement of which this prospectus forms a part to designate such affiliate as an "underwriter" within the meaning of the Securities Act. Only selling securityholders identified above who beneficially own the Debentures set forth opposite each such selling securityholder's name in the foregoing table on the effective date of the registration statement, of which this prospectus forms a part, may sell such securities pursuant to the registration statement. Prior to any use of this prospectus in connection with an offering of the Debentures or the underlying common stock by any holder not identified above, the registration statement of which this prospectus forms a part will be amended by a post-effective amendment to set forth the name and aggregate amount of Debentures beneficially owned by the selling securityholder intending to sell such Debentures or the underlying common stock and the aggregate amount of Debentures or the number of shares of the underlying common stock to be offered. The prospectus, which will be a part of such a post- effective amendment, will also disclose whether any selling securityholder selling in connection with such prospectus has held any position or office with, has been employed by or otherwise has had a material relationship with us during the three years prior to the date of the prospectus if such information has not been disclosed herein. PLAN OF DISTRIBUTION The Debentures and the underlying common stock are being registered to permit the resale of such securities by the holders of them from time to time after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling securityholders of the Debentures and common stock. We will bear the fees and expenses incurred in connection with our obligation to register the Debentures and the underlying common stock. These fees and expenses include registration and filing fees, printing and 59 duplication expenses, fees and disbursements of our counsel, reasonable fees and disbursements of the trustee and its counsel and of the registrar and transfer agent for the common stock, and fees and disbursements of one firm of legal counsel for the securityholders. However, the selling securityholders will pay all underwriting discounts, commissions and agent's commissions, if any. The selling securityholders may offer and sell the Debentures and the common stock into which the Debentures are convertible from time to time in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. Such sales may be effected by a variety of methods, including the following: - in market transactions; - in privately negotiated transactions; - through the writing of options; - in a block trade in which a broker-dealer will attempt to sell a block of securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; - if we agree to it prior to the distribution, through one or more underwriters on a firm commitment or best-efforts basis; - through broker-dealers, which may act as agents or principals; - directly to one or more purchasers; - through agents; or - in any combination of the above or by any other legally available means. In connection with the sales of the Debentures and the common stock into which the Debentures are convertible or otherwise, the selling securityholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the offered securities, short and deliver the Debentures and the common stock into which the Debentures are convertible to close out such short positions, or loan or pledge the Debentures and the common stock into which the Debentures are convertible to broker-dealers that in turn may sell such securities. If a material arrangement with any underwriter, broker, dealer or other agent is entered into for the sale of any Debentures and the common stock into which the Debentures are convertible through a secondary distribution or a purchase by a broker or dealer, or if other material changes are made in the plan of distribution of the Debentures and the common stock into which the Debentures are convertible, a prospectus supplement will be filed, if necessary, under the Securities Act disclosing the material terms and conditions of such arrangement. The underwriter or underwriters with respect to an underwritten offering of Debentures and the common stock into which the Debentures are convertible and the other material terms and conditions of the underwriting will be set forth in a prospectus supplement relating to such offering and, if an underwriting syndicate is used, the managing underwriter or underwriters will be set forth on the cover of the prospectus supplement. In connection with the sale of the Debentures and the common stock into which the Debentures are convertible, underwriters will receive compensation in the form of underwriting discounts or commissions and may also receive commissions from purchasers of Debentures and underlying common stock for whom they may act as agent. Underwriters may sell to or through dealers, and such dealers may receive compensation in the form of discounts, concessions or commissions from the underwriters or commissions from the purchasers for whom they may act as agent. To our knowledge, there are currently no plans, arrangements or understandings between any selling securityholders and any underwriter, broker-dealer or agent regarding the sale of the Debentures or the underlying common stock by the selling securityholders. Selling securityholders may decide not to sell all or a portion of the Debentures or the underlying common stock offered by them pursuant to this prospectus or may decide not to sell Debentures or the underlying common stock under this prospectus. In addition, any selling securityholder may transfer, devise or give the Debentures or the underlying common 60 stock by other means not described in this prospectus. Any Debentures or underlying common stock covered by this prospectus that qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than pursuant to this prospectus. The selling securityholders and any underwriters, broker-dealers or agents participating in the distribution of the Debentures and the common stock into which the Debentures are convertible may be deemed to be "underwriters" within the meaning of the Securities Act, and any profit on the sale of the Debentures or common stock by the selling securityholders and any commissions received by any such underwriters, broker-dealers or agents may be deemed to be underwriting commissions under the Securities Act. If the selling securityholders were deemed to be underwriters, the selling securityholders may be subject to statutory and implied liabilities including, but not limited to, those of Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. The selling securityholders and any other person participating in the distribution will be subject to the applicable provisions of the Exchange Act and the rules and regulations under the Exchange Act, including, without limitation, Regulation M, which may limit the timing of purchases and sales of any of the Debentures and the common stock into which the Debentures are convertible by the selling securityholders and any other relevant person. Furthermore, Regulation M may restrict the ability of any person engaged in the distribution of the Debentures and the common stock into which the Debentures are convertible to engage in market-making activities with respect to the particular Debentures and the common stock into which the Debentures are convertible being distributed. All of the above may affect the marketability of the Debentures and the common stock into which the Debentures are convertible and the ability of any person or entity to engage in market-making activities with respect to the Debentures and the common stock into which the Debentures are convertible. Under the securities laws of certain states, the Debentures and the common stock into which the Debentures are convertible may be sold in those states only through registered or licensed brokers or dealers. In addition, in certain states the Debentures and the common stock into which the Debentures are convertible may not be sold unless the Debentures and the common stock into which the Debentures are convertible have been registered or qualified for sale in the state or an exemption from registration or qualification is available and complied with. We have agreed to indemnify the selling securityholders against certain civil liabilities, including certain liabilities arising under the Securities Act, and the selling securityholders will be entitled to contribution from us in connection with those liabilities. The selling securityholders will indemnify us against certain civil liabilities, including liabilities arising under the Securities Act, and will be entitled to contribution from the selling securityholders in connection with those liabilities. We are permitted to suspend the use of this prospectus under certain circumstances relating to corporate developments, public filings with the SEC and similar events for a period not to exceed 45 days in any three-month period and not to exceed an aggregate of 120 days in any 12-month period. If the duration of such suspension exceeds any of the periods above-mentioned, we have agreed to pay liquidated damages. Please refer to the section entitled "Description of Debentures -- Registration Rights." NEW ISSUE OF DEBENTURES The Debentures are a new issue of securities with no established trading market. We do not intend to apply for listing of the Debentures on any national securities exchange or for quotation of the Debentures on any automated dealer quotation system. A liquid or active public trading market for the Debentures may never develop. If an active trading market for the Debentures does not develop, the market price and liquidity of the Debentures may be adversely affected. If the Debentures are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, our performance and other factors. 61 CERTAIN RELATIONSHIPS SouthTrust Bank is the trustee under the indenture. The trustee was the lead arranger, administrative agent and syndication agent for our credit facility that included the term loan that was repaid from a portion of the proceeds we received from the initial sale of the Debentures and the revolving credit facility which recently expired but may be renewed or replaced by a new facility in which the trustee may be a participant. The trustee and its affiliates also perform certain other commercial banking services for us, including providing cash management accounts, checking services, and serving as custodian for our investment securities for which it receives customary fees. The trustee will be the paying agent, conversion agent, transfer agent, and bid solicitation agent for the Debentures. LEGAL MATTERS Unless otherwise specified in a prospectus supplement, certain legal matters regarding the Debentures and the shares of our common stock issuable upon conversion of the Debentures have been passed upon for ProAssurance by Burr & Forman LLP. EXPERTS The consolidated financial statements of ProAssurance Corporation appearing in ProAssurance Corporation's Annual Report (Form 10-K/A) for the year ended December 31, 2002, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firm as experts in accounting and auditing. 62 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $107,600,000 (PROASSURANCE LOGO) PROASSURANCE CORPORATION 3.90% CONVERTIBLE SENIOR DEBENTURES DUE 2023 ------------------------------------------------------------ PROSPECTUS [ ], 2003 ------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses payable by the registrant in connection with the issuance and distribution of the Debentures and shares of underlying common stock being registered hereby, other than underwriting discounts and commissions. All the amounts shown are estimates, except the SEC registration fee. Securities and Exchange Commission registration fee......... $ 9,000 Accounting Fees and Expenses................................ $270,000 Legal fees and expenses..................................... $250,000 Printing fees and expenses.................................. $110,000 Trustee's fees and expenses................................. $ 15,000 Miscellaneous............................................... $ 60,000 -------- Total.................................................. $714,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Delaware law, the Registrant's certificate of incorporation provides that the directors of the Registrant will not be held personally liable for a breach of fiduciary duty as a director, except that a director may be liable for (1) a breach of the director's duty of loyalty to the corporation or its shareholders, (2) acts made in bad faith or which involve intentional misconduct or a knowing violation of the law, (3) illegal payment of dividends under Section 174 of the Delaware General Corporation Law; or (4) for any transaction from which the director derives an improper personal benefit. The Registrant's certificate of incorporation further provides that if Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Registrant shall be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. The by-laws of the Registrant provide that the Registrant will indemnify any person involved in litigation brought by a third party or by or in the right of the Registrant by reason of the fact that he or she is or was a director, officer, employee or agent of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another entity. The Registrant will only indemnify such a person if that person acted in good faith and in a manner he or she reasonably believed to be lawful and in the best interests of the Registrant, except that the person will not be entitled to indemnification in an action in which he or she is found to be liable to the corporation unless the Delaware Court of Chancery deems indemnification under these circumstances proper. The Registrant maintains in effect directors' and officers' liability insurance which provides coverage against certain liabilities. The Registrant has entered into indemnification agreements with each of its directors and executive officers which requires the Registrant to use reasonable efforts to maintain such insurance during the term of the agreement so long as the Board of Directors in the exercise of its business judgment determines that the cost is not excessive and is reasonably related to the amount of coverage and that the coverage provides a reasonable benefit for such cost. The indemnity agreements have initial terms that commenced on December 1, 2002 and will expire on November 30, 2003 and that will automatically renew for successive one year terms unless sooner terminated by Registrant on 60 days notice or upon the indemnitee's termination as an officer, director or employee of Registrant or its subsidiaries. The indemnity agreement requires the Registrant to indemnify the executive officers and directors to the fullest extent permitted under Delaware law to the extent not covered by liability insurance, including advances of expenses in the defense of claims against the executive officer or director while acting in such II-1 capacity. It is a condition to such indemnification that the indemnitee acted in good faith and in a manner that he or she believed to be in or not opposed to the interest of the Registrant or its shareholders, and with respect to a criminal action had no reasonable cause to believe his or her conduct was unlawful. Indemnification is not available from the Registrant: (a) in respect to remuneration that is determined to be in violation of law; (b) on account of any liability arising from a suit for an accounting of profits for the purchase and sale of Registrant's common stock pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended; (c) on account of conduct that is determined to have been knowingly fraudulent, deliberately dishonest or willful misconduct; (d) if indemnification is prohibited by the applicable laws of the State of Delaware; (e) if the indemnitee is found to be liable to the Registrant or its subsidiaries unless the Delaware Court of Chancery determines that the indemnitee is fairly and reasonably entitled to indemnification for expenses that the court deems proper; or (f) if a court should determine that such indemnification is not lawful. The indemnity agreement requires the indemnitee to reimburse the Registrant for all reasonable expenses incurred or advanced in defending any criminal or civil suit or proceedings against the indemnitee if the Registrant determines that indemnity is not available. The form of the indemnity agreement is included is an exhibit to this Registration Statement. This summary of the indemnity agreement is qualified in its entirety by reference to the terms and provisions of the form of the indemnity agreement included herein as an exhibit. ITEM 16. EXHIBITS The exhibits to this registration statement are listed in the Exhibit Index to this registration statement, which Exhibit Index is hereby incorporated by reference. ITEM 17. UNDERTAKINGS A. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; provided, however, that notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii) to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; II-2 provided, however, that the undertakings set forth in clauses (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those clauses is contained in periodic reports filed by the registrant pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The registrant undertakes that for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Birmingham, State of Alabama, on the 24th day of October, 2003. PROASSURANCE CORPORATION By: /s/ A. DERRILL CROWE ------------------------------------ A. Derrill Crowe Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Frank B. O'Neil, Howard H. Friedman and Victor T. Adamo, jointly and severally, his or her true and lawful attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done and hereby ratifying and confirming all that each of said attorneys-in-fact or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ A. DERRILL CROWE Chairman of the Board and Chief October 24, 2003 - -------------------------------------- Executive Officer A. Derrill Crowe (Principal Executive Officer) and Director /s/ HOWARD H. FRIEDMAN Senior Vice President, Chief October 24, 2003 - -------------------------------------- Financial Officer and Secretary Howard H. Friedman /s/ VICTOR T. ADAMO Director October 24, 2003 - -------------------------------------- Victor T. Adamo /s/ LUCIAN F. BLOODWORTH Director October 24, 2003 - -------------------------------------- Lucian F. Bloodworth /s/ PAUL R. BUTRUS Director October 24, 2003 - -------------------------------------- Paul R. Butrus /s/ ROBERT E. FLOWERS Director October 17, 2003 - -------------------------------------- Robert E. Flowers
II-4
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN J. MCMAHON, JR. Director October 24, 2003 - -------------------------------------- John J. McMahon, Jr. /s/ JOHN P. NORTH, JR. Director October 24, 2003 - -------------------------------------- John P. North, Jr. /s/ ANN F. PUTALLAZ Director October 24, 2003 - -------------------------------------- Ann F. Putallaz /s/ WILLIAM H. WOODHAMS Director October 24, 2003 - -------------------------------------- William H. Woodhams /s/ WILFRED W. YEARGAN, JR. Director October 24, 2003 - -------------------------------------- Wilfred W. Yeargan, Jr.
II-5 EXHIBIT INDEX 4.1 Purchase Agreement, dated July 1, 2003, between Registrant and the representatives of the initial purchasers of the Debentures (without exhibits). 4.2 Indenture dated July 7, 2003, between Registrant and SouthTrust Bank as Trustee(1) 4.3 Registration Rights Agreement, dated July 7, 2003, between and among Registrant and the initial purchasers of the Debentures(1) 4.4 Specimen of Common Stock Certificate of ProAssurance Corporation(2) 5.1 Opinion of Burr & Forman LLP as to legality of the Debenture and common stock covered by the Registration Statement 5.2 Opinion of Ernst & Young LLP as to certain federal income tax matters 10.1(a) Amendment and Assumption Agreement by and between ProAssurance and Medical Assurance, Inc.(3) 10.1(b) Medical Assurance, Inc. Incentive Compensation Stock Plan (formerly known as the Mutual Assurance, Inc. 1995 Stock Award Plan)(4) 10.1(c) Amendment and Assumption Agreement by and between Mutual Assurance, Inc. and MAIC Holdings, Inc. dated April 8, 1996(5) 10.2 Professionals Insurance Company Management Group 1996 Long Term Incentive Plan(6) 10.5(a) Release and Severance Agreement between Victor T. Adamo and ProAssurance(7) 10.5(b) Amendment to Release and Severance Compensation Agreement of Victor T. Adamo(8) 10.5(c) Release and Severance Agreement between Lynn M. Kalinowski and ProAssurance(9) 10.5(d) Release and Severance Agreement between Howard H. Friedman and ProAssurance(8) 10.5(e) Release and Severance Agreement between James J. Morello and ProAssurance(8) 10.5(f) Release and Severance Agreement between Frank B. O'Neil and ProAssurance(9) 10.6 Employment Agreement of A. Derrill Crowe, as amended(8) 10.7 Form of Indemnification Agreement between ProAssurance and each of the following named executive officers and directors of ProAssurance(10): Victor T. Adamo Lucian F. Bloodworth Paul R. Butrus A. Derrill Crowe Robert E. Flowers Howard H. Friedman Leon C. Hamrick Lynn M. Kalinowski John J. McMahon James J. Morello Drayton Nabers John P. North Frank B. O'Neil Ann F. Putallaz William P. Sabados William H. Woodhams Wilfred W. Yeargan 10.8 Description of Registrant's Executive Supplemental Life Insurance Plan(1) 12.1 Statement re: Ratio of Earnings to Fixed Charges 23.1 Consent of Ernst & Young LLP -- Report on Consolidated Financial Statements of Registrant and Subsidiaries 23.2 Consent of Ernst & Young LLP -- Tax Opinion (included in Exhibit 5.2)
II-6 23.3 Consent of Burr & Forman LLP (included in Exhibit 5.1) 24.1 Powers of Attorney (included in signature page) 25.1 Statement of Eligibility of SouthTrust Bank as Trustee on Form T-1
- --------------- Footnotes: (1) Filed as an Exhibit to ProAssurance's Quarterly Report on Form 10-Q for the period ended June 30, 2003 (File No. 001-16533) and incorporated herein by reference. (2) Filed as an Exhibit to ProAssurance's Registration Statement on Form S-3 (Commission File No. 333-100526), as amended and incorporated herein by reference. (3) Filed as an Exhibit to ProAssurance's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 001-16533) and incorporated herein by reference. (4) Filed as an Exhibit to MAIC Holding's Registration Statement on Form S-4 (Commission File No. 33-91508) and incorporated herein by reference. (5) Filed as an Exhibit to MAIC Holding's Proxy Statement for the 1996 Annual Meeting (Commission File No. 0-19439) is incorporated herein by reference. (6) Filed as an Exhibit to Professionals Group's Registration Statement on Form S-4 (Commission File No. 333-3138) and incorporated herein by reference. (7) Filed as an Exhibit to ProAssurance's Form 10-Q (Commission File No. 001-16533) for the quarter ended June 30, 2001 and incorporated herein by reference. (8) Filed as an Exhibit to ProAssurance's Registration Statement on Form S-3 (Commission File No. 333-100526), as amended, and incorporated herein by reference. (9) Filed as an Exhibit to ProAssurance's Form 10-Q (Commission File No. 001-16533) for the quarter ended September 30, 2001 and incorporated herein by reference. (10) Filed as an Exhibit to ProAssurance's Form 10-K (Commission File No. 001-16533) for the year ended December 31, 2002 and incorporated herein by reference. II-7 EX-4.1 3 g85376exv4w1.txt EX-4.1 PURCHASE AGREEMENT, DATED JULY 1, 2003 EXHIBIT 4.1 PROASSURANCE CORPORATION 3.90% CONVERTIBLE SENIOR DEBENTURES DUE 2023 PURCHASE AGREEMENT DATED JULY 1, 2003 i TABLE OF CONTENTS SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ........................................... 2 (a) No Registration ................................................................................ 2 (b) No Integration ................................................................................. 2 (c) Rule 144A ...................................................................................... 3 (d) Offering Memorandum ............................................................................ 3 (e) Offering Materials Furnished to the Initial Purchasers ......................................... 3 (f) Authorization of the Purchase Agreement ........................................................ 3 (g) Authorization of the Indenture ................................................................. 3 (h) Authorization of the Debentures ................................................................ 3 (i) Authorization of the Conversion Shares and Put Shares .......................................... 4 (j) Authorization of the Registration Rights Agreement ............................................. 4 (k) No Material Adverse Change ..................................................................... 4 (l) Independent Accountants ........................................................................ 4 (m) Preparation of the Financial Statements ........................................................ 5 (n) Incorporation and Good Standing of the Company and its Subsidiaries ............................ 5 (o) Capitalization and Other Capital Stock Matters ................................................. 5 (p) Stock Exchange Listing ......................................................................... 6 (q) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required ..... 6 (r) No Material Actions or Proceedings ............................................................. 6 (s) Intellectual Property Rights ................................................................... 7 (t) Governmental Licenses .......................................................................... 7 (u) Absence of Labor Dispute ....................................................................... 7 (v) Title to Properties ............................................................................ 7 (w) Tax Law Compliance ............................................................................. 8 (x) Company Not an "Investment Company" ............................................................ 8 (y) Insurance ...................................................................................... 8 (z) No Price Stabilization or Manipulation ......................................................... 9 (aa) Related Party Transactions .................................................................... 9 (bb) No General Solicitation ....................................................................... 9 (cc) Reporting Company ............................................................................. 9 (dd) Sarbanes-Oxley ................................................................................ 9 (ee) Exchange Act Compliance ....................................................................... 9 (ff) No Unlawful Contributions or Other Payments ................................................... 9 (gg) Company's Accounting System and Internal Controls ............................................. 9 (hh) ERISA Compliance .............................................................................. 10 (ii) Brokers ....................................................................................... 10 (jj) Divided Payments .............................................................................. 10 (kk) No Outstanding Loans or Other Indebtedness .................................................... 10 (ll) Compliance with Laws .......................................................................... 10 (mm) Statutory Insurance Filings ................................................................... 11 (nn) Reserving Practices ........................................................................... 11 (oo) Claims-paying Ability Rating .................................................................. 11 (pp) Validity of Reinsurance Treaties .............................................................. 11 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE DEBENTURES ........................................... 12 (a) The Firm Debentures ............................................................................ 12 (b) The First Closing Date ......................................................................... 12
ii (c) The Optional Debentures; the Second Closing Date ............................................... 12 (d) Payment for the Debentures ..................................................................... 12 (e) Delivery of the Debentures ..................................................................... 13 SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY ..................................................... 13 (a) Initial Purchasers' Review of Proposed Amendments and Supplements .............................. 13 (b) Amendments and Supplements to the Offering Memorandum and Other Securities Law Matters ......... 13 (c) Notice of Filings .............................................................................. 13 (d) Copies of Offering Memorandum .................................................................. 14 (e) Blue Sky Compliance ............................................................................ 14 (f) Rule 144A Information .......................................................................... 14 (g) Legends ........................................................................................ 14 (h) No General Solicitation ........................................................................ 14 (i) No Integration ................................................................................. 14 (j) Rule 144 Tolling ............................................................................... 14 (k) Use of Proceeds ................................................................................ 15 (l) Transfer Agent ................................................................................. 15 (m) The Depository Trust Company ................................................................... 15 (n) Reservation of Common Stock .................................................................... 15 (o) Rating of Debentures ........................................................................... 15 (p) PORTAL Designation ............................................................................. 15 (q) Earnings Statement ............................................................................. 15 (r) Company to Provide Interim Financial Statements ................................................ 15 (s) New York Stock Exchange Listing ................................................................ 15 (t) Agreement Not to Offer or Sell Additional Securities ........................................... 15 (u) Future Reports to the Representatives .......................................................... 16 (v) Investment Limitation .......................................................................... 16 (w) No Manipulation of Price ....................................................................... 16 (x) Existing Lock-Up Agreement ..................................................................... 16 SECTION 4. PAYMENT OF EXPENSES ..................................................................... 16 SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE INITIAL PURCHASERS ................................. 17 (a) Accountants' Comfort Letter .................................................................... 17 (b) No Material Adverse Change or Ratings Agency Change ............................................ 17 (c) Opinion of External and Internal Counsel for the Company ....................................... 17 (d) Opinion of Counsel for the Initial Purchasers .................................................. 18 (e) Officers' Certificate .......................................................................... 18 (f) Bring-down Comfort Letter ...................................................................... 18 (g) Registration Rights Agreement .................................................................. 18 (h) Lock-Up Agreement from Officers and Directors of the Company ................................... 18 (i) PORTAL Designation ............................................................................. 19 (j) Additional Documents ........................................................................... 19 SECTION 6. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES ......................................... 19 (a) Offer and Sale Procedures ...................................................................... 19 (b) Covenants of the Company ....................................................................... 20 (c) Qualified Institutional Buyer .................................................................. 21 (d) Restricted Securities .......................................................................... 21 SECTION 7. REIMBURSEMENT OF INITIAL PURCHASERS' EXPENSES ........................................... 21 SECTION 8. INDEMNIFICATION ......................................................................... 21 (a) Indemnification of the Initial Purchasers by the Company ....................................... 21 (b) Indemnification of the Company, its Directors and Officers ..................................... 22 (c) Notifications and Other Indemnification Procedures ............................................. 22
iii (d) Settlements .................................................................................... 23 SECTION 9. CONTRIBUTION ............................................................................ 23 SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL INITIAL PURCHASERS ............................... 24 SECTION 11. TERMINATION OF THIS AGREEMENT .......................................................... 26 SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY .................................... 26 SECTION 13. NOTICES ................................................................................ 26 SECTION 14. SUCCESSORS ............................................................................. 28 SECTION 15. PARTIAL UNENFORCEABILITY ............................................................... 28 SECTION 16. GOVERNING LAW .......................................................................... 28 SECTION 17. GENERAL PROVISIONS ..................................................................... 28
PURCHASE AGREEMENT July 1, 2003 BANC OF AMERICA SECURITIES LLC COCHRAN, CARONIA SECURITIES LLC c/o BANC OF AMERICA SECURITIES LLC 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: INTRODUCTORY. ProAssurance Corporation, a Delaware corporation (the "COMPANY"), proposes to issue and sell to the several purchasers named in Schedule A (the "INITIAL PURCHASERS") $100,000,000 in aggregate principal amount of its 3.90% Convertible Senior Debentures due 2023 (the "FIRM DEBENTURES"). In addition, the Company has granted to the Initial Purchasers an option to purchase up to an additional $35,000,000 in aggregate principal amount of its 3.90% Convertible Senior Debentures due 2023, as provided in Section 2 of this Agreement. The additional $35,000,000 in aggregate principal amount to be sold by the Company pursuant to such option are called the "OPTIONAL DEBENTURES". The Firm Debentures and, if and to the extent such option is exercised, the Optional Debentures are collectively called the "DEBENTURES". Banc of America Securities LLC ("BAS") and Cochran, Caronia Securities LLC have agreed to act as representatives of the several Initial Purchasers (in such capacity, the "REPRESENTATIVES") in connection with the offering and sale of the Debentures. The Debentures will be convertible into fully paid, non-assessable shares of common stock, par value $0.01 per share, of the Company (the "COMMON STOCK"). The Debentures will be convertible initially at a conversion rate of 23.9037 shares per $1,000 principal amount of the Debentures, on the terms, and subject to the conditions, set forth in the Indenture (as defined below). As used herein, "CONVERSION SHARES" means the shares of Common Stock into which the Debentures are convertible. The Debentures will be issued pursuant to an indenture (the "INDENTURE") to be dated as of the First Closing Date (as defined in Section 2 of this Agreement), between the Company and SouthTrust Bank, a banking corporation, as trustee (the "TRUSTEE"). The Debentures will be offered and sold to the Initial Purchasers without being registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), and the rules and regulations (the "RULES AND REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") thereunder, in reliance upon an exemption therefrom. Holders of the Debentures (including the Initial Purchasers and their direct and indirect transferees) will be entitled to the benefits of a Resale Registration Rights Agreement, dated the First Closing Date, between the Company and the Initial Purchasers (the "REGISTRATION RIGHTS AGREEMENT") in the form of Exhibit C attached hereto. In accordance with the Registration Rights Agreement, pursuant to which the Company will agree to file with the Commission a shelf registration statement pursuant to Rule 415 under the Securities Act (the "REGISTRATION STATEMENT") covering the resale of the Debentures and the Conversion Shares, and 2 to use its best efforts to cause the Registration Statement to be declared effective. This Agreement, the Indenture, the Debentures and the Registration Rights Agreement are referred to herein collectively as the "OPERATIVE DOCUMENTS". The Company understands that the Initial Purchasers propose to make an offering of the Debentures on the terms and in the manner set forth herein and in the Offering Memorandum (as defined below) and agrees that the Initial Purchasers may resell, subject to the conditions set forth herein, all or a portion of the Debentures to purchasers (the "SUBSEQUENT PURCHASERS") at any time after the date of this Agreement. The terms of the Debentures and the Indenture will require that investors that acquire the Debentures expressly agree that the Debentures (and any Conversion Shares) may only be resold or otherwise transferred, after the date hereto, if such Debentures (or Conversion Shares) are registered for sale under the Securities Act or if an exemption from the registration requirements of the Securities Act is available (including the exemption afforded by Rule 144A ("RULE 144A") thereunder). The Company has prepared an offering memorandum dated the date hereof setting forth information concerning the Company, the Debentures, the Registration Rights Agreement and the Common Stock (including the Conversion Shares and the Put Shares (as defined below) in form and substance reasonably satisfactory to the Initial Purchasers. As used in this Agreement, "OFFERING MEMORANDUM" means, collectively, the preliminary offering memorandum dated as of June 30, 2003 (the "PRELIMINARY OFFERING MEMORANDUM") and the final offering memorandum dated the date hereof (the "FINAL OFFERING MEMORANDUM"), each as amended or supplemented by the Company. As used herein, each of the terms "Offering Memorandum", "Preliminary Offering Memorandum" and "Final Offering Memorandum" shall include in each case the documents incorporated or deemed to be incorporated by reference therein. The Company hereby confirms its agreements with the Initial Purchasers as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents, warrants and covenants to the Initial Purchasers as follows: (a) No Registration. Assuming the accuracy of the representations and warranties of the Initial Purchasers contained in Section 6 of this Agreement and their compliance with the conditions and agreements set forth herein, it is not necessary, in connection with the issuance and sale of the Debentures to the Initial Purchasers, the offer, resale and delivery of the Debentures by the Initial Purchasers and the conversion of the Debentures into Conversion Shares, in each case in the manner contemplated by this Agreement, the Indenture and the Offering Memorandum, to register the Debentures or the Conversion Shares under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). In accordance with the Registration Rights Agreement, the Debentures will be registered under the Securities Act and the Trust Indenture Act. (b) No Integration. None of the Company or any of its subsidiaries, nor any person acting on its or their behalf (other than the Initial Purchasers in connection with the transactions contemplated by this Agreement, about which no representation is made by the Company) has, directly or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any "security" (as defined in the Securities Act) that is or will be integrated with the sale of the Debentures or the Conversion Shares in a manner that would require registration under the Securities Act of the Debentures or the Conversion Shares. 3 (c) Rule 144A. No securities of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as the Debentures are listed on any national securities exchange registered under Section 6 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or quoted on an automated inter-dealer quotation system. (d) Offering Memorandum. The Company hereby confirms that it has authorized the use of the Offering Memorandum in connection with the offer and sale of the Debentures by the Initial Purchasers. Each document, if any, filed or to be filed pursuant to the Exchange Act and incorporated by reference in the Offering Memorandum complied or will comply when it is filed in all material respects with the Exchange Act and the rules and regulations of the commission thereunder. The Preliminary Offering Memorandum and the Final Offering Memorandum as of their respective dates do not contain, and the Final Offering Memorandum as of the First Closing Date (as defined in Section 2 of this Agreement) and as of the Second Closing Date (as defined in Section 2 of this Agreement) will not contain, any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that the Company makes no representation or warranty as to information contained in or omitted from the Offering Memorandum in reliance upon and in conformity with written information furnished to the Company by or on the behalf of the Initial Purchasers specifically for inclusion therein. (e) Offering Materials Furnished to the Initial Purchasers. The Company has delivered to the Initial Purchasers Preliminary Offering Memorandums and Final Offering Memorandums, as amended or supplemented, in such quantities and at such places as the Initial Purchasers have reasonably requested for each of the Initial Purchasers. (f) Authorization of the Purchase Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as to rights of indemnification hereunder which may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (g) Authorization of the Indenture. The Indenture has been duly authorized by the Company and, upon the effectiveness of the Registration Statement, will be qualified under the Trust Indenture Act; on the First Closing Date, the Indenture will have been duly executed and delivered by the Company and, assuming due authorization, execution and delivery of the Indenture by the Trustee, will constitute a legally valid and binding agreement of the Company enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles; and the Indenture conforms in all material respects to the description thereof contained in the Offering Memorandum. (h) Authorization of the Debentures. The Debentures have been duly authorized by the Company; when the Debentures are executed, authenticated and issued in accordance with the terms of the Indenture and delivered to and paid for by the Initial Purchasers pursuant to this Agreement on the respective Closing Date (assuming due authentication of the Debentures by the Trustees), such Debentures will constitute legally valid and binding obligations of the Company, entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies 4 of creditors or by general equitable principles; and the Debentures will conform in all material respects to the description thereof contained in the Offering Memorandum. (i) Authorization of the Conversion Shares and Put Shares. The Conversion Shares have been duly and validly authorized and reserved for issuance upon conversion of the Debentures and are free of preemptive rights; and all Conversion Shares and the shares of Common Stock that may be delivered by the Company to holders of Debentures upon the exercise by such holders of certain repurchase rights upon the terms and conditions set forth in the Indenture (such shares, the "PUT SHARES" and, together with the Conversion Shares, the "SECURITIES"), when so issued and delivered upon such conversion or repurchase in accordance with the terms of the Indenture, will be duly and validly authorized and issued, fully paid and nonassessable and free and clear of all liens, encumbrances, equities or claims; no holder of such shares will be subject to personal liability by reason of being such a holder; the issuance of such shares upon such conversion will not be subject to the preemptive or other similar rights of any securityholder of the Company; and the Securities conform in all material respects to the description thereof contained in the Offering Memorandum. (j) Authorization of the Registration Rights Agreement. The Registration Rights Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. The Registration Rights Agreement conforms in all material respects to the description thereof contained in the Offering Memorandum. Except as described in the Offering Memorandum, there are no holders of securities (debt or equity) of the Company or holders of rights (including, without limitation, preemptive rights) with registration or other similar rights to have any securities registered by the Company under the Securities Act. (k) No Material Adverse Change. Except as otherwise disclosed in the Offering Memorandum (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement), subsequent to the respective dates as of which information is given in the Offering Memorandum: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "MATERIAL ADVERSE CHANGE"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business, nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock, except with respect to cashless exercises of stock options under our employee stock option plans. (l) Independent Accountants. Ernst & Young LLP who have expressed their opinions with respect to certain sections of the Offering Memorandum as well as the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement, or included or incorporated by reference in the Offering Memorandum, are independent public or certified public accountants as required by the Securities Act and the Exchange Act. Ernst & Young LLP 5 has not provided any audit-related or non-audit services to the Company or its subsidiaries since December 31, 2001, except for tax, actuarial, cash management services, audits of employee benefit plans, acquisition due diligence and audits of acquired businesses, as well as services provided in conjunction with the Debentures offering provided for herein. (m) Preparation of the Financial Statements. The financial statements included or incorporated by reference in the Offering Memorandum present fairly the consolidated financial position of the Company and its consolidated subsidiaries as of and at the dates indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included or incorporated by reference in the Offering Memorandum present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. The financial data set forth in the Offering Memorandum under the captions "Summary Consolidated Financial Information" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained or incorporated by reference in the Offering Memorandum. The Company's ratios of earnings to fixed charges set forth in the Offering Memorandum have been calculated in compliance with Item 503(d) of Regulation S-K under the Securities Act. (n) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Memorandum and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim, except that the shares of capital stock of Medical Assurance, Inc., Professionals Group, Inc., The Medical Assurance Company, Inc. and ProNational Insurance Company are subject to a pledge and security agreement with SouthTrust Bank, as Administrative Agent, for the ratable benefit of certain lenders under a credit facility dated May 10, 2001. The Company owns, directly or through its subsidiaries, 100% of the outstanding common stock of MEEMIC Holdings, Inc., free and clear of any security interest, mortgage, pledge, lien, encumbrance or other claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 22 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. (o) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Offering Memorandum under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Offering Memorandum or upon exercise of outstanding options described in the Offering Memorandum). The Common Stock conforms in all material respects to the description thereof contained in the Offering Memorandum. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. 6 None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Offering Memorandum, including rights granted pursuant to this Agreement. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Offering Memorandum accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights, other than options to acquire [] shares of common stock issued since December 31, 2002. (p) Stock Exchange Listing. The Conversion Shares, if any, have been approved for listing on the New York Stock Exchange. (q) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("DEFAULT") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "EXISTING INSTRUMENT"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of the Operative Documents and consummation of the transactions contemplated thereby and by the Offering Memorandum (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other party to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of the Operative Documents and consummation of the transactions contemplated thereby and by the Offering Memorandum, except (i) with respect to the transactions contemplated by the Registration Rights Agreement, as may be required under the Securities Act, the Trust Indenture Act and the rules and regulations promulgated thereunder and (ii) such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the New York Stock Exchange (the "NYSE") and the National Association of Securities Dealers, Inc. (the "NASD"). As used herein, a "DEBT REPAYMENT TRIGGERING EVENT" means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries. (r) No Material Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer 7 or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. (s) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, domain names, licenses, approvals, trade secrets and other similar rights (collectively, "INTELLECTUAL PROPERTY RIGHTS") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Offering Memorandum and are not described in all material respects. None of the technology employed by the Company has been obtained or is being used by the Company in violation of any contractual obligation binding on the Company or, to the Company's knowledge, any of its officers, directors or employees or otherwise in violation of the rights of any persons. (t) Governmental Licenses. The Company and each of its subsidiaries possess such valid and current certificates, permits, licenses, approvals, consents and other authorizations (collectively, "GOVERNMENTAL LICENSES") issued by the appropriate federal, state, provincial, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them except where the failure to possess such Governmental Licenses would not, individually or in the aggregate, result in a Material Adverse Change. The Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure to so comply would not, individually or in the aggregate, result in a Material Adverse Change. All of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, individually or in the aggregate, result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or filing, would result in a Material Adverse Change. No insurance regulatory authority having jurisdiction over the Company or any of its subsidiaries has issued any order or decree impairing, restricting or prohibiting (i) the payment of dividends by any of the subsidiaries to its parent, other than those restrictions applicable to insurance or reinsurance companies generally, or (ii) the continuation of the business of the Company or any of the subsidiaries in all material respects as presently conducted. (u) Absence of Labor Dispute. No labor dispute with the employees of the Company, nor any of its subsidiaries exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its subsidiaries' principal customers or contractors, which, in either case, may reasonably be expected to result in a Material Adverse Change. (v) Title to Properties. The Company and each of its subsidiaries has good and marketable title to all the properties and assets reflected as owned by each of them in the financial 8 statements referred to in Section 1(A)(m) above (or elsewhere in the Offering Memorandum), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (w) Tax Law Compliance. The Company and its subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(m) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its subsidiaries has not been finally determined. (x) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "INVESTMENT COMPANY ACT"). The Company is not, and after receipt of payment for the Debentures will not be, required to register as an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (y) Insurance. Each of the Company and its subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. The term insurance as applied in this section (y) is deemed not to include reinsurance contracts or treaties. 9 (z) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Debentures. (aa) Related Party Transactions. No relationship, direct or indirect, exists between or among any of the Company or any affiliate of the Company, on the one hand, and any director, officer, stockholder, customer or supplier of any of them, on the other hand, which, if the Debentures were being registered under the Securities Act, would be required by the Securities Act or the rules and regulations thereunder to be described in the applicable registration statement which is not so described in the Offering Memorandum. (bb) No General Solicitation. None of the Company or any of its affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act ("REGULATION D")), has, directly or through an agent, engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D) in connection with the offering of the Debentures or the Conversion Shares or in any manner involving a public offering within the meaning of Section 4(2) of the Securities Act; the Company has not entered into any contractual arrangement with respect to the distribution of the Debentures or the Conversion Shares except for this Agreement, and the Company will not enter into any such arrangement except for the Registration Rights Agreement and as may be contemplated thereby. (cc) Reporting Company. The Company is subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act. (dd) Sarbanes-Oxley. The Company is in material compliance with all applicable provisions of the U.S. Sarbanes-Oxley Act of 2002 that are effective. (ee) Exchange Act Compliance. The documents incorporated at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the Exchange Act, and, when read together with the other information in the Offering Memorandum, at the date of the Offering Memorandum and at the First Closing Date and the Second Closing Date, as the case may be, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the facts required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, with respect to any financial statements and other financial information, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods so presented. (ff) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Offering Memorandum. (gg) Company's Accounting System and Internal Controls. The Company maintains a system of accounting and internal controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to 10 maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; (v) financial statement certification requirements under the Exchange Act or otherwise are accurate and all requisite pre-certification procedures are adequately performed; (vi) an industry-standard code of ethics is consistently reviewed and followed without exception; and (vii) NYSE corporate governance requirements are complied with, in all material respects, including, without limitation, audit and other board of directors committee composition requirements, except as permitted by any applicable NYSE waiting period. (hh) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA and the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "CODE"). "ERISA AFFILIATE" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Code of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (ii) Brokers. There is no broker, finder or other party that is entitled to receive from the Company any brokerage or finder's fee or other fee or commission as a result of any transactions contemplated by this Agreement. (jj) Dividend Payments. No subsidiary of the Company is currently prohibited, directly or indirectly under any agreement or other instrument to which it is a party or is subject, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock or from repaying to the Company any loans or advances to such subsidiary from the Company. (kk) No Outstanding Loans or Other Indebtedness. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of any of them, except as disclosed in the Offering Memorandum. (ll) Compliance with Laws. The Company and each of its subsidiaries is conducting its business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where failure to be so in compliance would not result in a Material Adverse Change. In particular, without limitation, each of the subsidiaries of the 11 Company is in compliance with the requirements of the insurance laws and regulations of its jurisdiction of incorporation and the insurance laws and regulations of other jurisdictions which are applicable to each such subsidiary, and has filed all notices, reports, documents or other information required to be filed thereunder, except where the failure to so comply or file would not have, individually or in the aggregate with other such failures, result in a Material Adverse Change. (mm) Statutory Insurance Filings. The 2002 statutory annual statements of each regulated insurance subsidiary of the Company and the statutory balance sheets and income statements included in such statutory annual statements together with related schedules and notes, have been prepared, in all material respects, in conformity with statutory accounting principles or practices required or permitted by the appropriate insurance regulator of the jurisdiction of domicile of each such subsidiary, and such statutory accounting practices have been applied on a consistent basis throughout the periods involved, except as may otherwise be indicated therein or in the notes thereto, and present fairly, in all material respects, the statutory financial position of such insurance subsidiaries as of the dates thereof, and the statutory basis results of operations of such insurance subsidiaries for the periods covered thereby. (nn) Reserving Practices. The Company and its insurance subsidiaries have made no material changes in their insurance reserving practices since December 31, 2002, except where such change in such insurance reserving practices would not reasonably be expected to result in a Material Adverse Change. (oo) Claims-paying Ability Rating. The Company is not aware of any threatened or pending downgrading of any of its subsidiary's claims-paying ability rating by A.M. Best Company, Inc. or any other "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (pp) Validity of Reinsurance Treaties. All reinsurance treaties and arrangements to which the Company or any subsidiary is a party are in full force and effect and neither the Company nor any subsidiary is in violation of or in default in the performance, observance or fulfillment of, any obligation, agreement, covenant or condition contained therein; neither the Company nor any subsidiary has received any notice from any of the other parties to such treaties, contracts or agreements that such other party intends not to perform such treaty and, to the best knowledge of the Company and its subsidiaries, the Company and its subsidiaries have no reason to believe that any of the other parties to such treaties or arrangements will be unable to perform such treaty or arrangement; except, in each of the above cases, (i) to the extent adequately and properly reserved for in the financial statements of the Company included or incorporated by reference in the Offering Memorandum and (ii) for such violations or defaults that would not result in a Material Adverse Change. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Initial Purchasers shall be deemed to be a representation and warranty by the Company to each Initial Purchaser as to the matters set forth therein. The Company acknowledges that the Initial Purchasers and, for purposes of the opinions to be delivered pursuant to Section 5 hereof, counsel to the Company and counsel to the Initial Purchasers, will rely upon the accuracy and truthfulness of the foregoing representations and hereby consents to such reliance. 12 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE DEBENTURES. (a) The Firm Debentures. The Company agrees to issue and sell to the Initial Purchasers the Firm Debentures upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Initial Purchasers agree, severally and not jointly, to purchase from the Company the respective principal amount of Firm Debentures set forth opposite their names on Schedule A at a purchase price of 97.25 % of the aggregate principal amount thereof. (b) The First Closing Date. Delivery of the Firm Debentures to be purchased by the Initial Purchasers and payment therefore shall be made at the offices of the Company, 100 Brookwood Place, Birmingham, Alabama 35209 (or such other place as may be agreed to by the Company and the Representatives) at 9:00 a.m. New York time, on July 7, 2003, or such other time and date not later than 1:30 p.m. New York time, on July 21, 2003, as the Representatives and the Company shall agree upon (the time and date of such closing are called the "FIRST CLOSING DATE"). (c) The Optional Debentures; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the Initial Purchasers to purchase, severally and not jointly, up to $35,000,000 aggregate principal amount of Optional Debentures from the Company at the same price per Optional Note as the purchase price to be paid by the Initial Purchasers per Firm Note. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company, which notice may be given at any time within 13 days from the date of this Agreement. Such notice shall set forth (i) the amount (which shall be an integral multiple of $1,000 in aggregate principal amount) of Optional Debentures as to which the Initial Purchasers are exercising the option, (ii) the names and denominations in which the Optional Debentures are to be registered and (iii) the time, date and place at which such Debentures will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of the Firm Debentures and the Optional Debentures). Such time and date of delivery, if subsequent to the First Closing Date, is called the "SECOND CLOSING DATE" and shall be determined by the Representatives. Such date may be the same as the First Closing Date but not earlier than the First Closing Date nor later than 14 days after the First Closing Date. If any Optional Debentures are to be purchased, each Initial Purchaser agrees, severally and not jointly, to purchase the principal amount of Optional Debentures (subject to such adjustments to eliminate fractional amounts as the Representatives may determine) that bears the same proportion to the total principal amount of Optional Debentures to be purchased as the principal amount of Firm Debentures set forth on Schedule A opposite the name of such Initial Purchaser bears to the total principal amount of Firm Debentures. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Payment for the Debentures. Payment for the Firm Debentures shall be made at the First Closing Date (and, if applicable, for Optional Debentures at the Second Closing Date) by wire transfer of immediately available funds to a bank account designated in writing by the Company or in such manner of payment as the Company and the Representatives may agree. It is understood that the Representatives have been authorized, for their own account and the accounts of the Initial Purchasers, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Debentures and any Optional Debentures the Initial 13 Purchasers have agreed to purchase. BAS, individually and not as one of the Representatives, may (but shall not be obligated to) make payment for any Debentures to be purchased by any Initial Purchaser whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Initial Purchaser, but any such payment shall not relieve such Initial Purchaser from any of its obligations under this Agreement. (e) Delivery of the Debentures. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the Initial Purchasers certificates for the Firm Debentures at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor or in such manner of payment as the Company and the Representatives may agree. The Company shall also deliver, or cause to be delivered, to the Representatives for the accounts of the Initial Purchasers, certificates for the Optional Debentures the Initial Purchasers have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefore or in such other manner of payment as the Company and the Initial Purchasers may agree. The Debentures shall be registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Initial Purchasers. SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY. The Company further covenants and agrees with the Initial Purchasers as follows: (a) Initial Purchasers' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending upon completion of the resale of the Debentures by the Initial Purchases (as notified by the Initial Purchasers to the Company), prior to amending or supplementing the Offering Memorandum, the Company shall furnish to the Initial Purchasers for review a copy of each such proposed amendment or supplement, and the Company shall not print or distribute such proposed amendment or supplement to which the Representatives reasonably object. (b) Amendments and Supplements to the Offering Memorandum and Other Securities Law Matters. If, at any time prior to the completion of the resale of the Debentures by the Initial Purchasers (as notified by the Initial Purchasers to the Company), any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Offering Memorandum in order that the Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time it is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Initial Purchasers it is otherwise necessary to amend or supplement the Offering Memorandum to comply with law, the Company shall promptly notify the Initial Purchasers and prepare, subject to Section 3(a) hereof, such amendment or supplement as may be necessary to correct such untrue statement or omission. (c) Notice of Filings. The Company will promptly notify the Representatives of any filing made by the Company of information relating to the offering of the Debentures with any securities exchange or any other regulatory body in the United States or any other jurisdiction. 14 (d) Copies of Offering Memorandum. The Company agrees to furnish the Initial Purchasers without charge, until the earlier of nine months after the date hereof or the completion of the resale of the Debentures by the Initial Purchasers (as notified by the Initial Purchasers to the Company) as many copies of the Offering Memorandum and any amendments and supplements thereto as the Initial Purchasers may reasonably request. (e) Blue Sky Compliance. The Company shall cooperate with the Initial Purchasers and counsel for the Initial Purchasers, as the Initial Purchasers may reasonably request from time to time, to qualify or register the Debentures for sale under (or obtain exemptions from the application of) the state securities or blue sky laws of those jurisdictions designated by the Initial Purchasers, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Debentures. Notwithstanding the foregoing, the Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction, where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Initial Purchasers promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Debentures for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Rule 144A Information. For so long as any of the Debentures are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company shall provide to any holder of the Debentures or to any prospective purchaser of the Debentures designated by any holder, upon request of such holder or prospective purchaser, information required to be provided by Rule 144A(d)(4) of the Securities Act if, at the time of such request, the Company is not subject to the reporting requirements under Section 13 or 15(d) of the Exchange Act. (g) Legends. Each of the Debentures will bear, to the extent applicable, the legend contained in "Notice to Investors" in the Offering Memorandum for the time period and upon the other terms stated therein. (h) No General Solicitation. Except following the effectiveness of the Registration Statement (as defined in the Registration Rights Agreement), the Company will not, and will cause its subsidiaries not to, solicit any offer to buy or offer to sell the Debentures by means of any form of general solicitation or general advertising (as those terms are used in Regulation D) or in any manner that would require registration of the Debentures under the Securities Act. (i) No Integration. The Company will not, and will cause its subsidiaries not to, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Securities Act) in a transaction that could be integrated with the sale of the Debentures in a manner that would require the registration of the Debentures under the Securities Act. (j) Rule 144 Tolling. During the period of two years after the First Closing Date or, if later, the Second Closing Date, the Company will not, and will not permit any of its "affiliates" (as defined in Rule 144 under the Securities Act) to, resell any of the Debentures which constitute "restricted securities" under Rule 144 that have been reacquired by any of them. 15 (k) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Debentures sold by it in the manner described under the caption "Use of Proceeds" in the Offering Memorandum. (l) Transfer Agent. The Company shall engage and maintain, at its expense, one or more registrars and transfer agents for the Common Stock. (m) The Depository Trust Company. The Company will coordinate with the Representatives and use its best efforts to permit the Debentures to be eligible for clearance and settlement through the facilities of the Depository Trust Company. (n) Reservation of Common Stock. The Company will reserve and keep available at all times, free of preemptive or other similar rights, a sufficient number of authorized and unissued shares of Common Stock for the purpose of enabling the Company to satisfy any obligations to issue Conversion Shares. (o) Rating of Debentures. The Company shall take all reasonable action necessary to enable Standard & Poor's or any other "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act, to provide its credit rating of the Securities. (p) PORTAL Designation. The Company will use its best efforts to permit the Debentures to be designated PORTAL securities in accordance with the rules and regulations adopted by the NASD relating to trading in the PORTAL Market. (q) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Initial Purchasers an earnings statement (which need not be audited) covering the twelve-month period ending December 31, 2003 that satisfies the requirements of the Securities Act. (r) Company to Provide Interim Financial Statements. Prior to the Closing Date, the Company will furnish the Initial Purchasers, as soon as they have been prepared by or are available to the Company, a copy of any unaudited interim financial statements of the Company for any period subsequent to the period covered by the most recent financial statements appearing in the Offering Memorandum. (s) New York Stock Exchange Listing. The Company will use its best efforts to list, subject to notice of issuance, the Conversion Shares and the Put Shares, if any, on the NYSE. (t) Agreement Not to Offer or Sell Additional Securities. During the period commencing on the date hereof and ending on the 90th day following the date of the Final Offering Memorandum, the Company will not, without the prior written consent of BAS (which consent may be withheld at the sole discretion of BAS), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act (other than a registration statement on Form S-8), any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Debentures); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to 16 any stock option, stock bonus or other stock plan or arrangement described in the Final Offering Memorandum, but only if the holders of such shares, options, or shares issued upon exercise of such options, who is an officer or director of the Company or any of its subsidiaries, has agreed or agrees in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 90-day period without the prior written consent of BAS (which consent may be withheld at the sole discretion of the BAS). (u) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish certain reports, to the extent such reports are unavailable, free of charge, in electronic format from the Securities and Exchange Commission, to the BAS at 9 West 57th Street, New York, NY 10022 Attention: Robert Giammarco: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. (v) Investment Limitation. The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Debentures in such a manner as would require the Company or any of its subsidiaries to register as an investment company under the Investment Company Act. (w) No Manipulation of Price. The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (x) Existing Lock-Up Agreement. The Company will enforce any agreements between the Company and any of its security holders that prohibit the sale, transfer, assignment, pledge or hypothecation of any of the Company's securities. In addition, the Company will direct the transfer agent to place stop transfer restrictions upon any such securities of the Company that are bound by such existing "lock-up" agreements for the duration of the periods contemplated in such agreements. SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of their obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Debentures (including all printing, without limitation, costs), (ii) all fees and expenses of the Trustee under the Indenture, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Debentures to the Initial Purchasers, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, shipping and distribution of the Offering Memorandum (including financial statements, exhibits, schedules, and certificates of experts) and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Initial Purchasers in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Debentures for offer and sale under the state securities or blue sky laws, and, if requested by the Initial Purchasers, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements 17 thereto, advising the Initial Purchasers of such qualifications, registrations and exemptions, (vii) the expenses of the Company and the Initial Purchasers in connection with the marketing and offering of the Debentures, (viii) the fees and expenses associated with listing the Conversion Shares on the NYSE and (ix) all expenses and fees in connection with admitting the Debentures for trading in the PORTAL Market. Except as provided in this Section 4 and Sections 7 through 11 hereof, the Initial Purchasers shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE INITIAL PURCHASERS. The obligations of the Initial Purchasers to purchase and pay for the Firm Debentures as provided herein on the First Closing Date and, with respect to the Optional Debentures, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Debentures, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Accountants' Comfort Letter. On the date hereof, the Initial Purchasers shall have received from Ernst & Young LLP, independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Initial Purchasers, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to the Initial Purchasers, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Offering Memorandum (and the Representatives shall have received an additional three conformed copies of such accountants' letter for each of the Initial Purchasers). (b) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) there shall not have occurred any change, or any development that could reasonably be expected to result in a change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity, the effect of which is, in the judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Debentures as contemplated in the Offering Memorandum; and (ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the claims-paying ability rating accorded the Company's insurance subsidiaries by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (c) Opinions of External and Internal Counsel for the Company and Ernst & Young LLP. On each of the First Closing Date and the Second Closing Date the Representatives shall have received: (1) the favorable opinion of Burr & Forman LLP, external counsel for the Company, dated as of such Closing Date, the form of which is attached as Exhibit A (and the Representatives shall have received an additional three conformed copies of such counsel's legal 18 opinion for each of the Initial Purchasers); (2) the favorable opinion of internal counsel for the Company dated as of such Closing Date, the form of which is attached as Exhibit B (and the Representatives shall have received an additional three conformed copies of such counsel's legal opinion for each of the Initial Purchasers); and (3) the favourable opinion of Ernst & Young LLP dated as of such Closing Date, the form of which is attached as Exhibit E (and the Representatives shall have received an additional three conformed copies of such counsel's legal opinion for each of the Initial Purchasers). (d) Opinion of Counsel for the Initial Purchasers. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Shearman & Sterling LLP, counsel for the Initial Purchasers, dated as of such Closing Date, with respect to the matters customarily addressed in such transactions. (e) Officers' Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date. (f) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date the Representatives shall have received from Ernst & Young, LLP, independent public or certified public accountants for the Company a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received an additional three conformed copies of such accountants' letter for each of the Initial Purchasers). (g) Registration Rights Agreement. The Company and the Initial Purchasers shall have executed and delivered the Registration Rights Agreement (in form and substance satisfactory to the Initial Purchasers), and the Registration Rights Agreement shall be in full force and effect (assuming due execution, delivery and performance by the Initial Purchasers). (h) Lock-Up Agreement from Officers and Directors of the Company. On or prior to the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit C hereto from each officer and director of the Company, and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. 19 (i) PORTAL Designation. On or before each of the First Closing Date and the Second Closing Date, the Securities have been designated for trading on PORTAL. (j) Consent. On or before the First Closing Date, the consent (in form and substance reasonably satisfactory to the Initial Purchasers and their counsel) of SouthTrust Bank to the issuance of the Debentures contemplated in this Agreement. (k) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Initial Purchasers shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Debentures as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 7, Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 6. SUBSEQUENT OFFERS AND RESALES OF THE SECURITIES. (a) Offer and Sale Procedures. Each of the Initial Purchasers and the Company hereby establish and agree to observe the following procedures in connection with the offer and sale of the Debentures: (i) Offers and sales of the Debentures shall only be made to persons whom the offeror or seller reasonably believe to be qualified institutional buyers, as defined in Rule 144A ("Qualified Institutional Buyers"). Each Initial Purchaser severally agrees that it will not offer, sell or deliver any of the Debentures in any jurisdiction outside the United States except under circumstances that will result in compliance with the applicable laws thereof, and that it will take at its own expense whatever action is required to permit its purchase and resale of the Debentures in such jurisdictions. (ii) No general solicitation or general advertising (within the meaning of Rule 502(c) under the Securities Act) will be used in the United States in connection with the offering or sale of the Debentures. (iii) In the case of a non-bank Subsequent Purchaser of a Note acting as a fiduciary for one or more third parties, each third party shall, in the judgment of the applicable Initial Purchaser, be a Qualified Institutional Buyer. (iv) Each Initial Purchaser will take reasonable steps to inform, and cause each of its U.S. Affiliates to take reasonable steps to inform, persons acquiring Debentures from such Initial Purchaser or affiliate, as the case may be, in the United States that the Securities (A) have not been and will not be registered under the Securities Act, (B) are being sold to them without registration under the Securities Act in reliance on Rule 144A or in accordance with another exemption from registration under the Securities Act, as the case may be, and (C) may not be offered, sold or otherwise transferred except (1) to the Company, (2) in accordance with Rule 144A to a person 20 whom the seller reasonably believes is a Qualified Institutional Buyer that is purchasing such Debentures for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the offer, sale or transfer is being made in reliance on Rule 144A or (3) pursuant to another available exemption from registration under the Securities Act. (v) No sale of the Debentures to any one Subsequent Purchaser will be for less than U.S.$100,000 principal amount and no Note will be issued in a smaller principal amount. If the Subsequent Purchaser is a non-bank fiduciary acting on behalf of others, each person for whom it is acting must purchase at least U.S.$100,000 principal amount of the Debentures. (vi) The transfer restrictions and the other provisions set forth in the Offering Memorandum under the heading "Notice to Investors", including the legend required thereby, shall apply to the Debentures except as otherwise agreed by the Company and the Initial Purchasers. (vii) Each Initial Purchaser will deliver to each purchaser of the Debentures from such Initial Purchaser, in connection with its original distribution of the Debentures, a copy of the Offering Memorandum, as amended and supplemented at the date of such delivery. (b) Covenants of the Company. The Company covenants with each Initial Purchaser as follows: (i) The Company agrees that it will not and will cause its Affiliates not to, directly or indirectly, solicit any offer to buy, sell or make any offer or sale of, or otherwise negotiate in respect of, securities of the Company of any class if, as a result of the doctrine of "integration" referred to in Rule 502 under the Securities Act, such offer or sale would render invalid (for the purpose of (i) the sale of the Debentures by the Company to the Initial Purchasers, (ii) the resale of the Debentures by the Initial Purchasers to Subsequent Purchasers or (iii) the resale of the Debentures by such Subsequent Purchasers to others) the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof or by Rule 144A thereunder or otherwise. (ii) The Company agrees that, in order to render the Debentures eligible for resale pursuant to Rule 144A under the Securities Act, while any of the Debentures remain outstanding and are "restricted securities" within the meaning of Rule 144 under the Act, it will make available, upon request, to any holder of Debentures or prospective purchasers of Debentures the information specified in Rule 144A(d)(4), unless the Company furnishes information to the Commission pursuant to Section 13 or 15(d) of the Exchange Act. (iii) Until the expiration of two years after the original issuance of the Debentures, the Company will not, and will use its reasonable efforts to cause its subsidiaries over which it has control not to, resell any Debentures which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the Securities Act), whether as beneficial owner or otherwise (except as agent acting as a securities broker on behalf of and for the account of customers in the ordinary course of business in unsolicited broker's transactions. 21 (c) Qualified Institutional Buyer. Each Initial Purchaser severally and not jointly represents and warrants to, and agrees with, the Company that it is Qualified Institutional Buyer and an "accredited investor" within the meaning of Rule 501(a) under the 1933 Act. (d) Restricted Securities. The Initial Purchasers understand that the Debentures have not been and, except as required pursuant to the Registration Rights Agreement, will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from the registration requirements of the Securities Act. SECTION 7. REIMBURSEMENT OF INITIAL PURCHASERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10 or Section 11, or if the sale to the Initial Purchasers of the Debentures on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse each Representative and the other Initial Purchasers (or such Initial Purchasers as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Initial Purchasers in connection with the proposed purchase and the offering and sale of the Debentures, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 8. INDEMNIFICATION. (a) Indemnification of the Initial Purchasers by the Company. The Company agrees to indemnify and hold harmless each Initial Purchaser, its officers and employees, and each person, if any, who controls any Initial Purchaser within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Initial Purchaser or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or the laws or regulations of the provinces of Canada where the Debentures have been offered or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact, in each case, necessary to make the statements therein not misleading; or (ii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iii) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (iv) on any act or failure to act or any alleged act or failure to act by any Initial Purchaser in connection with, or relating in any manner to, the Debentures or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability, expense or action arising out of or based upon any matter covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (iv) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability, expense or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Initial Purchaser through its bad faith or willful misconduct, and to reimburse each Initial Purchaser and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BAS) as such expenses are reasonably incurred by such Initial Purchaser or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, 22 expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Offering Memorandum (or any amendment or supplement thereto). The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. The Initial Purchasers agree to indemnify and hold harmless the Company, each of its directors, each of its officers and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Initial Purchaser), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Offering Memorandum (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Offering Memorandum (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Initial Purchaser expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Initial Purchasers have furnished to the Company expressly for use in the Offering Memorandum (or any amendment or supplement thereto) are the statements set forth in the table in the first paragraph the eleventh paragraph under the caption "Plan of Distribution" in the Offering Memorandum; and the Initial Purchasers confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that the Initial Purchasers may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action 23 or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BAS in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Initial Purchasers, on the other hand, from the offering of the Debentures pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Initial Purchasers, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Initial Purchasers, on the other hand, in connection with the offering of the Debentures pursuant to this 24 Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Debentures pursuant to this Agreement (before deducting expenses) received by the Company, and the total discount received by the Initial Purchasers, bear to the aggregate initial public offering price of the Debentures. The relative fault of the Company, on the one hand, and the Initial Purchasers, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, on the one hand, or the Initial Purchasers, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company and the Initial Purchasers agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Initial Purchasers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9. Notwithstanding the provisions of this Section 9, no Initial Purchaser shall be required to contribute any amount in excess of the discount received by such Initial Purchaser in connection with the Debentures offered by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an Initial Purchaser and each person, if any, who controls an Initial Purchaser within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Initial Purchaser, and each director of the Company, each officer of the Company, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL INITIAL PURCHASERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Initial Purchasers shall fail or refuse to purchase Debentures that it or they have agreed to purchase hereunder on such date, and the aggregate amount of Debentures which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Debentures to be purchased on such date, the other Initial Purchasers shall be obligated, severally, in the proportions that the amount of Debentures set forth opposite their respective names on Schedule A bears to the aggregate amount of Debentures set forth opposite the names of all such non-defaulting Initial Purchasers, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Initial Purchasers, to purchase the Debentures which such defaulting Initial Purchaser or Initial 25 Purchasers agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Initial Purchasers shall fail or refuse to purchase Debentures and the aggregate amount of Debentures with respect to which such default occurs exceeds 10% of the aggregate amount of Debentures to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Debentures are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 7, Section 8 and Section 9 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Offering Memorandum or any other documents or arrangements may be effected. As used in this Agreement, the term "Initial Purchaser" shall be deemed to include any person substituted for a defaulting Initial Purchaser under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. 26 SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the New York Stock Exchange, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Debentures in the manner and on the terms described in the Offering Memorandum or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company to any Initial Purchaser, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Initial Purchasers pursuant to Sections 4 and 7 hereof, (b) any Initial Purchaser to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Initial Purchaser or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Debentures sold hereunder and any termination of this Agreement. SECTION 13. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: Banc of America Securities LLC 9 West 57th Street New York, NY 10019 Facsimile: 212-847-5084 ATTENTION: Robert Giammarco with a copy to: Banc of America Securities LLC 9 West 57th Street New York, NY 10019 Facsimile: 212-847-5124 ATTENTION: Eric Hambleton and with a copy to: Shearman & Sterling LLP 27 599 Lexington Avenue New York, NY 10022-6069 ATTENTION: Christopher Cummings If to the Company: ProAssurance Corporation 100 Brookwood Place Birmingham, Alabama 35209 Facsimile: (205) 877-4405 ATTENTION: A. Derrill Crowe, M.D. with a copy to: Burr & Forman LLP 3100 Southtrust Tower 420 North 20th Street Birmingham, Alabama 35203 ATTENTION: Jack Stephenson Any party hereto may change the address for receipt of communications by giving written notice to the others. 28 SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Initial Purchasers pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Debentures as such from any of the Initial Purchasers merely by reason of such purchase. SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in such state. SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Offering Memorandum (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. The respective indemnities, contribution agreements, representations, warranties and other statements of the Company and the several Initial Purchasers set forth in or made pursuant to this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation, or statement as to the results thereof, made by or on behalf of any Initial Purchaser, the officers or employees of any Initial Purchaser, any person controlling any Initial Purchaser, the Company, the officers or employees of the Company, or any person controlling the Company, (ii) acceptance of the Debentures and payment for them hereunder and (iii) termination of this Agreement. Except as otherwise provided, this Agreement has been and is made solely for the benefit of and shall be binding upon the Company, the Initial Purchasers, the Initial 29 Purchasers' officers and employees, any controlling persons referred to herein, the Company's directors and the Company's officers and their respective successors and assigns, all as and to the extent provided in this Agreement, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include a purchaser of any of the Shares from any of the several Initial Purchasers merely because of such purchase. 30 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, PROASSURANCE CORPORATION By: /s/ Victor T. Adamo -------------------------- Name: Victor T. Adamo Title: President and Chief Operating Officer By: /s/ A. Derrill Crowe -------------------------- Name: A. Derrill Crowe, M.D. Title: Chairman and Chief Executive Officer The foregoing Purchase Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. BANC OF AMERICA SECURITIES LLC COCHRAN, CARONIA SECURITIES LLC Acting as Representatives of the several Initial Purchasers named in the attached Schedule A. By: BANC OF AMERICA SECURITIES LLC By: /s/ Michael Anderson ------------------------------ Name: Michael Anderson Title: Managing Director SCHEDULE A
AGGREGATE PRINCIPAL AMOUNT OF FIRM DEBENTURES TO BE INITIAL PURCHASER PURCHASED Banc of America Securities LLC ............................... $80,000,000 Cochran, Caronia Securities LLC ............................. $20,000,000 Total ...................................... $100,000,000*
- ---------- * Assuming no exercise of the Initial Purchasers' option. EX-5.1 4 g85376exv5w1.txt EX-5.1 OPINION OF BURR & FORMAN LLP EXHIBIT 5.1 Jack P. Stephenson, Jr. Direct Dial: (205) 458-5201 Email: jstephen@burr.com October 24, 2003 ProAssurance Corporation 100 Brookwood Place Birmingham, Alabama 35209 Ladies and Gentlemen: We have acted as counsel to ProAssurance Corporation, a Delaware corporation ("ProAssurance"), in connection with the issuance and sale of its 3.90% Convertible Senior Debentures due 2023 in principal amount of $107,600,000 (the "Debentures") pursuant to the Purchase Agreement ("Purchase Agreement") dated July 1, 2003, among ProAssurance and Banc of America Securities LLC and Cochran, Coronia Securities LLC, as representatives of the initial purchasers named therein (the "Initial Purchasers"). The Debentures are convertible into 2,572,038 shares of common stock of ProAssurance, par value $0.01 per share (the "Common Stock"), at an initial conversion rate of 23.9037 per $1,000 principal amount of the Debentures (the "Conversion Shares"). We have been requested to render the following opinion to you in connection with ProAssurance's Registration Statement on Form S-3 ("Registration Statement") filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the registration by ProAssurance of the Debentures and Conversion Shares. In so acting, we participated in the preparation of the Purchase Agreement and in the closing of the sale of the Debentures as contemplated thereby. In addition, we have participated in the preparation of, and we have reviewed and are familiar with the following documents executed in connection with the transactions contemplated by the Purchase Agreement and described in the Registration Statement (together with the Purchase Agreement, the "Operative Documents"). 1. Registration Rights Agreement between ProAssurance and the Initial Purchasers dated July 7, 2003 (the "Registration Rights Agreement"); 2. Indenture dated July 7, 2003, between ProAssurance as Issuer and SouthTrust Bank as Trustee for up to $135,000,000 Aggregate Principal Amount of 3.90% Convertible Senior Debentures due 2023 (the "Indenture"); 3. The Debentures in principal amount of $100,000,000 and $7,600,000, delivered by ProAssurance on July 7, 2003 and July 16, 2003, respectively, Cusip Number 74267AA4. For purposes of rendering this opinion, we have examined and relied upon the originals or copies, certified or otherwise, identified to our satisfaction of such records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. In all such examinations, we have assumed the October 24, 2003 Page 2 ___________________ authenticity of all documents submitted to us as originals, the genuineness of all signatures on original documents and the conformity to such original documents of all copies submitted to us as certified, conformed, photographic or telecopied copies, and as to certificates, telegraphic and telephonic confirmations given by public officials, we have assumed the same to have been properly given and to be accurate. In addition and without limiting the foregoing, we have, without any independent investigation, assumed the following in connection with the opinions rendered below: the genuineness of all signatures on the Operative Documents (other than the signatures of ProAssurance) and the authority of each of such persons to sign the Operative Documents and that the Operative Documents have been duly authorized, executed and delivered by all parties thereto (other than ProAssurance). Based upon the foregoing and subject to the qualifications, limitations, and exceptions set forth herein, we are of the following opinions: (i) The Debentures have been duly authorized, issued and delivered by ProAssurance and constitute legally valid and binding obligations of ProAssurance, entitled to the benefits of the Indenture and enforceable against ProAssurance in accordance with their terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (ii) The Indenture has been duly authorized, executed and delivered by ProAssurance and constitutes a legally valid and binding agreement of ProAssurance enforceable against ProAssurance in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles, and except that we express no opinion as to the enforceability of Section 6.7 of the Indenture. (iii) The shares of Common Stock initially issuable upon conversion of the Debentures have been duly authorized and reserved for issuance and, when issued upon conversion of the Debentures in accordance with the terms of the Debentures, will be validly issued, fully paid and non-assessable. The laws covered by the opinions expressed herein are limited to the federal law of the United States, the laws of the State of Alabama, the Delaware General Corporation Law, and for purposes of the opinion set forth in paragraphs (i) and (ii), the laws of the State of New York. No opinion is expressed with respect to the statutes, administrative decisions and rules and regulations of county, municipal and special political subdivisions. October 24, 2003 Page 3 ___________________ We consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to this opinion and our firm under the caption "Legal Matters" in the Registration Statement and prospectus included therein. Yours very truly, /s/ BURR & FORMAN LLP JPSJr./st EX-5.2 5 g85376exv5w2.txt EX-5.2 OPINION OF ERNST & YOUNG LLP EXHIBIT 5.2 October 24, 2003 ProAssurance Corporation 100 Brookwood Place Birmingham, Alabama 35209 Ladies and Gentlemen: We have acted as tax advisors to ProAssurance Corporation (the "Company") in connection with the filing of a registration statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, for the registration of $107,600,000 aggregate principal amount of its Convertible Senior Debentures due 2023 (the "Debentures")(which includes $100,000,000 of the Debentures which were sold to Banc of America Securities LLC and Cochran, Caronia Securities LLC as the initial purchasers (the "Initial Purchasers") and $7,600,000 of the Debentures which were sold to the Initial Purchasers in connection with the exercise of the option granted to the Initial Purchasers pursuant to Section 2(c) of the purchase agreement dated as of July 1, 2003 (the "Purchase Agreement") between the Company and the Initial Purchasers), pursuant to the Purchase Agreement. Unless otherwise specifically provided for herein, capitalized terms used herein have the meanings given to them in the Purchase Agreement. For purposes of rendering this opinion, we have considered such principles and authorities of U.S. federal income tax law and examined copies certified or otherwise identified to our satisfaction such documents, corporate records and other instruments, as we have considered necessary or appropriate. Included in such examination were the following: (i) the Purchase Agreement; (ii) the registration rights agreement dated as of July 7, 2003 (the "Registration Rights Agreement") between the Company and the Initial Purchasers; (iii) the prospectus portion of the Registration Statement filed with the Securities and Exchange Commission on the date hereof (the "Prospectus") with respect to (a) the Debentures and (b) the shares of the Company's common stock issuable upon conversion of the Debentures; and (iv) the indenture dated as of July 7, 2003, among the Company and SouthTrust Bank, as trustee, pursuant to which the Debentures have been issued (the "Indenture"). Page 2 ProAssurance Corporation October 24, 2003 In such examination, we have assumed (i) the genuineness of all signatures, (ii) the authenticity of all documents submitted to us as originals, (iii) the conformity to authentic originals of all documents submitted to us as certified or photocopies, (iv) the genuineness of all signatures on all documents of all parties, (v) the legal capacity and competency of natural persons, (vi) the due authorization, execution and delivery of the Purchase Agreement and the Indenture by all parties thereto, and (vii) that the Purchase Agreement and Indenture constitute the valid, binding and enforceable obligations of all parties thereto. On the basis of such examination, we advise you that, in our opinion, (i) for U.S. federal income tax purposes, the Debentures should be subject to Treasury Regulation Section 1.1275-4(b) and (ii) the information in the Prospectus under the caption "Certain U.S. Federal Income Tax Consequences," to the extent that it constitutes matters of U.S. federal tax law or legal conclusions with respect thereto, is correct in all material respects. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In addition, we consent to the reference to us under the caption "Certain U.S. Federal Income Tax Consequences" in the Prospectus. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by or furnished to any other person without our prior written consent. Sincerely, /s/ ERNST & YOUNG LLP EX-12.1 6 g85376exv12w1.txt EX-12.1 STATEMENT RE: RATIO OF EARNINGS EXHIBIT 12.1 PROASSURANCE CORPORATION AND SUBSIDIARIES EARNINGS TO FIXED CHARGE RATIO HISTORICAL RATIO FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND THE YEARS ENDED DECEMBER 31, 1998 THROUGH 2002 PRO FORMA RATIO FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND THE YEAR ENDED DECEMBER 31, 2002 (in thousands)
PRO FORMA RATIOS HISTORICAL RATIOS --------------------- ----------------------------------------------------------------- SIX SIX MONTHS YEAR MONTHS YEAR ENDED ENDED ENDED ENDED ------------------------------------------------------- 6/30/2003 12/31/2002 6/30/03 2002 2001 2000 1999 1998 --------- ---------- -------- -------- -------- -------- -------- -------- DENOMINATOR--FIXED CHARGES: Interest expense, including amortization of capitalized expenses related to debt $ 2,280 $ 4,561 $ 1,069 $ 2,875 $ 2,591 $ -- $ -- $ -- Interest within rental expense 670 1,423 670 1,423 911 281 332 237 --------- ---------- -------- -------- -------- -------- -------- -------- Fixed Charges $ 2,950 $ 5,984 $ 1,739 $ 4,298 $ 3,502 $ 281 $ 332 $ 237 ========= ========== ======== ======== ======== ======== ======== ======== NUMERATOR--EARNINGS, AS ADJUSTED: Income before taxes, minority interest, and cumulative effect $ 17,951 $ 11,924 $ 19,162 $ 13,610 $ 10,969 $ 28,300 $ 63,160 $ 66,202 Fixed charges $ 2,950 $ 5,984 1,739 4,298 3,502 281 332 237 Other required adjustments 69 12 69 12 (312) (218) (18) (181) --------- ---------- -------- -------- -------- -------- -------- -------- Earnings as defined in Item 503 of Reg. S-K $ 20,970 $ 17,920 $ 20,970 $ 17,920 $ 14,159 $ 28,363 $ 63,474 $ 66,258 ========= ========== ======== ======== ======== ======== ======== ======== EARNINGS TO FIXED CHARGES RATIO 7.11 2.99 12.06 4.17 4.04 100.94 191.19 279.57 ========= ========== ======== ======== ======== ======== ======== ========
EX-23.1 7 g85376exv23w1.txt EX-23.1 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in the Registration Statement (Form S-3) and related Prospectus of ProAssurance Corporation for the registration of $107,600,000 of 3.9% Convertible Senior Debentures and 2,572,038 shares of its common stock and to the incorporation by reference therein of our report dated February 21, 2003, with respect to the consolidated financial statements and schedules of ProAssurance Corporation included in its Annual Report (Form 10-K/A) for the year ended December 31, 2002, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Birmingham, Alabama October 21, 2003 EX-25.1 8 g85376exv25w1.txt EX-25.1 STATEMENT OF ELIGIBILITY, FORM T-1 Form T-1 OMB APPROVAL OMB Number: 3235-0110 Expires June 30, 2003 Estimated Average burden Hours per response...15 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE UNITED STATES CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) [X] SouthTrust Bank --------------------------------------------------- (Exact name of trustee as specified in its charter) Alabama 63-0022787 ------- ---------- (Jurisdiction of incorporation or organization (I.R.S. Employer Identification if not a U.S. national bank) Number) 420 North 20th Street Birmingham, Alabama 35223 ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) John Buchanan, Chief Legal Officer ---------------------------------- SouthTrust Bank 420 North 20th Street Birmingham, Alabama 35203 --------------------------------------------------------------- (205) 254-5150 -------------- (Name, address and telephone number of agent for services) ProAssurance Corporation ------------------------ (Exact name of obligor as specified in its charter) Delaware 63-1261433 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 Brookwood Place, Birmingham, AL 35209 --------------------------------------- ----- (Address of principal executive offices) (Zip Code) 3.90% Convertible Senior Debentures Due 2023 -------------------------------------------- (Title of the indenture securities) FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a)NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT Federal Reserve Bank of Atlanta 1000 Peachtree St., NE Atlanta, GA 30309-4470 State of Alabama State Banking Department Center for Commerce 401 Adams Avenue, Suite 680 Montgomery, AL 36130-1201 Federal Deposit Insurance Corporation Washington, DC 20549 (b)WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS: The trustee is authorized to exercise corporate trust powers. ITEM #2 AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE SUCH AFFILIATION. The obligor is not an affiliate of the trustee. ITEMS 3 TO 15. Items 3 through 15 are inapplicable because, to the best of the trustee's knowledge, the obligor is not in default on any indenture for which the trustee acts as trustee. ITEM 16. LIST OF EXHIBITS. List below all exhibits filed as a part of this statement of eligibility. 1. A copy of the articles of association of the trustee as now in effect. SEE EXHIBIT #1 2. A copy of the certificate of authority of the trustee to commence business, if not contained in the articles of ASSOCIATION. SEE EXHIBIT #1 3. A copy of the authorization of the trustee to exercise corporate trust powers, if such authorization is not contained in the documents specified in paragraph (1) or (2) above. SEE EXHIBIT #1 4. A copy of the existing bylaws of the trustee, or instruments corresponding thereto. SEE EXHIBIT #2 5. A copy of each indenture referred to in Item 4, if the obligor is in default. N/A 6. The consents of United States institutional trustees required by Section 321 (b) of the Act. SEE EXHIBIT #3 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. SEE EXHIBIT #4 8. A copy of any order pursuant to which the foreign trustee is authorized to act as sole trustee under indentures qualified or to be qualified under the Act. N/A 9. Foreign trustees are required to furnish a consent to service of process on Form F-X. N/A SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the trustee, SouthTrust Bank, an Alabama banking corporation, organized and existing under the laws of Alabama, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Birmingham, and State of Alabama, on the 24th day of October, 2003. SouthTrust Bank By: /s/ John S. Hiott ------------------- John S. Hiott Senior Vice President and Manager Corporate Trust Department EXHIBIT#1 ARTICLES OF INCORPORATION OF SOUTHTRUST BANK, AN ALABAMA BANKING CORPORATION The undersigned, acting as incorporators under the Code of Alabama 1975, as amended, including, without limitation, the provisions of Section 5-7A-21 thereof, adopt the following Articles of Incorporation. ARTICLE 1 Name The name of the corporation shall be SouthTrust Bank. ARTICLE 2 Duration The duration of the corporation shall be perpetual, unless otherwise legally terminated. ARTICLE 3 Objects The objects or purposes for which the corporation is formed are: (a) To do all things necessary and incident to carrying on the business of banking and such business as is done by trust companies doing a banking business. (b) To discount bills, notes and other evidences of debt. (c) To receive and pay out deposits, with or without interest, and impose charges for services. (d) To receive on special deposit money, bullion, or foreign coins, or bonds or securities. (e) To buy and sell foreign and domestic exchanges, gold and silver bullion or foreign coins, bonds, bills of exchange, notes and other negotiable paper. (f) To lend money on personal security or upon pledge of bonds, stocks or other negotiable security. (g) To take and receive security by mortgage, security agreement, or otherwise own property, real and personal. (h) To become trustee for any purpose and to be appointed and to act as executors, administrators, guardians, receivers or fiduciaries as provided by law. (i) To lease real and personal property upon the specific request of a customer. (j) To perform computer, management, and travel agency services for others. (k) To subscribe to the capital stock and become a member of the Federal Reserve System and to comply with the rules and regulations thereof. (l) To do any business and exercise any powers incident to the business of bank and trust companies doing a banking business. ARTICLE 4 Registered Office and Agent The address of the corporation's initial registered office shall be 420 North 20th Street, Birmingham, Jefferson County, Alabama 35203 and its initial agent at such address shall be John D. Buchanan. ARTICLE 5 Capital Accounts 5.1 The corporation's total authorized capital stock shall be $9,006,600.00, divided into 1,020,000 shares of common stock with a par value of eight dollars and eighty-three cents ($8.83) each. 5.2 The amount of capital, surplus and undivided profit with which the corporation will begin business as a state bank shall be $9,006,600 as capital stock, $1,722,348,855 as surplus, $1,634,759,842 as undivided profit and net unrealized gain (loss) on available for sale securities of ($141,831,404) for a total of $3,224,283,893. ARTICLE 6 Principal Office The location of the principal office of the corporation in the State of Alabama shall be 420 North 20th Street, Birmingham, Jefferson County, Alabama 35203. ARTICLE 7 Powers The corporation shall possess all of the powers necessary and incident to the conduct the banking business and it is hereby vested with the necessary power to carry out the objects and purposes herein expressed in Article 3 hereof, and shall have all powers especially conferred upon its corporation by the laws of the State of Alabama, as well as those necessarily implied, together with the following additional powers: (a) To engage in business as a natural person may, not inconsistent with the provisions of law pertaining to the organization and regulation of a banking corporation in the State of Alabama. (b) To lend money and take security therefor, and to borrow money and give security therefor on any and all of the property of the corporation. (c) To buy, sell, lease, acquire, own, use and occupy real estate and personal property in any locality, in a legal manner, that may be necessary or convenient for the conduct and maintenance of a banking business. (d) To conduct for a reasonable time any business of each and every kind that might be necessary for it to conduct by virtue of the corporation having taken over such business as a result of a foreclosure of any mortgage or collateral security that might necessarily have taken over; provided, however, that said authority shall in no event continue or be exercised beyond such time as the Superintendent of Banks for the State of Alabama shall fix as the termination date for the reasonable exercise of the authority. (e) To accept deposits and payments on loans and other obligations as agent for other banks located in Alabama that are subsidiaries of the same bank holding company. (f) To exercise any power which a federally chartered or regulated bank could exercise (subject to the prior approval, if required, of the Superintendent of Banks for the State of Alabama). ARTICLE 8 Directors 8.1 The corporation's current Board of Directors consists of fourteen (14) persons, who shall serve until the next annual meeting of the shareholders and until their successors are elected and qualified. 8.2 Each director shall be the owner and holder of shares of stock in the corporation or its ultimate parent bank holding company, and each director shall hold at least two shares in his or her name, unpledged and unencumbered in any way except for a statutory lien which might attach in favor of the corporation issuing such stock. 8.3 Not less than 75% of the directors of the corporation shall, during their whole term of service, be citizens of the United States. At least 51% of the directors of the corporation shall be residents of the State of Alabama. 8.4 The names and addresses of the members of the current Board of Directors are set forth below: (a) Julian W. Banton: SouthTrust Bank, National Association 420 North 20th Street, 4th Floor Birmingham, Alabama 35203 (b) Thomas E. Bradford, Jr.: Bradford & Company Post Office Box 278 Birmingham, Alabama 35201 (c) Ronald G. Bruno: Bruno Capital Management Corporation Bruno Capital Building 100 Grandview Place, Suite 500 Birmingham, Alabama 35243 (d) H. M. Burt, Jr.: 727 Hillyer High Road Anniston, Alabama 36207 (e) David J. Cooper: Cooper/T. Smith Corporation Post Office Box 1566 Mobile, Alabama 36633 (f) Sallie C. Creel: Thrifty Car Rental 3844 Brook Hollow Lane Birmingham, Alabama 35243 (g) James D. Davis: Jemison Investment Company, Inc. 2001 Park Place, Suite 320 Birmingham, Alabama 35203 (h) James C. Harrison: Protective Industrial Insurance Company 2300 11th Avenue North Birmingham, Alabama 35234 (i) Chris H. Horgen: Southeastern Technology Fund 207 Eastside Square Huntsville, Alabama 35801 (j) Judy M. Merritt: Jefferson State Junior College 2601 Carson Road Birmingham, Alabama 35215 (k) Thomas E. Mitchell: Stuart Construction Company, Inc. Post Office Box 579 Bay Minette, Alabama 36507 (l) William V. Muse: Auburn University 107 Samford Hall Auburn, Alabama 36849 (m) William E. Smith, Jr.: Royal Cup, Inc. 160 Cleage Drive Birmingham, Alabama 35217 (n) R. Neal Travis: 2120 Southwinds Circle Birmingham, Alabama 35244 ARTICLE 9 Incorporators 9.1 The name and address of the incorporators are as follows: (a) Julian W. Banton: SouthTrust Bank, National Association 420 North 20th Street, 4th Floor Birmingham, Alabama 35203 (b) Thomas E. Bradford, Jr.: Bradford & Company Post Office Box 278 Birmingham, Alabama 35201 (c) H. M. Burt, Jr.: 727 Hillyer High Road Anniston, Alabama 36207 (d) Sallie C. Creel: Thrifty Car Rental 3844 Brook Hollow Lane Birmingham, Alabama 35243 (e) James D. Davis: Jemison Investment Company, Inc. 2001 Park Place, Suite 320 Birmingham, Alabama 35203 (f) James C. Harrison: Protective Industrial Insurance Company 2300 11th Avenue North Birmingham, Alabama 35234 (g) Judy M. Merritt: Jefferson State Junior College 2601 Carson Road Birmingham, Alabama 35215 (h) William E. Smith, Jr.: Royal Cup, Inc. 160 Cleage Drive Birmingham, Alabama 35217 (i) R. Neal Travis: 2120 Southwinds Circle Birmingham, Alabama 35244 ARTICLE 10 By-Laws 10.1 The dates on which the shareholders. annual meeting shall be held, the number of directors and the terms of office of the officers, and the powers and duties of the officers shall be fixed by the by-laws of the corporation. 10.2 The corporation shall have power to make by-laws for the regulation and governance of the corporation, its agents, servants or officers, and for all other purposes not inconsistent with the Constitution and laws of the State of Alabama. ARTICLE 11 No Director Liability A director of the corporation shall have no liability to the corporation or its shareholders for money damages for any action taken, or any failure to take any action, as a director, except for liability for (A) the amount of a financial benefit received by a director to which he or she is not entitled; (B) an intentional infliction of harm on the corporation or the shareholders; (C) a violation of Alabama Code Section 10-2B-8.83, (D) liability imposed by any federal or state law or regulation or applicable regulatory agency; (E) an intentional violation of criminal law; or (F) a breach of the directorss.s duty of loyalty to the corporation or its shareholders. IN WITNESS WHEREOF, the undersigned incorporators set their names on the 19th day of May, 2000. //James D. Davis ----------------------------------------- //Julian W. Banton ----------------------------------------- //William E. Smith, Jr. ----------------------------------------- //H.M Burt, Jr. ----------------------------------------- //Sallie C. Creel ----------------------------------------- //R. Neal Travis ----------------------------------------- //Thomas E. Bradford, Jr. ----------------------------------------- //James C. Harrison ----------------------------------------- //Judy M. Merritt EXHIBIT#2 B Y L A W S OF SOUTHTRUST BANK an Alabama Banking Corporation TABLE OF CONTENTS Article I. Offices........................................................................................ 1 Article II. Shareholders................................................................................... 1 Section 2.1 Annual Meetings....................................................................... 1 Section 2.2 Special Meetings...................................................................... 1 Section 2.3 Place of Meetings..................................................................... 1 Section 2.4 Action by Shareholders Without a Meeting.............................................. 1 Section 2.5 Notice of Meetings.................................................................... 2 Section 2.6 Waiver of Notice...................................................................... 2 Section 2.7 Record Date........................................................................... 3 Section 2.8 Shareholders' List for Meeting........................................................ 3 Section 2.9 Voting Entitlement of Shares.......................................................... 3 Section 2.10 Proxies............................................................................... 4 Section 2.11 Corporation's Acceptance of Votes..................................................... 4 Section 2.12 Conduct of Meeting.................................................................... 5 Section 2.13 Quorum................................................................................ 5 Section 2.14 Voting for Directors; Cumulative Voting............................................... 5 Article III. Board of Directors............................................................................. 6 Section 3.1 General Powers........................................................................ 6 Section 3.2 Number, Tenure and Qualifications..................................................... 6 Section 3.3 Oath of Directors..................................................................... 6 Section 3.4 Resignation of Directors.............................................................. 7 Section 3.5 Removal of Directors by Shareholders.................................................. 7 Section 3.6 Vacancy on Board...................................................................... 7 Section 3.7 Compensation of Directors............................................................. 7 Section 3.8 Meetings.............................................................................. 8 Section 3.9 Action Without Meeting................................................................ 8 Section 3.10 Notice of Meeting..................................................................... 8 Section 3.11. Waiver of Notice...................................................................... 8 Section 3.12 Quorum and Voting..................................................................... 9 Section 3.13 Committees of Directors............................................................... 9 Section 3.14 Director Emeritus..................................................................... 13 Section 3.15 Area Boards........................................................................... 13 Article IV. Officers....................................................................................... 14 Section 4.1 Positions............................................................................. 14 Section 4.2 Election and Term of Office........................................................... 14 Section 4.3 Vacancies............................................................................. 14 Section 4.4 Resignation and Removal of Officers................................................... 14 Section 4.5 Contract Rights of Officers........................................................... 15 Section 4.6 Duties of Officers.................................................................... 15 Section 4.7 Compensation.......................................................................... 16
i Article V. Conveyances, Transfers and Contracts........................................................... 16 Section 5.1 Conveyances, Etc...................................................................... 16 Section 5.2 Receipts, Checks, Drafts and Warrants................................................. 16 Section 5.3 Trust Department Activities........................................................... 16 Section 5.4 Seal.................................................................................. 17 Article VI. Borrowings..................................................................................... 17 Section 6.1 Borrowings; Collateral for Borrowings................................................. 17 Section 6.2 Time or Interest Bearing Certificates of Deposit...................................... 17 Article VII. Certificates Representing Shares............................................................... 17 Section 7.1 Certificates Representing Shares...................................................... 17 Section 7.2 Legends on Certificates............................................................... 18 Section 7.3 Transfer of Shares.................................................................... 18 Section 7.4 Lost, Stolen, Destroyed, or Mutilated Certificates.................................... 18 Article VIII. Indemnification of Directors, Officers and Employees........................................... 19 Section 8.1 Indemnification....................................................................... 19 Section 8.2 Insurance............................................................................. 19 Section 8.3 Survival of Right..................................................................... 20 Article IX. General........................................................................................ 20 Section 9.1 Fiscal Year........................................................................... 20 Section 9.2 Surplus; Restriction of Dividends..................................................... 20 Section 9.3 Checks................................................................................ 20 Section 9.4 Corporate Seal........................................................................ 20 Section 9.5 Voting of Corporation's Securities.................................................... 20 Section 9.6 Loans, Gifts, Favors, Etc. to Banking Department Employees from the Corporation, Employees, Etc., Prohibited.................................................................... 21 Section 9.7 Semi-Annual Report.................................................................... 21 Section 9.8 Loans................................................................................. 21 Section 9.9 Bonds................................................................................. 22 Section 9.10 Purchase of Corporate Stock........................................................... 22 Section 9.11 Articles of Incorporation............................................................. 22 Article X. Amendment of Bylaws............................................................................ 22 Section 10.1 Amendment by Board of directors or Shareholders....................................... 22 Section 10.2 Bylaw Increasing Quorum or Voting Requirement for Shareholders........................ 22 Section 10.3 Bylaw Increasing Quorum or Voting Requirement for Directors........................... 23 Article XI. Emergency Preparedness Program................................................................. 23
ii BYLAWS OF SOUTHTRUST BANK an Alabama Banking Corporation Article I. Offices The main office of the corporation shall be located in Birmingham, Alabama. The corporation may have such other offices, within and without the State of Alabama, as the board of directors may determine or as the business of the corporation may require. The registered office of the corporation, required by the Alabama Business Corporation Act to be maintained in the State of Alabama, may but need not be the same as its main office in the State of Alabama. The corporation may change its registered office from time to time in the manner specified by the Alabama Business Corporation Act. The corporation may change its main office from time to time in the manner specified by the Alabama Banking Code. Article II. Shareholders Section II.1 Annual Meetings. The annual meeting of the shareholders of the corporation, commencing with the year 2001, shall be held on the third Tuesday of January in each year if not a legal holiday in the State of Alabama, and if a legal holiday, then on the next succeeding business day not a legal holiday, at 10:00 a.m., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated herein for the annual meeting of the shareholders, or at any adjournment thereof, the board of directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as may be conveniently held. Section II.2 Special Meetings. Special meetings of the shareholders may be called by the board of directors, the chairman of the board, the president or the holders of at least 10 percent of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting in the manner specified by the Alabama Business Corporation Act. Section II.3 Place of Meetings. Annual and special meetings shall be held at the main office of the corporation in the State of Alabama, or at such other place, within or without the State of Alabama, as may be designated by the board of directors or the person or persons calling the meeting and stated in the notice of the meeting. Section II.4 Action by Shareholders Without a Meeting. Action required or permitted by the Constitution of Alabama or the Alabama Business Corporation Act to be taken at a shareholders' meeting may be taken without a meeting if the action is taken by all shareholders entitled to vote on the action. The action shall be evidenced by one or more written consents describing the action taken, signed by all the shareholders entitled to vote on the action, and delivered to the corporation for inclusion in the minutes or filing with the corporate records. 1 Section II.5 Notice of Meetings. (a) The corporation, or, in the case of a special meeting called by the holders of at least 10 percent of all the votes entitled to be cast on any issue proposed to be considered at the special meeting, the holders calling the meeting, shall notify shareholders in writing of the date, time, and place of each annual and special shareholders' meeting no fewer than 10 nor more than 60 days before the meeting date except as otherwise required by the Alabama Banking Code. Unless the Alabama Business Corporation Act or the articles of incorporation require otherwise, the corporation, or other persons calling the meeting, are required to give notice only to shareholders entitled to vote at the meeting. Notwithstanding the provisions of this section or any other provisions of the Alabama Business Corporation Act, the stock or bonded indebtedness of the corporation shall not be increased at a meeting unless notice of such meeting shall have been given as may be required by Section 234 of the Constitution of Alabama as the same may be amended from time to time. Without limitation, deposits accepted by the corporation, whether insured or secured, shall not be deemed bonded indebtedness. (b) Notice of an annual meeting need not include a statement of the purpose or purposes for which the meeting is called. (c) Notice of a special meeting shall include a statement of the purpose or purposes for which the meeting is called. (d) If not otherwise fixed in the manner specified under the Alabama Business Corporation Act, the record date for determining shareholders entitled to notice of and to vote at an annual or special shareholders' meeting is the day before the first notice is delivered to shareholders. (e) If an annual or special shareholders' meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time, or place if the new date, time, or place is announced at the meeting before adjournment. If a new record date for the adjourned meeting is or must be fixed in the manner specified under the Alabama Business Corporation Act, however, notice of the adjourned meeting shall be given to persons who are shareholders as of the new record date. Section II.6 Waiver of Notice. A shareholder may waive any notice required by the Constitution of Alabama, the Alabama Business Corporation Act, the Alabama Banking Code, the articles of incorporation, or these bylaws before or after the date and time stated in the notice. Execution of a unanimous action by written consent by shareholders shall be deemed to include a waiver of notice of a meeting. The waiver shall be in writing, be signed by the shareholder entitled to the notice, and be delivered to the corporation for inclusion in the minutes or filing with the corporate records. A shareholder's attendance at a meeting: (a) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and 2 (b) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter before action is taken on the matter. Section II.7 Record Date. The board of directors may fix or provide the manner of fixing the record date for one or more voting groups in order to determine the shareholders entitled to notice of a shareholders' meeting, to demand a special meeting, to vote, or to take any other action. A record date may not be more than 70 days before the meeting or action requiring a determination of shareholders. A determination of shareholders entitled to notice of or to vote at a shareholders' meeting is effective for any adjournment of the meeting unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. Section II.8 Shareholders' List for Meeting. After fixing a record date for a meeting, the corporation shall prepare an alphabetical list of the names of all its shareholders who are entitled to notice of a shareholders' meeting. The list shall be arranged by voting group (and within each voting group by class or series of shares) and show the address of and number of shares held by each shareholder. The shareholders' list shall be available for inspection by any shareholder, beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting, at the corporation's main office or, if the corporation's main office is located outside the State of Alabama, at its registered office. A shareholder, his or her agent, or attorney is entitled on written demand to inspect and, for a proper purpose, to copy the list, during regular business hours and at his or her expense, during the period it is available for inspection. The corporation shall make the shareholders' list available at the meeting, and any shareholder, his or her agent, or attorney is entitled to inspect the list at any time during the meeting or any adjournment. Refusal or failure to prepare or make available the shareholders' list does not affect the validity of action taken at the meeting. The stock transfer records of the corporation shall be prima facie evidence as to who are the shareholders entitled to examine the shareholders' list or transfer records or to vote at any meeting of shareholders. Section II.9 Voting Entitlement of Shares. (a) Subject to subsections (b) and (c) of this section, each outstanding share, regardless of class, is entitled to one vote on each matter submitted to a vote at a shareholders' meeting. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation the pledgor has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Only shares are entitled to vote. (b) The shares of the corporation are not entitled to vote if they are owned, directly or indirectly, by a second corporation, domestic or foreign, and the first corporation owns, directly or indirectly, a majority of the shares entitled to vote for directors of the second corporation, unless a court of competent jurisdiction determines that the voting of such shares is not for the purpose of perpetuation of management or other improper purpose. (c) Subsection (b) of this section does not limit the power of a corporation to vote any shares, including its own shares, held by it in a fiduciary capacity. 3 (d) Redeemable shares are not entitled to vote after notice of redemption is mailed to the holders and a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares. Section II.10 Proxies. A shareholder may vote in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by the shareholder's attorney-in-fact. An appointment of a proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. An appointment is valid for 11 months unless a longer period is expressly provided in the appointment form. An appointment of a proxy is revocable by the shareholder unless the appointment form conspicuously states that it is irrevocable and the appointment is coupled with an interest. The revocation of an appointment or the death or incapacity of the shareholder appointing a proxy does not affect the right of the corporation to accept the proxy's authority unless notice of the revocation, death or incapacity is received by the secretary or other officer or agent authorized to tabulate votes before the proxy exercises his or her authority under the appointment. An appointment made irrevocable under this section is revoked when the interest with which it is coupled is extinguished. Section II.11 Corporation's Acceptance of Votes. If the name signed on a vote, consent, waiver or proxy appointment corresponds to the name of a shareholder, the corporation if acting in good faith is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its shareholder, the corporation if acting in good faith is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if: (a) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (b) the name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the corporation requests, evidence of fiduciary status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (c) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the corporation requests, evidence of his or her status acceptable to the corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (d) the name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the corporation requests, evidence acceptable to the corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or (e) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all co-owners. 4 The corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. The corporation and its officer or agent who accepts or rejects a vote, consent, waiver, or proxy appointment in good faith and in accordance with the standards of this section are not liable in damages to the shareholder for the consequences of the acceptance or rejection. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this section is valid unless a court of competent jurisdiction determines otherwise. Section II.12 Conduct of Meeting. (a) Except as to matters approved unanimously by voice vote of the shareholders and votes concerning matters deemed to be procedural or administrative in character by the chairman of the meeting, all votes of shareholders shall be cast by written ballot of the shareholders on such forms as may be prescribed by the board of directors of the corporation or, in the absence thereof, the chairman of the meeting. (b) All meetings of shareholders shall be presided over by a chairman who shall be the chairman of the board of directors of the corporation, or in his absence, the president of the corporation, or the designee of such person. The chairman of the meeting shall conduct the meeting in a reasonable and orderly fashion and shall have the discretion to adopt such rules of, and make determinations as to, parliamentary procedure as he deems necessary or appropriate. Not limiting the foregoing, the chairman of the meeting shall have the discretion to determine matters which may be properly brought before the meeting, to establish agendas for the meeting, to recognize speakers and to reasonably limit time for debate. Section II.13 Quorum. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the Alabama Business Corporation Act provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter, but in no event shall a quorum consist of less than one-third of the votes entitled to be cast on the matter by the voting group. Once a share is represented for any purpose at a meeting, it is, unless established to the contrary, presumed present for quorum purposes for the remainder of the meeting. If a quorum is present when a vote is taken, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Constitution of Alabama as the same may be amended from time to time, the articles of incorporation, or the Alabama Business Corporation Act require a greater number of affirmative votes. An amendment of articles of incorporation adding, changing, or deleting a quorum or voting requirement for a voting group greater than specified must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirements then in effect or proposed to be adopted, whichever is greater. Section II.14 Voting for Directors; Cumulative Voting. Directors are elected by a majority of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present when the vote is taken. Shareholders shall not have the right to cumulate their votes for directors. 5 Article III. Board of Directors Section III.1 General Powers. All corporate powers shall be exercised by or under authority of, and the business and affairs of the corporation managed under the direction of, its board of directors, subject to any limitation set forth in the articles of incorporation or a shareholder agreement authorized under the Alabama Business Corporation Act. Section III.2 Number, Tenure and Qualifications. (a) The directors constituting the current board of directors are set forth in the articles of incorporation, and the members of the board shall hold office until the first annual meeting of shareholders following the adoption of these bylaws and until their successors shall have been elected and qualified. Thereafter, the number of directors constituting the board of directors shall be not less than five nor more than twenty-five, the exact number to be determined by resolution of the board of directors. After shares are issued, only the shareholders may change the range for the size of the board or change from a fixed to a variable-range size board or vice versa. (b) The directors have the power to fix or change the number of directors; and the directors may increase or decrease by 30 percent or less the number of directors last approved by the shareholders, but only the shareholders may increase or decrease by more than 30 percent the number of directors last approved by the shareholders. (c) Directors shall hold office until the next succeeding annual meeting of shareholders and until their successors shall have been elected and qualified. (d) A director shall be a natural person of the age of at least nineteen (19) years. Not less than seventy-five percent (75%) of the directors of the corporation shall, during their whole term of service, be citizens of the United States At least fifty-one percent (51%) of the directors of the corporation must be residents of the State of Alabama. Each director shall be the owner and holder of at least two shares of stock in the corporation, or its ultimate parent bank holding company, in his or her own name, and such shares must not be pledged or encumbered in any way except for statutory lien which might attach in favor of the corporation. No person convicted of a felony or a crime involving moral turpitude shall serve as a director. (e) In applicable circumstances, persons standing for election as directors shall receive the prior approval of the primary federal regulator of the corporation. (f) Any director of the corporation or any member of any Area Board (as defined in Section 3.15 of these bylaws) who has reached his or her 68th birthday or who has retired from his or her principal business position or occupation will not be eligible for re-election as director or as a member of a Area Board; provided, however, that the foregoing provision relating to retirement from such person's principal business position or occupation shall not apply to any director who has served as chairman of the board of the corporation. Section III.3 Oath of Directors. Every director shall, within thirty (30) days after his election, take and subscribe, in duplicate, an oath that he will diligently and honestly perform his 6 duties as such director, not knowingly violate or permit to be violated any provision of the banking law of the State of Alabama and that he is the owner in good faith of the shares of stock of the corporation, or its ultimate parent bank holding company, required to qualify him for such office, standing in his own name on such corporation's books. A copy of such oath shall be filed with the Superintendent of Banks of the State of Alabama. No director shall perform the duties of his office until such oath is made, and in case a director fails to make such oath, his place on the board of directors shall be declared vacant and his successor elected as prescribed by these bylaws, such successor being required to have the same qualifications and take the same oath as provided by this Article. Section III.4 Resignation of Directors. A director may resign at any time by delivering written notice to the board of directors, the chairman of the board of directors, or to the corporation. A resignation is effective when the notice is delivered unless the notice specifies a later effective date. Section III.5 Removal of Directors by Shareholders. The shareholders may remove one or more directors with or without cause unless the articles of incorporation provide that directors may be removed only for cause. If a director is elected by a voting group of shareholders, only the shareholders of that voting group may participate in the vote to remove him or her. A director may be removed only if the number of votes cast to remove him or her exceeds the number of votes cast not to remove him or her. A director may be removed by the shareholders only at a meeting called for the purpose of removing him or her and the meeting notice must state that the purpose, or one of the purposes, of the meeting is the removal of the director or by a unanimous action by written consent of the shareholders. Section III.6 Vacancy on Board. If a vacancy occurs on a board of directors: (a) The shareholders may fill the vacancy, whether resulting from an increase in the number of directors or otherwise; or (b) The board of directors may fill the vacancy, except that the directors shall have the power to fill a vacancy resulting from an increase in the number of directors only if expressly provided for in the articles of incorporation; or (c) If the directors remaining in office constitute fewer than a quorum of the board, they may fill the vacancy, if it is one that the directors are authorized to fill, by the affirmative vote of a majority of all the directors remaining in office. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group are entitled to vote to fill the vacancy if it is filled by the shareholders. A vacancy that will occur at a specific later date (by reason of a resignation effective at a later date as provided by the Alabama Business Corporation Act or otherwise) may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs. Section III.7 Compensation of Directors. Each director of the corporation who is not an officer or employee of the corporation shall be entitled to an attendance fee for each meeting 7 of the board of directors and a quarterly retainer fee, the amount of such fees to be established from time to time by the Human Resources Committee of the board of directors. Section III.8 Meetings. The board of directors may hold regular or special meetings within or without the State of Alabama. The board of directors shall hold regular meetings at such time as may be fixed by the directors. Unless the articles of incorporation provide otherwise, the board of directors may permit any or all directors to participate in a regular or special meeting by, or conduct a meeting through the use of, any means of communication by which all participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present. (a) Directors' First Meeting of Each Year. The board of directors, at their first meeting after their election by the shareholders at the annual meeting, shall fix and prescribe the amount of bond that shall be required of each officer and employee of the bank, and such amount shall not be less than the amount that may have been fixed or that may be hereafter fixed by the Superintendent of Banks of the State of Alabama for officers and employees of banks of the class to which the corporation belongs. (b) Superintendent Called Meetings. Anything contained in these bylaws or in the articles of incorporation to the contrary notwithstanding, meetings of the board of directors may be called by the Superintendent of Banks of the State of Alabama and held at any time and place he or she requires. Section III.9 Action Without Meeting. Action required or permitted by the Alabama Business Corporation Act to be taken at a board of directors' meeting may be taken without a meeting if the action is taken by all members of the board. The action shall be evidenced by one or more written consents describing the action taken, signed by each director, and included in the minutes or filed with the corporate records reflecting the action taken. Action taken under this section is effective when the last director signs the consent, unless the consent specifies a different effective date. A consent signed under this section has the effect of a meeting vote and may be described as such in any document. Section III.10 Notice of Meeting. (a) A regular meeting of the board of directors may be held without notice immediately after, and at the same place as, the annual meeting of shareholders. Other regular meetings may be held upon such notice and at such time and place as shall be determined by the board. (b) Special meetings of the board of directors shall be preceded by reasonable advance notice of the date, time, and place of the meeting. The notice need not describe the purpose of the special meeting. Notice may be given in writing or in person or by telegram, telephone, facsimile or other reasonable means. Section III.11 Waiver of Notice. (a) A director may waive any notice required by the Alabama Business Corporation Act, the Alabama Banking Code, the articles of incorporation, or these bylaws before or after the date and time stated in the notice. Except as provided by subsection (b) of this section, the waiver 8 must be in writing, signed by the director entitled to notice, and filed with the minutes or corporate records. (b) A director's attendance at or participation in a meeting: (1) waives objection to lack of any required notice to him or her or defective notice of the meeting unless the director at the beginning of the meeting (or promptly upon his or her arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting; and (2) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the director objects to considering the matter before action is taken on the matter. Section III.12 Quorum and Voting. A quorum of the board of directors consists of: (a) a majority of the fixed number of directors if the corporation has a fixed board size; or (b) a majority of the fixed number of directors prescribed, or if no number is prescribed the number in office immediately before the meeting begins, if the corporation has a variable-range size board. If a quorum is present when a vote is taken, the affirmative vote of a majority of directors present is the act of the board of directors. A director is, unless established to the contrary, presumed present for quorum purposes for the remainder of a meeting at which he or she has been present for any purpose. A director who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is deemed to have assented to the action taken unless: (1) he or she objects at the beginning of the meeting (or promptly upon his or her arrival) to holding it or transacting business at the meeting or, as to a matter required under the articles of incorporation or these bylaws to be included in the notice of the purpose of the meeting, he or she objects before action is taken on the matter; (2) his or her dissent or abstention from action taken is entered in the minutes of the meeting; or (3) he or she delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the corporation immediately after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. Section III.13 Committees of Directors. The board of directors may create one or more committees and appoint members of the board of directors to serve on them. Each committee may have one or more members, who serve at the pleasure of the board of directors. The creation of a committee and appointment of members to it shall be approved by the greater of (1) a majority of all the directors in office when the action is taken or (2) the number of directors required by the articles of incorporation or these bylaws to take such action. The provisions of the articles of incorporation and these bylaws which govern meetings, action without meetings, notice and waiver of notice, and quorum and voting requirements of the board of directors, apply to committees and 9 their members as well. To the extent specified by the board of directors or in the articles of incorporation or these bylaws, each committee may exercise the authority of the board of directors. A committee may not however: (1) authorize shareholder distributions; (2) approve or propose to shareholders action that the Alabama Business Corporation Act requires be approved by shareholders; (3) fill vacancies on the board of directors or on any of its committees; (4) amend the articles of incorporation; (5) adopt, amend, or repeal bylaws; (6) approve a plan of merger not requiring shareholder approval; (7) authorize or approve reacquisition of shares, except according to formula or method prescribed by the board of directors; or (8) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the board of directors may authorize a committee (or a senior executive officer of the corporation) to do so within limits specifically prescribed by the board of directors. Such committees shall include, but shall not be limited to, the following: EXECUTIVE COMMITTEE. The board of directors shall, at its initial meeting after its election in each year, elect from among their number a committee of three or more who, with the chairman of the board and the president of the corporation, shall constitute the Executive Committee of the board of directors. Each member of the Executive Committee shall serve for the ensuing year and until his or her successor is elected and shall qualify; provided, however, that any member of the Executive Committee may be removed, with or without cause, at any time by the board of directors. All vacancies in said Committee shall be filled by the board of directors. The chairman of the board of directors and the president of the corporation shall be members of the Committee and shall have the power to vote with respect to all matters coming before the Executive Committee. The Executive Committee shall meet at such times as it may decide. It shall keep a separate book of minutes of its proceedings and actions, and make reports to the board of directors, from time to time, of its actions. All the powers of the board of directors when the board is not in session may be exercised by the Executive Committee, except such powers as are prohibited by Section 3.13 above. Unless otherwise provided by resolutions duly adopted by the board of directors, a majority of the Executive Committee shall constitute a quorum for the transaction of business. The Executive Committee shall review all loans when the total liability of the borrower exceeds an established amount, which amount is to be determined and set by the board of directors from time to time. All persons appointed or elected to office by the Executive Committee shall hold their respective offices only until the next annual meeting of the board of directors. Each member of the Executive Committee, except salaried officers of the corporation, shall be entitled to an attendance fee for each meeting of the Committee, the amount of such fee to be established by the board of directors. AUDIT AND EXAMINATION COMMITTEE. The board of directors shall, at its initial meeting after its election in each year, elect from among its number a committee of three or 10 more who constitute the Audit and Examination Committee of the board of directors. No member of the Audit and Examination Committee shall be an officer or employee of the corporation or shall be a member of the Trust Policy Committee. Each member of the Audit and Examination Committee shall serve until his or her successor is elected and shall qualify; provided, however, that any member of the Audit and Examination Committee may be removed, with or without cause, at any time by the board of directors of the corporation. The Audit and Examination Committee shall make suitable examinations every six months of the affairs of the corporation. The result of such examination shall be reported in writing to the board of directors at the next regular meeting thereafter, stating whether the corporation is in a sound and solvent condition, whether adequate internal audit controls and procedures are being maintained, and recommending to the board such changes in the manner of doing business, etc. as shall be deemed advisable. The Audit and Examination Committee, upon its own recommendation and with the approval of the board of directors, may employ a qualified firm of Certified Public Accountants to make an examination and audit of the corporation. If such a procedure is followed, the one annual examination and audit of such firm of accountants and the presentation of its report to the board of directors will be deemed sufficient to comply with the requirements of this section of these bylaws. At least once during each calendar year and as often as required by regulations, the Audit and Examination Committee shall make suitable audits of the Trust and Financial Services Division or cause suitable audits to be made by auditors responsible only to the board of directors and, at such time, shall ascertain whether the Trust and Financial Services Division has been administered in accordance with law, appropriate regulations and sound fiduciary principles. In lieu of such periodic audits, the board of directors may elect to adopt an adequate continuous audit system. A report of the audits and examinations, together with the action taken thereon, shall be noted in the minutes of the board of directors. Each member of the Audit and Examination Committee, except salaried officers, shall be entitled to an attendance fee for each meeting of the Committee, the amount of such fee to be established by the Human Resources Committee of the board of directors. TRUST POLICY COMMITTEE. The board of directors shall, at its initial meeting after its election in each year, elect from among its number a committee of four or more directors, who are not officers or employees of the corporation, who shall constitute the Trust Policy Committee. Each member of the Trust Policy Committee shall serve for the ensuing year and until his or her successor is elected and shall qualify; provided, however, that any member of the Trust Policy Committee may be removed, with or without cause, at any time by the board of directors of the corporation. The Trust Policy Committee shall be responsible for the formulation of policy with respect to all fiduciary functions exercised by the Trust and Financial Services Division and shall take all such action as, in its judgment, may be necessary to insure the proper functioning of the Trust and Financial Services Division in matters pertaining to trust administration, investments, operations and new business development. The Trust Policy Committee shall from time to time receive information reflecting the implementation of its decisions and shall have authority to establish standing or ad hoc committees for the purpose of carrying out policies formulated by it. 11 The Trust Policy Committee shall review the affairs of the Trust and Financial Services Division on an annual basis and, if appropriate, make recommendations with respect thereto. The Trust Policy Committee may authorize any one or more of its members, or officers assigned to the Trust and Financial Services Division, to grant prior approval of the acceptance of any or all appointments of the corporation in a fiduciary capacity and to cause the granting of each such prior approval to be made a matter of written record. The Trust Policy Committee shall have such other and further duties as may from time to time be assigned to it by the board of directors. All investments of trust funds shall be made, retained or disposed of in accordance with policies, procedures or practices established or approved by the Trust Policy Committee, or with the express approval of the Trust Policy Committee, and the Trust Policy Committee shall keep minutes of all of its meetings showing the disposition of all matters considered and passed upon by it. At least once during each period of twelve months, the Trust Policy Committee shall review, or cause to be reviewed, all the assets held in or for each fiduciary account for which the Trust and Financial Services Division is charged with investment responsibility in order to determine the safety and current value of such accounts and the feasibility of retaining or disposing of them. The Trust Policy Committee shall fix the time for its regular meetings (to be held at least quarterly), provide for the call of special meetings and may adopt rules of procedure. Unless otherwise provided by a resolution duly adopted by the board of directors, the majority of the Trust Policy Committee shall constitute a quorum for the transaction of business. Each member of the Trust Policy Committee shall be entitled to an attendance fee for each meeting of the Trust Policy Committee, the amount of such fee to be established by the board of directors. HUMAN RESOURCES COMMITTEE. The board of directors shall, at its initial meeting after its election in each year, elect from among its number a committee of three or more members who shall constitute the Human Resources Committee. Each member of the Human Resources Committee shall serve for the ensuing year and until his or her successor is elected and shall qualify; provided, however, that any member of the Human Resources Committee may be removed, with or without cause, at any time by the board of directors of the corporation. The Human Resources Committee shall monitor, on behalf of the board of directors, management's performance in providing the management and manpower requirements for the proper functioning and progress of the corporation and shall counsel with management; the Human Resources Committee shall review plans for management succession, management training and management development programs; the Human Resources Committee shall review (and, if directed by the board of directors, establish) salary and wage administration procedures, including current ranges and surveys; approve any major deviation from established salary and wage levels; review compliance with applicable regulations; approve (and, if directed by the board of directors, establish) compensation of the principal executive officers, considering the recommendation of the Chairman of the Board, and in the case of the Chief Executive Officer's salary, considering the recommendation of the Chairman or President of SouthTrust Corporation; establish directors' fees; review and recommend proposed new board members; review employee relation plans and activities; and establish a budget for contributions and review management's recommendations for individual contributions. Each member of the Human Resources Committee shall be entitled to an attendance fee for each meeting of the Human Services Committee, the amount of such fee to be established by the board of directors. 12 The board of directors also may appoint, from time to time, such other committees, including temporary committees, for such purposes and with such powers as the board of directors may determine, and may establish such attendance fees for the members of such other committees as the board of directors may determine. The persons constituting the entire membership of any committee provided for or created pursuant to the bylaws may be increased by the board of directors whenever it sees fit. In the case of any such increase in the membership of any such committee, the board of directors may fix the term of service on any committee of any person elected to fill a vacancy created by any such increase. Section III.14 Director Emeritus. A director of the corporation is eligible for election as a director emeritus if such person is ineligible for re-election as a director of the corporation under Section III.3.2(f) above or if such person has served as a director of the corporation for at least five years and voluntarily declines to stand for re-election as a director. Immediately following each annual meeting of shareholders, or from time to time as the board of directors may determine, the board of directors, in its discretion, may elect one or more eligible persons to serve as a director emeritus for the ensuing year or until his or her successor is elected and shall qualify. Notwithstanding the foregoing, the board of directors of the corporation may remove, with or without cause, a director emeritus from office at any time. If requested by the board of directors, a director emeritus may attend meetings of the board of directors, but shall not have voting power or power of final decision on any matter concerning the business or affairs of the corporation, and his or her presence at any meeting of the board of directors shall not be counted in the determination of a quorum. A director emeritus shall not have the same responsibilities and liabilities imposed by law and banking regulation upon members of the board of directors. A director emeritus shall receive such fees as the board of directors may from time to time determine. A director emeritus shall not be required to own qualifying shares of the corporation or its ultimate parent bank holding company. Section III.15 Area Boards. From time to time as the Chief Executive Officer of each city or other geographical area in which the corporation transacts business may determine, such Chief Executive Officer may name persons to serve as advisory or honorary members of the board of directors, with respect to such geographical area (each advisory or honorary board being hereinafter referred to as the "Area Board"). Members of each Area Board shall be named to serve for the ensuing year and until their successors are named. Notwithstanding the foregoing, the Chief Executive Officer of the city or other geographical area served by an Area Board may remove, with or without cause, any member of such Area Board at any time. The members of the Area Boards shall assist the board of directors and the officers of the corporation in business development, with particular emphasis being placed upon business development in the city or other geographical area with respect to which such members have been designated, and shall have such other duties and functions as the appropriate Chief Executive Officer shall determine; provided, however, that the members of the Area Boards shall not have power of final decision on any matter concerning the business or affairs of the corporation. If requested by the board of directors, the members of the Area Boards shall attend meetings of the board of directors of the corporation, but shall not have voting power, and the presence of any Area Board member at any meeting of the board of directors shall not be counted in the determination of a quorum. Members of the Area Boards shall not be deemed to have the responsibilities and liabilities imposed upon directors of the corporation by law and banking 13 regulations. Members of the Area Boards may receive such fees as the Human Resources Committee of the board of directors may from time to time determine. The members of each Area Board shall not be required to own qualifying shares of the corporation or its ultimate parent bank holding company. The provisions of the articles of incorporation and the bylaws of the corporation governing the conduct of meetings of the board of directors, including, without limitation, the time and place of any such meeting, the power to convene or call a meeting, the giving of notice of any meeting, and the quorum and voting requirements thereof, shall apply to each Area Board, and meetings and other business of each Area Board shall be convened and conducted in accordance with such provisions. The Chief Executive Officer of the city or other geographical area for which any Area Board is established shall serve as a member of any such Area Board. In addition, subject to the other notice provisions contained herein, the Chief Executive Officer of the city or other geographical area for which any Area Board is established shall be entitled to convene or call meetings of any such Area Board and shall be entitled to attend and vote in respect of all matters coming before meetings of any such Area Board. Article IV. Officers Section IV.1 Positions. The officers of the corporation shall be appointed by the board of directors and shall be a chairman of the board of directors, a president and a cashier. The board of directors may also appoint a chief executive officer; one or more vice presidents, one or more of whom may be designated as executive vice president, senior vice president, group vice president, or other designation; one or more assistant vice presidents; one or more trust officers; a secretary; a comptroller; and other officers or attorneys in fact to perform such duties as may, from time to time, appear to the board of directors to be required or desirable to transact the business of the corporation. The same person may be elected to more than one office of the corporation. Section IV.2 Election and Term of Office. The officers of the corporation shall be elected by the board of directors at a meeting of the board of directors. Each officer shall hold office at the pleasure of the board of directors or until such officer's death or such officer shall resign or shall have been removed in the manner hereinafter provided. Section IV.3 Vacancies. A vacancy in any office may be filled by the board of directors, subject in applicable instances to the prior approval of the corporation's primary federal regulator for senior executive officers. Section IV.4 Resignation and Removal of Officers. An officer may resign at any time by giving notice to the corporation. A resignation is effective when the notice is given unless the notice specifies a later effective date. If a resignation is made effective at a later date and the corporation accepts the future effective date, the board of directors may fill the pending vacancy before the effective date if the board of directors provides that the successor does not take office until the effective date. The board of directors may remove any officer at any time with or without cause. 14 Section IV.5 Contract Rights of Officers. The appointment of an officer does not itself create contract rights. An officer's removal does not affect the officer's contract rights, if any, with the corporation. An officer's resignation does not affect the officer's contract rights, if any, with the corporation. Section IV.6 Duties of Officers. The officers of the corporation, if and when elected by the board of directors of the corporation, shall have the following duties: (a) Chairman of the Board. The chairman of the board or, in his or her absence, the president, shall preside at all meetings of the board of directors and, in case of absence of the chairman of the board and of the president, the board of directors shall appoint one of their members to preside during such absence or inability. In the absence of the chairman of the board, the powers and duties hereby vested in and imposed upon such person shall be exercised by the President. In the absence of both the chairman of the board and the president, those powers and duties shall be exercised by such officer of the corporation as may have been designated for that purpose by the chairman of the board or the president, as the case may be. If none has been so designated by either thereof, the board of directors shall designate an officer of the corporation to act in such capacity. If the office of the chairman of the board of directors becomes vacant, the powers and duties herein vested in and imposed upon the holder of that office shall be vested in and discharged by the president, and the number of persons constituting the Executive Committee of the board of directors shall be correspondingly decreased while any such vacancy continues. (b) President. The president shall have general executive and administrative powers with respect to the business and affairs of the corporation and shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice to the office of president. The president also shall have and may exercise such powers and duties as may from time to time be assigned or conferred upon him by the board of directors of the corporation. (c) Vice Presidents. The vice presidents of the corporation shall perform such duties and possess such powers as may be directed and delegated by the board of directors. The executive vice president(s) shall rank in priority and in presiding over all other vice presidents; and the senior vice president(s) and group vice president(s) shall rank below the executive vice president(s) but shall rank in priority and in presiding over all other vice presidents. (d) Cashier. The cashier shall have the custody of such property and assets of the corporation as may be entrusted to him or her by the board of directors. In the absence, removal or other disability of the cashier, the chairman of the board or the president shall designate an officer for that purpose who shall perform his or her duties until action by the board of directors or Executive Committee. The cashier shall serve as the secretary of the corporation. The officers of the corporation shall perform such other or additional duties as may be prescribed by the board of directors, a committee of the board of directors, the chairman of the board, or the president. 15 Any office described in Sections 4.6(a)-(d) of this Article IV may, by appropriate resolution adopted by the board of directors, be established in respect of any city or other geographical area in which the corporation transacts business, and the board of directors of the corporation may appoint persons to fill any such office created. In such event, and except as otherwise provided by resolution of the board of directors, the duties and responsibilities assigned to each officer of the corporation also shall constitute the duties and responsibilities of the person serving in a comparable office with respect to any such city or other geographical area, and such persons shall be deemed officers of the corporation, except that, in the latter case, such duties and responsibilities shall be limited to the operations of the corporation in the city or other geographical area with respect to which such person has been so designated. Any person designated by the board of directors to serve as an officer with respect to any city or other geographical area shall be given such title as the board of directors may determine; provided, however, that such titles shall distinguish such persons from those persons holding comparable positions with the corporation. Section IV.7 Compensation. The officers of this corporation shall receive such compensation as may be fixed by the board of directors or, if the board of directors directs, and following advice or consultation with such persons as the board of directors deems appropriate, by the Human Resources Committee. Article V. Conveyances, Transfers and Contracts Section V.1 Conveyances, Etc. The chairman of the board or the president is authorized, in his or her discretion, to do and perform any and all corporate and official acts in carrying on the business of the corporation, either of its own or when acting in any fiduciary capacity whatsoever. Each is hereby empowered, in his or her discretion, to appoint all necessary agents or attorneys in fact. The chairman of the board, the president, any vice president designated as executive vice president, senior vice president, group vice president or vice president, or any other officer or agent authorized by the board of directors, or by the Executive Committee or Trust Policy Committee, is also authorized to make, execute and acknowledge all deeds, mortgages, releases, leases, agreements, contracts, bills of sale, assignments, transfers, powers of attorney or of substitution, proxies to vote stock, or any other instrument in writing that may be necessary in the purchase, sale, mortgage, lease, assignment, transfer, management, or handling in any way of any property of any description held or controlled by the corporation, either in its own right or in any fiduciary capacity. The enumeration of particular powers in this section shall not restrict, or be taken to restrict, in any way the general powers and authority herein given to any of said officers. Section V.2 Receipts, Checks, Drafts and Warrants. The chairman of the board, the president, the cashier, or any officer or employee to whom such authority is delegated by any of them, is authorized and empowered to receive and give receipts for money due and payable to the corporation from any source whatever and to sign and endorse checks, drafts and warrants in its name or on its behalf. 16 Section V.3 Trust Department Activities. The chairman of the board, the president, or any vice president designated as executive vice president, senior vice president, group vice president or vice president, including those persons serving in such capacities who also carry the designation of Trust Officer, shall have full power and authority to execute any and all trustee's certificates on behalf of the corporation or any certificate of any character pertaining to any activity or condition in the Asset Management Company (Trust Division) of the corporation; and those officers, and any other officer or employee authorized by the Trust Policy Committee, also shall have full power and authority to sign any acceptance of any trust on behalf of the corporation, to validate bonds, and to take actions on behalf of the corporation acting in any fiduciary capacity, provided that (i) prior approval of the acceptance of any trust, validation of bonds, or taking of other actions shall have been granted by such officers or committees as shall then be authorized by the Trust Policy Committee to grant such approval and (ii) a record of the giving of such approval shall have been made. Section V.4 Seal. The cashier shall have the general custody of the seal of the corporation, and he or she shall have authority to affix the same to any instrument or other writing, and to attest by his or her signature the execution on any instrument or other writing by any authorized officer and the affixing of the seal of the corporation. The cashier may give authority to any other officer to affix the seal of the corporation and to attest by his or her signature the execution of any instrument or other writing by any authorized officer on behalf of the corporation and the affixing of the seal of the corporation. No affixing of the seal of the corporation, and no attesting of the affixing of the seal or of the execution of any instrument or other writing by any authorized officer of the corporation, shall be necessary to the due execution of any such instrument or writing unless otherwise provided by law. Article VI. Borrowings Section VI.1 Borrowings; Collateral for Borrowings. With the approval of the board of directors or executive committee, the chairman of the board, the president, any executive vice president, senior vice president, group vice president, or vice president, including those persons serving in such capacities who also carry the designation of Trust Officer, shall have the authority to borrow money, including the authority to pledge and hypothecate any securities or any stocks or bonds, notes, or any property, real or personal, of the corporation as collateral for such loan, and to endorse or guarantee in its name any notes or obligations payable or belonging to the corporation and to execute and acknowledge, any document or instrument required for such purpose or purposes. Section VI.2 Time or Interest Bearing Certificates of Deposit. All time or interest bearing certificates of deposit may be signed by the chairman of the board, the president, any executive vice president, senior vice president, group vice president, vice president or any assistant vice president, the cashier or any employee or employees of the corporation designated by name or by job title or description from time to time by the chairman of the board or the president. The provisions of this section are supplemental to any other provision of these bylaws. 17 Article VII. Certificates Representing Shares Section VII.1 Certificates Representing Shares. Certificates representing shares of the corporation shall be in such form as shall be determined by the board of directors and shall be in accordance with the Alabama Business Corporation Act. Such certificates shall be signed either manually or in facsimile by any two of the following officers: the chairman of the board, the president, any vice-president or assistant vice-president, the treasurer or any assistant treasurer, the secretary or any assistant secretary, and may be sealed with the corporate seal or a facsimile thereof. In case any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer at the date of its issue. Each certificate for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number and class of shares and date of issue, shall be entered on the stock transfer books of the corporation. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the board of directors may prescribe. Section VII.2 Legends on Certificates. Any written restriction on the transfer of shares of the corporation must be noted conspicuously on the certificate representing such shares. In addition, if the corporation is authorized to issue shares of more than one class, there shall be set forth upon the face or back of every certificate, or every certificate shall have a statement that the corporation will furnish to any shareholder upon request and without charge, a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, and if the corporation is authorized to issue any preferred or special class in series, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series. Certificates may, but need not, also note restrictions on transfer to certain persons arising under federal and state banking laws. Section VII.3 Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by such person's legal representative, who shall furnish proper evidence of authority to transfer, or by such person's attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be the owner thereof for all purposes. The corporation may, but shall not be required to, transfer shares of the corporation to any person to whom transfer, the board of directors in its reasonable discretion determines, may be violative of applicable state or federal banking or securities laws. Section VII.4 Lost, Stolen, Destroyed, or Mutilated Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed. When authorizing such issue of a new certificate, the board of directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it 18 deems adequate, to protect the corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. Article VIII. Indemnification of Directors, Officers and Employees Section VIII.1 Indemnification. (a) Subject to the limitations stated in this Article VIII, the corporation shall indemnify, to the fullest extent permitted by applicable state or federal law or regulation which may be in effect from time to time, its directors (which shall include, for purposes of this Article VIII, honorary and advisory directors), officers and employees, and any such director, officer or employee of the corporation who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against liability or other expenses incurred in connection with the defense of any proceeding, or of any claim, issue or matter in such proceeding, in which such director, officer or employee is a party because such person is or was a director, officer or employee of the corporation or is or was serving at the request of the corporation in one of the capacities referred to above. If the amount, extent, or quality of indemnification permitted by law should be in any way restricted after the adoption of these bylaws, then the corporation shall indemnify such persons to the fullest extent permitted by law as in effect at the time of the occurrence of the omission or the act giving rise to the claimed liability with respect to which indemnification is sought. (b) In connection with indemnification of directors, officers and employees pursuant to Section VIII.8.1(a) of these bylaws, the corporation shall advance expenses to such persons as and to the extent permitted by applicable law or regulation. (c) In addition to the conditions under which indemnification and advancement of expenses by the corporation are permitted under the Alabama Business Corporations Act and other applicable state or federal law or regulation (which conditions are incorporated herein by this reference), the indemnification and advancement of expenses otherwise provided by this Article VIII also shall not be made by the corporation if, in the judgment of the corporation, the director, officer, employee, agent or other person has not cooperated with the corporation in its dealing with any such proceeding, or any claim, issue or matter in such proceeding. If requested by the corporation, the director, officer, employee, agent or other person shall assist in investigations and in the conduct of suits, including attending hearings and trials and giving evidence in connection therewith. (d) The indemnification and advancement of expenses pursuant to this Article VIII shall be in addition to, and not exclusive of, any other right that the person seeking indemnification may have under these bylaws, the articles of incorporation of the corporation, any separate contract or agreement or applicable law. Section VIII.2 Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, partner, trustee, employee or agent of the corporation, or any person who is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, 19 joint venture, trust, employee benefit plan or other enterprise, against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under applicable law. Section VIII.3 Survival of Right. Any right to indemnification or advancement of expenses provided by or granted pursuant to this Article VIII shall continue as to a person who has ceased to be a director, officer, employee or agent or to serve as a director, officer, partner, trustee, employee or agent of such other foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Any repeal or modification of this Article VIII which serves to restrict or lessen the rights to indemnification or advancement of expenses provided by this Article VIII shall be prospective only and shall not lessen the right to indemnification or advancement of expenses existing at the time of such repeal or modification with respect to liabilities arising out of claimed acts or omissions occurring prior to such repeal or modification. Article IX. General Section IX.1 Fiscal Year. The fiscal year of the corporation shall be December 31. Section IX.2 Surplus; Restriction of Dividends. The corporation shall transfer to surplus each year at least ten percent (10%) of its net earnings until the surplus of the corporation shall be equal to at least twenty percent (20%) of its capital, and the corporation shall not declare or pay a dividend in excess of ninety percent (90%) of its net earnings until the surplus of the corporation shall be equal to at least twenty percent (20%) of the capital. Thereafter, the board of directors, from time to time, may declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law; provided, however, that prior written approval of the Superintendent of Banks of the State of Alabama shall be required if the total of all dividends declared by the corporation in any calendar shall exceed the total of the corporation's net earnings of that year combined with its retained net earnings of the preceding two years, less any required transfers to surplus. No dividends, withdrawals, or transfers may be made from the corporation's surplus without the prior written approval of the Superintendent of Banks of the State of Alabama. For the purposes of this Section 9.2, the terms "net earnings" shall mean the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, and all federal, state and local taxes. Section IX.3 Checks. All checks or demands for money and notes of the corporation shall be signed by an officer of the corporation or by an agent authorized by the board of directors. Section IX.4 Corporate Seal. The board of directors shall select a corporate seal which shall have inscribed thereon the name of the corporation, the words "Alabama" and "Banking 20 Corporation," and such seal may include the date of incorporation of the corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. Section IX.5 Voting of Corporation's Securities. Unless otherwise ordered by the board of directors, the chairman of the board, the president, any vice-president or the secretary, or such other officer as may be designated by the board of directors to act in the absence of the chairman of the board, the president, any vice-president or the secretary, shall have full power and authority on behalf of the corporation to attend and to act and to vote, and to execute a proxy or proxies empowering others to attend and to act and to vote, at any meetings of security holders of any corporation in which the corporation may hold securities, and at such meetings the chairman of the board, the president, or such other officer of the corporation, or such proxy shall possess and may exercise any and all rights and powers incident to the ownership of such securities, and which as the owner thereof the corporation might have possessed and exercised, if present. The secretary or any assistant secretary may affix the corporate seal to any such proxy or proxies so executed by the chairman of the board, the president, or such other officer, and attest the same. The board of directors by resolution from time to time may confer like powers upon any other person or persons. Section IX.6 Loans, Gifts, Favors, Etc. to Banking Department Employees from the Corporation, Employees, Etc., Prohibited. No officer, agent, director, or employee of the corporation shall offer or give to an employee of the Alabama State Banking Department, or such employee's family, a gift, favor, or service or promise of future employment. Expenses associated with social occasions afforded such employees shall not be deemed a thing of value within the meaning of this Section 9.6 or prohibited hereby. No Alabama State Banking Department employee shall, either directly or indirectly, be allowed to have a pecuniary interest in or loan from the corporation. Nothing herein shall be construed to prohibit the Superintendent of Banks of the State of Alabama or a State of Alabama Banking Department employee from owning a certificate of deposit in the corporation, however, no preferential rate shall be granted. Section IX.7 Semi-Annual Report. The corporation shall make to the Superintendent of Banks of the State of Alabama, on the call of the Superintendent of Banks of the State of Alabama for such report, not less than two (2) reports during each year according to the form which may be prescribed by the Superintendent of Banks of the State of Alabama. Such report shall be verified by the oath or affirmation by the president, secretary and by at least three directors of the corporation to be correct to the best of their knowledge and belief of each. Each report required above shall exhibit in detail and under appropriate headings the resources and liabilities of the corporation at the close of business on any past date specified by the Superintendent of Banks of the State of Alabama, not more than five (5) days prior to the issue of the Superintendent of Banks of the State of Alabama's call, and the report shall be published once by the corporation in the newspaper of general publication in the corporation's location. Proof of such publication shall be furnished by the corporation to the Superintendent of Banks of the State of Alabama in such manner as may be prescribed by him, including the clippings of the reports as published in the newspaper. Section IX.8 Loans. The corporation shall not make any loans to its officers, director or employees, except as provided for by the Alabama Banking Code and Regulation O of the Federal Reserve Board, as each may be amended from time to time. Any such loan must comply with the requirements of the Federal Reserve Board or The Federal Deposit Insurance Corporation, as applicable. The corporation shall not make any loan to any one person which, when combined with all other loans to such person, would cause the total loans to that person to exceed the limits 21 provided for in Section 5-5A-22 of the Alabama Banking Code, as it may be amended from time to time. Section IX.9 Bonds. The directors shall require bonds, either individual or in blanket form, from each and every officer and employee handling money, checks, securities or other valuable papers of the corporation, such bond to be made by a bonding company authorized to make such bonds in the State of Alabama to be approved by the board of directors and to be in such form as may be approved by the Superintendent of Banks of the State of Alabama. The Superintendent of Banks of the State of Alabama or the board of directors of the corporation may require an increase of the amount of such bond or other additional bond and securities, when he or they deem it necessary for the better protection of the bank and its depositors. Directors, as such, shall not be required to give bond. Section IX.10 Purchase of Corporate Stock. The corporation shall not make any loan taking its own stock as security therefor or directly or indirectly purchase shares of its own stock, except in pursuance of the provisions of law for reducing its capital stock. The corporation shall not subscribe for or own capital stock in any other bank, except in the usual course of business in payment of an indebtedness or in order to prevent a loss on a debt owing to it and the corporation must sell said stock within one (1) year from the time the same is acquired, unless this time period is extended by the Superintendent of Banks of the State of Alabama. Section IX.11 Articles of Incorporation. To the extent that these bylaws may be inconsistent with the articles of incorporation of the corporation, as may be amended from time to time, the provisions of the articles of incorporation shall control. Article X. Amendment of Bylaws Section X.1 Amendment by Board of directors or Shareholders. (a) The board of directors may amend or repeal the corporation's bylaws unless: (9 the articles of incorporation or the Alabama Business Corporation Act reserve this power exclusively to the shareholders in whole or in part; or (10 the shareholders in amending or repealing a particular bylaw provide expressly that the board of directors may not amend or repeal that bylaw. (b) the shareholders may amend or repeal the bylaws even though the bylaws may also be amended or repealed by the board of directors. Section X.2 Bylaw Increasing Quorum or Voting Requirement for Shareholders. (a) If authorized by the articles of incorporation, the shareholders may adopt or amend a bylaw that fixes a greater quorum or voting requirement for shareholders (or voting groups of shareholders) than is required by the Alabama Business Corporation Act. The adoption or 22 amendment of a bylaw that adds, changes, or deletes a greater quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. (b) A bylaw that fixes a greater quorum or voting requirement for shareholders under subsection (a) may not be adopted, amended, or repealed by the board of directors. Section X.3 Bylaw Increasing Quorum or Voting Requirement for Directors. (a) A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended or repealed: (11 if originally adopted by the shareholders, only by the shareholders; (12 if originally adopted by the board of directors, either by the shareholders or by the board of directors. (b) A bylaw adopted or amended by the shareholders that fixes a greater quorum or voting requirement for the board of directors may provide that it may be amended or repealed only by a specified vote of either the shareholders or the board of directors. (c) Action by the board of directors under subsection (a)(2) to adopt or amend a bylaw that changes the quorum or voting requirement for the board of directors must meet the same quorum requirement and be adopted by the same vote required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater. Article XI. Emergency Preparedness Program In the event of the destruction of properties, personnel and records of the corporation, to the extent that continued operation of the corporation is not reasonably possible, provisions in various resolutions hereafter adopted by the board of directors with reference to emergency operations shall become effective and continue to be in effect until conditions warrant the reestablishment of operations. 23 HISTORY OF BYLAWS Initial adoption June 6, 2000. 24 EXHIBIT#3 CONSENT OF TRUSTEE PURSUANT TO THE REQUIREMENTS OF SECTION 321(b) OF THE TRUST INDENTURE ACT OF 1939 IN CONNECTION WITH THE PROPOSED ISSUE OF 3.9% CONVERTIBLE SENIOR DEBENTURES DUE DECEMBER 30, 2023 BY PROASSURANCE CORPORATION, WE HEREBY CONSENT THAT REPORTS OF EXAMINATION BY FEDERAL, STATE, TERRITORIAL, OR DISTRICT AUTHORITIES MAY BE FURNISHED BY SUCH AUTHORITIES TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST THEREFORE. SOUTHTRUST BANK BY /s/ John S. Hiott ------------------- JOHN S. HIOTT SENIOR VICE PRESIDENT AND TRUST OFFICER CORPORATE TRUST DEPARTMENT DATED: OCTOBER 24, 2003 EXHIBIT #4 Consolidated Report of Condition for Insured Commercial and State-Chartered Savings Banks for June 30, 2003 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC - Balance Sheet
----------------------- Dollar Amounts in Thousands RCFD Bil Mil Thou - ---------------------------------------------------------------------------------------------------------------------------- ASSETS 1 . Cash and balances due from depository institutions (from Schedule RC-A): ----------------------- 0081 1,250,600 - ----------------------------------------------------------------------------------------------------- ----------------- b. Interest-bearing balances(2) ........................................... 4.288 - ----------------------------------------------------------------------------------------------------- ----------------- 2. Securities: ----------------------- 1754 270,838 - ---------------------------------------------------------------------------------------------------------------------------- b. Available-for-sale securities (from Schedule RC-B, column D) .......... 1773, 10,856 214 - ---------------------------------------------------------------------------------------------------------------------------- 3. Federal funds sold and securities purchased under agreements to resell:.... - ---------------------------------------------------------------------------------------------------------------------------- a.Federal funds sold in domestic offices RCON B987[ 108 294 - ---------------------------------------------------------------------------------------------------------------------------- b. Securities purchased under agreements to resell(3) ................... RCFD B989 0 - ---------------------------------------------------------------------------------------------------------------------------- 4. Loans and lease financing receivables (from Schedule RC-C): RCFD : ----------------------- 5369 1,267 092 - ----------------------------------------------------------------------------------------------------------- b. Loans and leases, net of unearned income ............................. B528 34,411,599 - ----------------------------------------------------------------------------------------------------- c. LESS: Allowance for loan and lease losses ............................ 3123 501,068 - ---------------------------------------------------------------------------------------------------------------------------- d. Loans and leases, net of unearned income and allowance (item 4.b minus 4.c) B529 33,910 531 ---------------------------------------- 3545 133 160 - ---------------------------------------------------------------------------------------------------------------------------- 2145 920 409 - ---------------------------------------------------------------------------------------------------------------------------- 2150 45 583 - ---------------------------------------------------------------------------------------------------------------------------- 8, Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) ........ 2130 0 ----------------------- 2155 0 - ----------------------------------------------------------------------------------------------------- ----------------- 10. Intangible assets: ----------------------- 3163 775 413 - ---------------------------------------------------------------------------------------------------------------------------- 0426 38 218 - ---------------------------------------------------------------------------------------------------------------------------- 11 Other assets (from Schedule RC-F) ...................................... 2160 2,036 113 - ---------------------------------------------------------------------------------------------------------------------------- 12. Total assets (sum of items 1 through 11) ... ............... 2170 51,616 753 - ----------------------------------------------------------------------------------------------------------------------------
{1} Includes cash items in process of collection and unposted debits. (2) Includes time certificates of deposit not held for trading. (3) Includes all securities resale agreements in domestic and foreign offices, regardless of maturity. Schedule RC - Continued
---------------------- Dollar Amounts in Thousands | Bil | Mil Thou - ----------------------------------------------------------------------------------------------------- ---------------- LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, ---------------------- 2200 31.086 193 - --------------------------------------------------------------------------------------------------------------------------- (1) Noninterest-bearing(1) ............................................ RCON 6631 3,560,500 - --------------------------------------------------------------------------------------------------------------------------- (2) Interest-bearing .................................................. RCON 6636 27,525,693 - ----------------------------------------------------------------------------------------------------------- b. In foreign offices, Edge and Agreement subsidiaries, and IBFs RCFN ---------------------- 2200 1 3,421,211 - --------------------------------------------------------------------------------------------------------------------------- (1) Noninterest-bearing ............................................. RCFN 6631 0 - ----------------------------------------------------------------------------------------------------- (2) Interest-bearing .................................................. RCFN 6636 3.421.211 - ----------------------------------------------------------------------------------------------------- 14. Federal funds purchased and securities sold under agreements to repurchase ---------------------------- RCON B993 3,140,579 - --------------------------------------------------------------------------------------------------------------------------- b. Securities sold under agreements to repurchase(3) .................. RCFD B995 1,965 686 - --------------------------------------------------------------------------------------------------------------------------- 15. Trading liabilities (from Schedule RC-D) .......................... RCFD 3548 129 160 - --------------------------------------------------------------------------------------------------------------------------- 16. Other borrowed money (includes mortgage indebtedness and obligations under RCFD ---------------------- 3190 5,356.924 - --------------------------------------------------------------------------------------------------------------------------- 17. Not applicable ---------------------- 2920 0 - --------------------------------------------------------------------------------------------------------------------------- 19. Subordinated notes and debentures(4) .............................. 3200 869 638 - --------------------------------------------------------------------------------------------------------------------------- 20. Other liabilities (from Schedule RC-G) ............................ 2930 1,062 188 - --------------------------------------------------------------------------------------------------------------------------- 21 Total liabilities (sum of items 13 through 20) ..................... 2948 47,031 579 - --------------------------------------------------------------------------------------------------------------------------- 3000 0 - --------------------------------------------------------------------------------------------------------------------------- EQUITY CAPITAL ---------------------- 3838 0 - --------------------------------------------------------------------------------------------------------------------------- 3230 9 007 - --------------------------------------------------------------------------------------------------------------------------- 25 Surplus (exclude all surplus related to preferred stock) ........... 3839 2,214 559 - --------------------------------------------------------------------------------------------------------------------------- 3632 2,111 570 - --------------------------------------------------------------------------------------------------------------------------- B530 250 038 - --------------------------------------------------------------------------------------------------------------------------- A130 0 - --------------------------------------------------------------------------------------------------------------------------- 3210 4,585 174 - --------------------------------------------------------------------------------------------------------------------------- 29. Total liabilities, minority interest, and equity capital (sum of items 21, and 28).... 3800 51,616 753 ---------------------------------------------------
Memorandum To be reported with the March Report of Condition. ------------------ 1. Indicate in the box at the right the number of the statement below that best describes RCFD Number the most comprehensive level of auditing work performed for the bank by independent external ------------------ auditors as of any date during 2002................................... 6724 N/A M.1 ------------------
1 = Independent audit of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the bank 2 = Independent audit of the bank's parent holding company conducted in accordance with generally accepted auditing standards by a certified public accounting firm which submits a report on the consolidated holding company (but not on the bank separately) 3 = Attestation on bank management's assertion on the effectiveness of the bank's internal control over financial reporting by a certified public accounting firm 4 = Directors' examination of the bank conducted in accordance with generally accepted auditing standards by a certified public accounting firm (may be required by state chartering authority) 5 = Directors' examination of the bank performed by other external auditors (may be required by state chartering authority) 6 = Review of the bank's financial statements by external auditors 7 = Compilation of the bank's financial statements by external auditors 8 = Other audit procedures (excluding tax preparation work) 9 = No external audit work (1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Report overnight Federal Home Loan Bank advances in Schedule RC, item 16, "Other borrowed money." (3) Includes all securities repurchase agreements in domestic and foreign offices, regardless of maturity. (4) Includes limited-life preferred stock and related surplus. (5) Includes net unrealized holding gains (losses) on available-for-sale securities, accumulated net gains (losses) on cash flow hedges, cumulative foreign currency translation adjustments, and minimum pension liability adjustments. (6} Includes treasury stock and unearned Employee Stock Ownership Plan shares. -----END PRIVACY-ENHANCED MESSAGE-----